Capital One-Discover A Done Deal, As DOJ Softens Stance?

Capital One’s (NYSE: COF) acquisition of Discover Financial appears to be making progress toward regulatory approval. Although the U.S. Department of Justice initially raised concerns over the $35.3 billion merger due to potential consolidation in the banking sector and reduced competition in the subprime credit segment, it is now reportedly concentrating on how the merger may impact consumers lacking a credit history. The Capitol Forum, an investigative outlet, indicated that the DOJ may not pursue legal action to block the deal, as it likely does not have sufficient grounds to win in court.

Although shareholders have approved the merger, it still awaits regulatory approval from the Federal Reserve and the Office of the Comptroller of the Currency. Discover’s stock has risen roughly 7% in the past two trading sessions, reaching around $171 per share—just below the $181 value implied by the deal terms. The tightening gap suggests growing investor confidence in the deal’s success.

What are the deal’s potential advantages?

Capital One and Discover both issue credit cards and together represent less than 20% of U.S. consumer credit card balances. If finalized, this transaction would make them the largest credit card issuer in the U.S. by loan volume. A key benefit of the deal lies in Discover’s proprietary card network, which earns fees from merchants for processing transactions. Currently, Capital One relies on Visa and Mastercard, which dominate the payments network space. Upon completing the acquisition, Capital One may transition some of its transactions to the Discover network.

However, Discover’s merchant acceptance still trails behind its rivals. Discover is accepted at about 70 million merchants, compared to roughly 130 million for Visa and 100 million for Mastercard. Therefore, a significant portion of Capital One’s volume may continue using Visa and Mastercard even after the merger. Still, the deal could give Discover greater bargaining power with the dominant network providers. Capital One might also use the opportunity to grow and strengthen Discover’s acceptance footprint. For example, its robust credit card fraud protection capabilities could be applied more broadly across Discover’s network.

The merger would also allow Capital One to offer a broader suite of financial services—like checking and savings accounts, as well as personal and auto loans—to Discover’s loyal cardholder base. This could help boost overall revenues for the combined company.

COF stock has seen uneven performance over the past four years, showing more volatility than the S&P 500. The stock posted annual returns of 49% in 2021, -34% in 2022, 44% in 2023, and 38% in 2024. In contrast, the Trefis High Quality Portfolio, which consists of 30 stocks, has shown significantly less volatility and has consistently outpaced the S&P 500over the same period.

What explains this outperformance? The HQ Portfolio comprises stocks that generally deliver better risk-adjusted returns than the benchmark index—offering steadier gains, as shown in the HQ Portfolio performance metrics.
Given today’s unpredictable macroeconomic conditions—including uncertainty over rate cuts and ongoing global conflicts—could COF repeat its 2022 underperformance, or might it deliver another strong year?

We estimate the fair value of Capital One stock at about $194 per share, modestly above its current market price of around $178. For more details on our valuation model, see our breakdown of Capital One Valuation.

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