Launched by Sears in the mid-1980s, Discover Financial Services was an industry pioneer, originating cash-back credit cards that now are commonplace and improbably growing into one of the survivors in a U.S. credit card business increasingly dominated by a handful of giants such as Chase, Citibank and American Express.
So the Monday announcement that McLean, Virginia-based Capital One is gobbling Discover, based in north suburban Riverwoods, in an all-stock deal valued at $35 billion, marked a sad day for Chicago.
If the tie-up survives regulatory scrutiny — and that’s not a sure bet given the Biden administration’s tough antitrust approach to large-scale mergers, particularly in financial services — it will mean the loss not only of a major corporate headquarters but also a hefty number of good-paying jobs. Capital One has promised shareholders it will cut $1.2 billion, or more than a quarter, of Discover’s operating expenses. That’s not possible to do without chopping a meaningful number of employees doing work Capital One already has its own people doing.
Such is the cold math of deals like this that promise investors the benefits of “scale” and “synergies.” Those cost cuts contribute to earnings per share. The losers in these transactions almost always are the regions the sellers call home.
Executives at Capital One, in their deal presentation and in comments with analysts on Tuesday’s conference call, pledged to keep a “significant presence” in “Chicagoland.”
But the mention was barely in passing. Chicago should prepare to become but one of a number of U.S. outposts in Capital One’s wallet, even though Capital One has said it will keep the Discover brand active even after the merger, along with Discover’s branded savings accounts.
How did we get here? A year ago today, this deal would have been almost unimaginable.
Discover was growing more rapidly than it had since its earliest days. The well-regarded company wasn’t viewed as takeover bait. But then, in July, Discover shocked investors by disclosing that it was in hot water with federal regulators over compliance deficiencies – and, more worrisome, confessed to giving short shrift to regulatory compliance over several years. Barely a month later, Roger Hochschild was gone, and the board was conducting a national search for a new CEO.
The stock dropped accordingly, providing an opening for an aggressive suitor to make an offer. Discover didn’t have to say whether it was for sale. A company in that position is in play whether it wants to be or not.
The curveball in this tale is that Discover in fact hired a new CEO, Michael Rhodes. A financial services industry veteran, Rhodes had no ties to Chicago and officially started as Discover CEO on Feb. 1 — less than three weeks ago. Nice to know you, Mr. Rhodes.
Ordinarily when a deal like this takes place, the CEO of the selling company takes great pains to reassure the firm’s hometown that nothing will change and the deal will be good for all involved. Rhodes is in no position to do that credibly — and didn’t really try on the call with analysts.
This has been a lousy stretch for Chicago’s business community. The rocky start of Mayor Brandon Johnson’s administration has business people deeply worried. The recent departures of household names such as Citadel, Caterpillar and Boeing in the face of concerns about public safety and the city’s post-pandemic vibrancy and health have been deeply unsettling.
Discover is more than a faceless credit card outfit stashed away in the suburbs. One of its longtime selling points to consumers has been U.S.-based customer service, in contrast with most of its rivals. During the widespread unrest and reassessment following the murder of George Floyd, Discover opened a call center — one of just a handful in the country — in a shuttered Target in Chatham, employing hundreds of South Siders.
That’s the virtue of a company dedicated to its hometown. Hochschild played an instrumental role in making that happen.
Now we have this important, publicly traded company being acquired due to self-inflicted wounds. All the more reason for the progressive political forces in positions of power to pay far greater heed to this region’s business environment than they have to date.