Capital One Financial (COF 0.16%) has a deal in place to acquire Discover Financial Services (DFS 1.62%) at a significant premium. Discover shareholders are celebrating, as the market sent shares up by 11% as of 10 a.m. ET.
A new leader in credit cards
Capital One and Discover are two giants of the banking industry, but they have taken very different approaches to the lending business. Capital One began its life catering to people who have traditionally had trouble securing credit, but as it has grown, it has been trying to broaden its share of prime, or lower-risk, customers. That segment has always been Discover's focus.
Late Monday, Capital One announced plans to acquire Discover in a deal that values the target at $35.3 billion. Terms of the deal call for each Discover share to be exchanged for 1.0192 shares of Capital One. Based on Friday's closing prices, that puts a premium of about 26.6% on Discover.
Discover stock did not rise by the full 26% in part because Capital One shares fell at the open, and also due to the regulatory uncertainty surrounding the deal. If the transaction closes, existing Capital One shareholders will own about 60% of the combined business.
The announcement could be bittersweet for some long-term Discover holders, as the spike only returns the stock to the levels where it traded last summer. In July, Discover announced the resignation of its CEO due to compliance and risk-management lapses.
Is Discover stock a buy after its big deal announcement?
The deal, if approved, would create a powerhouse credit card lender with the size and the scale to compete against industry leaders like JPMorgan Chase and Bank of America. Those buying in now will miss out on the big pop that followed news of the deal, but if the merger closes, Discover shareholders will get shares in a well-run credit card lender.
If the deal doesn't close, Discover wouldn't be at risk, but the stock would likely retreat, as the institution would have to rebuild its reputation on its own.
Investors have every reason to be intrigued by the potential of the combination, but there is no reason to rush to buy shares of Discover now that its initial share price spike is already in the books.
