A Capital One disclosure filed Friday with the Securities and Exchange Commission detailed a six-month pursuit of Discover, including a seven-week span during which the sides discontinued discussions.
Stephen Crawford, a senior adviser to Capital One CEO Richard Fairbank, reached out to Tom Maheras, Discover’s board chair — regarding the card company’s “future strategic direction and its willingness to consider potential strategic options” — shortly after Discover’s CEO, Roger Hochschild, abruptly resigned in August, the filing indicated. Discover, less than a month earlier, had disclosed a pricing issue and a compliance investigation by the Federal Deposit Insurance Corp.
Maheras took a meeting in September with Fairbank and Crawford — at which Fairbank laid out his views on the companies’ businesses “and the potential benefits of a combination,” the filing indicated. Capital One’s presentation pitched an all-stock acquisition of Discover with a 30% premium on the card company’s share price, according to the filing. Maheras told Capital One that Discover wasn’t seeking a “combination or other strategic transaction” at the time, the filing indicated.
It would be the first of three spurned offers Capital One would make for Discover, according to the filing. Roughly a week later, however, Maheras would tell Discover’s board the inquiry “likely merited further consideration,” and the card company established a subgroup of directors, including Discover’s now-interim CEO Michael Shepherd, to evaluate offers, according to the filing.
Fairbank and Crawford met with the Discover subgroup in late October, during which Capital One again floated an all-stock deal with a 30% premium for the card company, the filing indicated. The Discover subgroup rebuffed the offer, according to the filing.
Crawford asked Maheras in November what Discover’s board would need to get the deal done. Maheras reiterated that Discover was not formally considering a transaction but added he was unsure a 30% premium was enough, according to the filing. Crawford then indicated Capital One might be amenable to a 33% premium, the bank said.
At that point, Discover hired financial advisers and legal counsel for a potential deal.
Senior management of the two companies met on the day after Thanksgiving to discuss preliminary due diligence matters, the filing indicated. And in early December, an initial draft of the merger agreement passed between the companies’ legal counsels.
Days later, however, Discover went ahead with a plan to name TD veteran Michael Rhodes as its next CEO. Crawford and Maheras, on the same day, “determined, based on the status of Capital One’s due diligence and various other factors, to not proceed further with discussions toward the potential transaction,” according to the filing.
But throughout December and January, Capital One management “continued to monitor” Discover’s business, performance and related developments, the filing indicated.
After Discover reported fourth-quarter earnings — disclosing a 62% drop in profits year over year — Crawford called Maheras to indicate that Capital One would be willing to restart discussions.
Capital One’s board, at its next meeting in February, unanimously supported resuming negotiations with Discover and told the bank’s management to act quickly, according to the filing.
Crawford then gave Maheras a proposal with updated terms including a fixed exchange ratio of 1.0192 shares of Capital One common stock for each share of Discover common stock — a 30% premium — with the aim of announcing a finalized deal by Feb. 20, the filing indicated.
Senior management of the two companies formally resumed their due diligence discussions Feb. 10 and, over the next week, Discover, Capital One and their advisers and attorneys evaluated the deal’s impact on banking and network business lines, technology, human resources, legal, finance, risk and compliance, according to the filing.
Capital One and Discover announced the $35.3 billion transaction Feb. 19.
