Capital One-Discover deal: Will US regulators play spoiler?

Capital One Financial (COF) has announced a $35 billion all-stock deal to acquire Discover Financial Services (DFS) while keeping the Discover brand. There have been calls for US regulators to step in, most notably by Senator Elizabeth Warren (D-MA).

Yahoo Finance Reporters David Hollerith and Alexis Keenan join the Live show to break down how US regulators could get in the way of the Capital One-Discover merger.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

- Capital One's planned purchase of Discover would combine two of the largest credit card companies in the US. With more, we're joined by Yahoo Finance's Alexis Keenan and David Hollerith. David, let's start with you. Give us the details on this deal, and what kind of company is going to result.

DAVID HOLLERITH: Yeah, so what we're looking at-- and, obviously, regulators do need to approve this deal. But we're looking at what would effectively be a new financial consumer banking giant in the US. And it's a $35.3 billion all-stock transaction deal.

And the all-stock is a pretty important thing to point out, too. As of Discover's closing stock price on Friday, it's actually getting sort of a 26% premium to this. Capital One stock also in context to the larger banking sector. Its stock actually performed fairly well last year, too.

So, together, these two banks would make the sixth largest bank by deposits and total assets. And by credit card loans, it would be the largest bank. That being said, some really important parts to this are whether or not Capital One would be able to make use of Discover's credit card network.

Discover has the fourth largest US credit card network. That's after VISA, Mastercard, and American Express. And it's actually much smaller than those other three.

But the fact that Capital One is also such a large issuer, it means that it could put its weight, its customers move it over to Discover's network. And then potentially, have a lot of cost savings there. There's also a lot of cost savings associated to the amount of marketing expenses that both credit card banks spend per year.

And also, the fixed costs like technology expenses for anti-fraud kinds of things. So there's a lot of hope there, obviously. The company has given out $2.7 billion pre-tax cost synergies, I guess, you could call it.

So it really depends on what regulators think. But we do have to imagine that they have had conversations with regulators at this point leading up to this. So now I guess we're kind of waiting to see on that.

- All right, Alexis, let's bring you here as well. As we wait for regulators, we heard from one lawmaker already, Alexis, Senator Warren posted on X. Doesn't sound happy, Alexis, saying this deal would be bad for competition. So what are antitrust experts telling you?

ALEXIS KEENAN: Yeah. Yeah, she's not happy with this proposed deal. But look, the head of the DOJ's Antitrust Division, Jonathan Kanter, he promised last year some banking merger scrutiny. So we're going to expect a full review of this deal.

But legal experts tell me that they think this one is ultimately going to result in no formal challenges from regulators. The major reason is that this horizontal merger would not create a monopoly in the markets that we're concerned with here. Capital One holds approximately 10% of card balances with discovered about 8% of card balances.

So that 18% is really well below that market dominance level that is of concern to antitrust regulators. Now, despite that the merged firm would have more cards than their rivals, they just ultimately wouldn't have that monopoly position. Now, here though, it's kind of interesting.

There are two different markets at issue for regulators at least. You have the card-issuing side. That's that retail side.

And then you also have the card processing networks. And it's that card-issuing business that the legal experts think is going to pose the most scrutiny. It's going to get the most look at from these regulators. And that's because that's where you'd see that market increase despite it not rising to maybe a monopolistic level.

Though on the card processing side, that current market rivalry you have, as David was saying, there discover VISA, Mastercard. And then to a lesser extent, Amex because that's really a closed network system. But this merger between Capital One and Discover, it really only risks on that processing side.

That Capital One would tap into Discover's network. So they would be kind of just moving over to have a new processor rather than dominating that market. So a lot to think about here.

Certainly, they are going to kick the tires and they're going to kick them hard. Guys.

- Yeah. And the stocks seem to be trading as though investors are assuming that this deal does have a likelihood of going through. Thanks so much to you both, David and Alexis.