Buying Discover gives Capital One one of the four major payment networks, says Jim Cramer

Key Concepts:

• Capital One Financial (COF)
• Discover Financial (DFS)
• Payment Networks (Visa, Mastercard, American Express, Discover)
• Acquisition
• Antitrust Regulation
• Growth Stock
• Transaction Fees
• Credit Risk
• CNBC Investing Club

Capital One and Discover Acquisition: A Growth Story

The speaker highlights Capital One Financial (COF) as a stock with significant growth potential, despite claims of overvaluation. The CNBC Investing Club owns this stock in the Chapels Trust. Since the initial purchase on March 6th, the stock is up over 28%, and the speaker believes there's more room to run.

Acquisition Details and Rationale:

The primary driver of this growth is Capital One's acquisition of Discover Financial (DFS) in an all-stock deal valued at $35.3 billion. While Capital One is already a major credit card issuer, acquiring Discover provides them with one of the four major payment networks, placing them alongside Visa, Mastercard, and American Express.

Discover's Unique Position:

Discover, like American Express, operates differently from Visa and Mastercard. Discover issues its own cards and processes payments. Visa and Mastercard only operate payment networks and collect transaction fees without taking on credit risk.

Strategic Advantages of the Acquisition:

The acquisition grants Capital One ownership of the Discover Global Network, enabling them to scale into a global payments platform. This reduces their dependence on Mastercard and Visa, as they can now collect transaction fees directly through their own network.

Antitrust Perspective:

The speaker criticizes the Biden administration's antitrust regulators for opposing mergers, arguing that some deals, like this one, can foster competition. Discover, independently, couldn't effectively compete with Visa, Mastercard, and American Express.

Conclusion:

The acquisition of Discover by Capital One is presented as a strategic move that positions Capital One for substantial growth by establishing it as a major player in the global payments landscape. The speaker believes that the deal will allow Capital One to compete more effectively with established payment networks and reduce its reliance on Visa and Mastercard.