Two of the nation's largest credit card lenders are merging, and some investors are worried about what the deal might mean for Mastercard(NYSE: MA). Shares of the global payment network processor are down 3% as of 10:30 ET Tuesday.
Is Capital One buying its own rails?
On Monday, Capital One Financial (NYSE: COF)announced it had made a deal to acquire Discover Financial Services(NYSE: DFS) for $35.3 billion in stock. The purchase is primarily about adding new customers for Capital One, but the company, which currently relies on Mastercard and other payment processing networks, also seems intrigued by Discover's competing network.
In the press release, Capital One noted that Discover has built a "rare and valuable" global payment network with 70 million merchant acceptance points in more than 200 countries. Today, Discover is the smallest of four major U.S.-based payment networks, but Capital One called the deal "a key foundation" in its "quest to build a global payments company."
Capital One sees opportunities to extract about $1.2 billion in network synergies through the acquisition. Those savings are likely, at least in part, to come via Mastercard's margin, as Capital One could grow Discover into a competing network or at least use the network to extract better terms from its existing partners.
Mastercard has a large number of customers, but seeing Capital One build out the Discover network would create a new headache for the brand. As a result, investors are selling off Mastercard shares on Tuesday.
Is Mastercard a buy after the Capital One/Discover announcement?
The threat is real, but Mastercard investors should not go into a full panic. Capital One first has to get the deal past regulators and closed, and even then, it will likely move slowly in integrating Discover and adopting its network. Capital One is unlikely to jeopardize its existing business by downgrading its current customers to what, as of now, is an inferior network, and it will require years of investment to build Discover into a proper rival to Mastercard.
At worst, the deal could cause a slow Capital One transition away from Mastercard and Visa(NYSE: V) on a portfolio-by-portfolio basis. And even if that happens, Discover being owned by a credit card bank would likely make it less appealing to other lenders, which would help to lock in MasterCard business elsewhere.
Mastercard has been a big winner for long-term shareholders: It beat the market by more than 300 percentage points over the past decade. The Capital One/Discover deal creates new uncertainty for it, but there are plenty of opportunities for Mastercard to continue to deliver for investors for the foreseeable future.
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Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool recommends Discover Financial Services and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
