Discover Financial Services DFS recently announced that it will be acquired by Capital One Financial Corporation COF in an all-stock deal for $35.3 billion. Under this transaction, Capital One will provide 1.0192 shares of its company for each DFS share. This represents a premium of 26.6% on DFS’s closing price of $110.49 on Feb 16, 2024. The deal is expected to close by late 2024 or early 2025, subject to regulatory and shareholder approvals and closing conditions. After closing, Discover Financial shareholders will own 40% of the combined company.

This move bodes well for Discover Financial, which is struggling to generate positive results. Its adjusted earnings plummeted 59% year over year in the fourth quarter of 2023. The combined entity will leverage complementary franchises and capabilities. DFS has left no stone unturned to increase its acceptance rates, although it has never been able to surpass Mastercard and Visa. This combination will improve DFS’s acceptance and business as COF will eliminate Mastercard and Visa to have DFS as its payments network partner. However, it is yet to be seen if COF can properly leverage DFS’s widespread payments network.

Discover Financial’s fourth-quarter results were hurt by higher operating costs. DFS combining with COF will provide cost synergies as fixed costs of technology tend to improve when the company gets bigger. Their complementary credit card businesses will be able to provide enhanced products by leveraging each other’s expertise. This combination is expected to generate expense synergies worth $1.5 billion in 2027, partially offset by investments made in Discover Network. This transaction will also prove to be beneficial for shareholders as they will be able to participate in the success of the combined company.

Discover Financial’s national direct savings bank will complement Capital One Bank, enhancing the competitiveness of the combined entity in the banking space. Network synergies are expected to be around $1.2 billion in 2027. Return on invested capital is expected to come in at 16% in 2027.

Price Performance

Discover Financial’s shares have gained 28.6% in the past three months compared with the 28% rise of the industry.

Image Source: Zacks Investment Research

Zacks Rank & Key Picks

Discover Financial currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks from the Financial – Consumer Loans space are EZCORP, Inc. EZPW and World Acceptance Corporation WRLD. Each company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.