Discover CEO Resigns as Capital One Announces $35 Billion Acquisition

Key Takeaway

• Discover CEO Michael Rhodes resigns to become CEO at Ally Financial; succeeded by interim CEO J. Michael Shepherd with a $1.25 million salary.
• Capital One acquires Discover in a $35 billion all-stock deal, aiming to become the largest US credit card company by loan volume.
• Despite regulatory concerns over financial-services consolidation, Discover shares surged 35.9% over the past 12 months, reflecting market optimism.

Leadership Transition at Discover

Discover Financial Services announced the departure of Chief Executive Officer Michael Rhodes, who will be leaving to take up the role of CEO at Ally Financial Inc. Rhodes, who joined Discover from Toronto-Dominion Bank, was appointed CEO in December following Roger Hochschild's resignation due to compliance and risk-management issues. Rhodes will remain at Discover until April 1, succeeded by J. Michael Shepherd as interim CEO. Shepherd, a former chairman and CEO of Bank of the West, will receive a base salary of $1.25 million along with a one-time restricted-stock award valued at $5.75 million. Rhodes expressed his admiration for Ally's digital banking and automotive finance leadership, stating, "I am so pleased the board has put its trust in me to continue advancing Ally’s strategy alongside the strong leadership team."

Capital One's Acquisition of Discover

In a significant move within the financial sector, Capital One Financial Corp. has agreed to acquire Discover Financial Services in a $35 billion all-stock deal. This acquisition is set to create the largest US credit card company by loan volume, surpassing competitors like JPMorgan Chase & Co. and Citigroup Inc. The deal, expected to close in late 2024 or early 2025, will see Capital One holders owning about 60% and Discover holders about 40% of the combined company. The acquisition aims to generate pre-tax synergies of $2.7 billion and positions Capital One to enhance its payments network and compete more effectively with major players like Visa and Mastercard.

Regulatory Challenges and Market Response

The acquisition of Discover by Capital One is anticipated to address Discover's past compliance and risk-management lapses, which have been a concern. Capital One CEO Richard Fairbank acknowledged the significant effort required to rectify these issues, stating, "These can be very big undertakings. Whatever people think it is, we’ll take the over." The deal has drawn attention from regulators and politicians, with some expressing concerns about the impact of financial-services industry consolidation on consumers. Despite these challenges, the market has reacted positively, with Discover shares rising 35.9% over the past 12 months, indicating investor confidence in the strategic direction of both companies.

Management Quotes

• Michael Rhodes, CEO of Discover Financial Services:

  "I have long admired Ally’s transformational approach to digital banking and its leading position in automotive finance. I am so pleased the board has put its trust in me to continue advancing Ally’s strategy alongside the strong leadership team."