THE CAPITAL ONE - DISCOVER

MERGER
Price Analysis and Market Consequences
A M&A analysis by Domenico Soprano
Agenda
What this report covers

01 What the Capital One - Discover merger means for consumers and the market

02 Capital One vs. Discover: a comparative analysis of two financial titans

03 M&A deal details

04 Unveiling Discover’s true value: a comprehensive valuation analysis

05 Future prospects
 Capital One Financial Corporation and Discover
Financial Services are prominent players in the U.S.
financial sector, particularly in the credit card market
and financial services.

Consumers
Both companies have earned a reputation for
consumer trust and innovation in financial
technologies.
The consolidation strategy between Capital One and
Discover holds crucial importance for the credit card
sector.
It could potentially reshape the competitive landscape,
offering enhanced services and products to consumers

What the Capital while leveraging their combined strengths in technology

and customer-centric approaches.
One-Discover merger
Market
means for consumers This strategic move could lead to synergies in
and the market operations, increased efficiency, and potentially set
new benchmarks in the industry for customer
satisfaction and financial innovation.
 A comparative analysis of two financial titans

Similarities Differences
Capital One and Discover are both credit card issuers and Discover controls both the emission and the payment
providers of financial services in the U.S. network. Capital One uses external payment networks, such
as Visa or Mastercard.

They are customers-oriented, offering high-tech products Discover is focused on high-net-worth profiles. Capital One
and benefits to cardholders. serves customers across all profiles.

They are customers-oriented, offering high-tech products Discover has developed its customer network through
and benefits to cardholders. strategic partnerships. Capital One has acquired several
financial companies.

Capital One is larger than Discover. Capital One is one of the

most significant banks in the U.S.
 M&A deal details

Capital One is acquiring Discover for $35 billion in an all-stock deal, paying a premium of 26,6% on
Discover’s closing price on February 16, 2024.
Discover shareholders will receive 1.0192 Capital One shares for each Discover share they own.

After the deal:

• Capital One shareholders will own 60% of the combined entity;
• Discovery shareholders will own the 40%.

60%

Sources: the New York Times; Milano Finanza

 Advantages Disadvantages
The acquisition of Discover will create the The company resulting from the deal could
sixth-largest U.S. bank in terms of assets become large enough that regulatory
and a credit card giant capable of institutions might decide to delay the deal
competing with JP Morgan Chase and or force the company to accept certain
Citigroup. conditions.

The deal could decrease costs thanks to a This merger could decrease competition in
greater scale and a Capital One credit card the market, potentially leading to higher
built on the Discovery payment network. prices for credit cards, loans, and financial
services for customers.
 Unveiling Discover's True Value: A Comprehensive
Valuation Analysis
Analysis of market multiples
To analyze the market multiples, I compared Discover and American Express due to their strong analogy.
This comparison aimed to verify if Capital One’s acquisition price is reasonable.
I evaluated the value of these companies based on the situation at the end of February 16, 2024.
These multiples suggest that Discover might be
Financial DIscover Financial American
undervalued compared to American Express
Metrics Services Express based on Earnings and Book Value, implying that
Capital One’s acquisition price and the 26.6%
Price/Earnings ratio premium on the stock price might be reasonable
11 12.5
(P/E) or even favorable given Discover’s growth
prospects and recent deals in the financial services
Price/Book value sector.
2.2 2.73
ratio (P/B)

Price/Sales ratio
2.75 3
(P/S)
Source: YahooFinance
RECOMMENDATION

A more precise valuation method for Discover can be achieved using the Discounted Cash Flows (DCF) model.
DCF analysis involves projected future cash flows and discounting them to their present value to determine the intrinsic value of
a company.
This method is advantageous because it considers future performance and growth prospects, offering a more detailed and
forward-looking valuation.

In contrast, market multiples analysis may not fully capture Discover’s unique growth potential and risk profile. While market
multiples provide a quick comparative valuation based on current market conditions, they often overlook the company-specific
factors that could impact future performance.
Therefore, incorporating a DCF analysis can provide a more accurate and holistic valuation of Discover by focusing on its
projected cash flows and intrinsic value, rather than solely relying on market comparisons.
 Considering the 2022 data on Credit Card Purchase Volumes,
Market Share, and Networks, we can gain a clearer
understanding of the potential effects of the Capital One and
Discover deal.

U.S. Credit Card Issuers’ 2022 Purchase

Volumes
DiscoverU.S. B
4.9% 4.9% JP Morgan Chase
Bank of America 27.5%
11.8%

Capital One
12.7%

Citi American Express

13.7%
24.5%

Analysis of Market Capital One would become the third-largest company in

terms of Purchase Volumes.

Key Performance This would lead to increased competitiveness, higher

commissions, and improved efficiency.
However, the risk of default would also rise, requiring Capital
Indicators (KPIs) One to be more vigilant in risk management.

Data credit: Upgraded Points

 Top 2022 Credit Card Networks By
10 largest Card Issuers by Market Share
Purchase Volume

American Express JP Morgan Chase

Other Issuers
10.2% 18.7% 16.6%
Discover
7.1%

Visa Barclays
41.7% Citi
Others 2.6% 11.6%
13.6% U.S. Bank
4.1%
Wells Fargo
4.3%

Discover American Express

7.6% 11.3%

Mastercard Capital One Bank of America

27.4% 10.5% 10.7%

Discover handles 7.13% of the Credit Card Networks in terms of The acquisition would make Capital One the largest player in
Purchase Volume, while Capital One lacks its own payment the U.S. market.
network. By leveraging a broad customer base, Capital One could reduce
This means Capital One could leverage Discover’s extensive costs through increased efficiency and economies of scale.
network, enhancing payment options for customers. These potential benefits have raised concerns among regulatory
However, integration challenges may arise, and there could be authorities, who are analyzing the situation to determine if could
potential conflicts of interest with existing partners. lead to market issues.

Data credit: Upgraded Points Data credit: Upgraded Points

 The merger of Capital One and Discover marks a pivotal
moment in the financial sector, promising profound implications
for competitiveness and consumer services.
While multiples market analysis indicates a reasonable
valuation of Discover, it fails to fully encompass potential
growth and risk factors. A more comprehensive evaluation
using the Discounted Cash Flows model would provide a clearer
picture, accounting for future performances and growth
prospects of the company.

Future
Prospects Implications for Capital One
The merger will significantly impact costs and operational efficiency for
Capital One, presenting opportunities to streamline operations despite
potential integration challenges.

Implications for customers

Customers may benefit from enhanced product offerings and services
resulting from the merger. However, the reduced competition could
also lead to higher prices in certain market segments.
Thank you!
Feel free to reach out to me if you have any suggestions or
questions.

Email Address
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