What's In Your Wallet? How To Profit From Capital One's $35.3 Billion Acquisition Of Discover

seekingalpha02-21

Capital One announced a deal to acquire Discover Financial for $35.3 billion in an all-stock deal.Today's market reaction has been positive for DFS stock and neutral for COF stock.Merger arbitrage, ...

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How To Profit From Capital One's $35.3 Billion Acquisition Of Discover","media":"seekingalpha","content":"<div>\n<p>Capital One announced a deal to acquire Discover Financial for $35.3 billion in an all-stock deal.Today's market reaction has been positive for DFS stock and neutral for COF stock.Merger arbitrage, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4671631-how-to-profit-from-capital-one-acquisition-of-discover\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>What's In Your Wallet? 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How To Profit From Capital One's $35.3 Billion Acquisition Of Discover\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-02-21 02:08 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4671631-how-to-profit-from-capital-one-acquisition-of-discover><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Capital One announced a deal to acquire Discover Financial for $35.3 billion in an all-stock deal.Today's market reaction has been positive for DFS stock and neutral for COF stock.Merger arbitrage, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4671631-how-to-profit-from-capital-one-acquisition-of-discover\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0889565833.HKD","symbol_name":"FRANKLIN TECHNOLOGY \"A\" (HKD) ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4671631-how-to-profit-from-capital-one-acquisition-of-discover","article_id":"2413857244","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2413857244","pubTimestamp":1708452513,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Capital One announced a deal to acquire Discover Financial for $35.3 billion in an all-stock deal.Today's market reaction has been positive for DFS stock and neutral for COF stock.Merger arbitrage, anyone?The deal presents an 11.1% premium for investors buying DFS stock that will be realized upon the deal closing, likely in late 2024 or early 2025.   ANDREW CABALLERO-REYNOLDS/AFP via Getty ImagesYesterday after market close, Capital One  announced a monster deal to acquire Discover Financial  for roughly $35.3 billion. This represents 1.0192 COF shares for each DFS share . In its press release, Capital One cited cost savings of $2.7 billion annually and a 20% IRR on the deal. The deal will create the largest credit card company in the US by loan volume and allow Capital One to issue its own credit cards. The initial market reaction was somewhat negative for COF stock, but the stock is now nearly flat since announcing the deal. DFS stock is up roughly 13% on the news. Both stocks are up","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"LU0889565833.HKD":"FRANKLIN TECHNOLOGY \"A\" (HKD) ACC","LU1551013342.USD":"Allianz Income and Growth Cl AMg2 DIS USD","GB00BDT5M118.USD":"天利环球扩展Alpha基金A Acc","LU1093756325.SGD":"FTIF - Franklin K2 Alt Strat Fd A (acc) SGD-H1","V":"Visa","IE00B1XK9C88.USD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A\" (USD) ACC","LU":"陆金所","IE00BBT3K403.USD":"LEGG MASON CLEARBRIDGE TACTICAL DIVIDEND INCOME \"A(USD) ACC","BK4594":"比特币ETF概念","LU0234572021.USD":"高盛美国核心股票组合Acc","LU0310799852.SGD":"FTIF - Templeton Global Equity Income A MDIS SGD","BK4566":"资本集团","LU0353189763.USD":"ALLSPRING  US ALL CAP GROWTH FUND \"I\" (USD) ACC","ATVI":"动视暴雪","IE00BZ1G4Q59.USD":"LEGG MASON CLEARBRIDGE US EQUITY SUSTAINABILITY LEADER \"A\"(USD) INC (A)","AXP":"美国运通","IE00BWXC8680.SGD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A5\" (SGD) ACC","LU0130102774.USD":"Natixis Harris Associates US Equity RA USD","LU0648000940.SGD":"Natixis Harris Associates Global Equity RA SGD","GBTC":"Grayscale Bitcoin Trust","BK4166":"消费信贷","JPM":"摩根大通","LU0868494617.USD":"UBS (LUX) EQUITY SICAV - US TOTAL YIELD SUSTAINABLE \"P\" (USD) ACC","IE00B1BXHZ80.USD":"Legg Mason ClearBridge - US Appreciation A Acc USD","LU0648001328.SGD":"Natixis Harris Associates US Equity RA SGD","LU0672654240.SGD":"FTIF - Franklin US Opportunities A Acc SGD-H1","DFS":"发现金融","LU0130103400.USD":"Natixis Harris Associates Global Equity RA USD","LU0690374961.EUR":"FUNDSMITH EQUITY \"R\" (EUR) INC","LU1244550577.SGD":"FTIF - Franklin Global Multi-Asset Income A (Mdis) SGD-H1","LU0211326839.USD":"TEMPLETON GLOBAL INCOME \"A\" (USD) INC","LU1201861165.SGD":"Natixis Harris Associates Global Equity PA SGD","LU0690374615.EUR":"FUNDSMITH EQUITY \"R\" (EUR) ACC","LU1668664300.SGD":"Blackrock World Financials A2 SGD-H","LU0256863811.USD":"ALLIANZ US EQUITY \"A\" INC","LU1201861249.SGD":"Natixis Harris Associates US Equity PA SGD-H","LU0211328371.USD":"TEMPLETON GLOBAL EQUITY INCOME \"A\" (MDIS) (USD)   INC","LU0980610538.SGD":"Natixis Harris Associates US Equity RA SGD-H","LU0348723411.USD":"ALLIANZ GLOBAL HI-TECH GROWTH \"A\" (USD) INC","LU0211331839.USD":"FRANKLIN MUTUAL GLB DISCOVERY \"A\" (USD) ACC","COF":"第一资本","IE00BLSP4239.USD":"Legg Mason ClearBridge - Tactical Dividend Income A Mdis USD Plus","IE00B775SV38.USD":"NEUBERGER BERMAN US MULTICAP OPPORTUNITIES \"A\" (USD) ACC","LU0943347566.SGD":"安联收益及增长平衡基金AM H2-SGD","IE00BFSS7M15.SGD":"Janus Henderson Balanced A Acc SGD-H","IE00B3S45H60.SGD":"Neuberger Berman US Multicap Opportunities A Acc SGD-H","LU0234570918.USD":"高盛全球核心股票组合Acc Close","MA":"万事达","LU0053666078.USD":"摩根大通基金-美国股票A（离岸）美元"},"translate_title":"你钱包里有什么？如何从Capital One以353亿美元收购Discover中获利","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"AXP":1,"V":1,"MA":1,"JPM":1,"GBTC":1,"DFS":1,"ATVI":1,"COF":1,"LU":0.6},"content_text":"Capital One announced a deal to acquire Discover Financial for $35.3 billion in an all-stock deal.Today's market reaction has been positive for DFS stock and neutral for COF stock.Merger arbitrage, anyone? The deal presents an 11.1% premium for investors buying DFS stock that will be realized upon the deal closing, likely in late 2024 or early 2025.   ANDREW CABALLERO-REYNOLDS/AFP via Getty ImagesYesterday after market close, Capital One (NYSE:COF) announced a monster deal to acquire Discover Financial (NYSE:DFS) for roughly $35.3 billion. This represents 1.0192 COF shares for each DFS share (worth $139.56 per DFS share at current prices). In its press release, Capital One cited cost savings of $2.7 billion annually and a 20% IRR on the deal. The deal will create the largest credit card company in the US by loan volume and allow Capital One to issue its own credit cards. The initial market reaction was somewhat negative for COF stock, but the stock is now nearly flat since announcing the deal. DFS stock is up roughly 13% on the news. Both stocks are up nicely for the year. Data by YChartsIs The Capital One/Discover Deal Smart? Will It Close? Judging from the press release and market reaction, the deal seems good for DFS and reasonable for COF. Analysts have cited significant IT savings that the larger combined company is likely to benefit from and the potential to cut out Visa (V) and Mastercard (MA) as middlemen. At least some investors are taking this seriously – Mastercard and Visa shares quickly dropped after the news broke. There's the risk that DFS might be a bit of a gift horse for COF – the company saw its previous CEO exit last year amidst compliance and regulatory issues. That's part of why Capital One can buy Discover so cheaply. Capital One and Discover also both tend to cater to a customer base that's lower on the income and credit spectrum than say, American Express or JPMorgan Chase (JPM). This may amplify the risks of a recession to the combined company. Delinquencies are rising across the credit card industry, but when you charge 25% annually in interest and only have to write off a few percent, it's impossible to lose money. Even during the depths of the 2008 recession, Capital One turned an operating profit. Both shareholder bases will have to vote on the deal, but I believe that the deal will be easily approved by shareholders. As is typical for the financial industry, the deal will be done as an all-stock deal rather than cash. This means DFS and COF shareholders will split the market risk of the combined company. The deal is expected to close in late 2024 or early 2025. Of course, there's also the risk that the Biden administration will block the deal or that a future Republican administration could do so as well. My initial read is that this risk is not as severe as a naive expectation would be, though. Capital One appears to be aiming to undercut the oligopoly between Visa, Mastercard, and American Express (AXP). Whether they actually would compete much on price is an open question – after all, if realtors and Ivy League universities seem to not need to compete on price, four major corporations controlling the credit card market probably won't either. However, competition from four players is better for consumers than three, and it's hard to see a court finding this deal as harming consumers. I think there's a high probability that this deal will close. Merger Arbitrage In Discover Stock This deal presents a straightforward merger arbitrage trade for those interested. DFS trades for $125.50 and the value of the deal is currently about $139.50 (I'm rounding, as the value changes with the value of COF stock). You can buy DFS here and collect a ~11.1% premium in the roughly 12 months that it should take for the deal to close. And if you own Capital One stock, that's exactly what I would do. You can swap your COF out for DFS and get your stock back in a year with an 11.1% kicker. Of course, this strategy fails if the deal doesn't close, but the market thinks that the deal is likely to close, as do I. Because deal premiums tend to ebb and flow, you can bet small and then double/triple down if the premium gets bigger (as it did with deals like Activision Blizzard (ATVI), Twitter, and in the crazy Grayscale Bitcoin Trust (GBTC) trade that at one point offered over 2-1 on the deal closing). In a classic merger arbitrage trade, you usually buy stock in a company that's being acquired for cash. This means that the acquiring company bears the risk of the market conditions changing. In a stock deal like this, this risk is split between both shareholder bases. What does this mean for you? If you buy DFS stock here, you're being paid in COF stock, so if the market crashes or COF stock crashes then you're going to lose money. However, Capital One has a great track record. Last year, I highlighted why Warren Buffett and Michael Burry both were loading up on the stock – since then, it's up roughly double the S&P 500. Bottom Line  After yesterday's M&A announcement, buying DFS here for merger arbitrage is a good deal. I believe the deal will close, I like the 11.1% kicker, and believe that Capital One will continue to succeed in the long run. I wouldn't bet the farm, but there's some value to be had here.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2413857244"}