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Capital One’s acquisition has $1.4 billion breakup fee if rival bid emerges, but none if regulators kill deal

Certainly! Here’s a human-like rewrite:Capital One’s bid to take over Discover Financial has stirred up quite a buzz, especially with the revelation that Discover could face a hefty $1.38 billion breakup fee if they choose another buyer. But interestingly, if the deal falls through due to regulatory issues, no such fee applies.

The news of Capital One’s agreement to acquire Discover, valued at a whopping $35.3 billion in an all-stock deal, broke late on Monday.

While Discover is restricted from actively seeking other offers, it’s allowed to entertain proposals from other well-financed bidders before the shareholders vote on the acquisition.

Should Discover decide to opt for a different offer, it would owe Capital One a substantial $1.38 billion, a figure in line with typical breakup fees in the banking sector, which usually range between 3% and 4% of the transaction value, according to insiders.

Breakup fees are meant to incentivize both parties to see the deal through to completion. In cases where deals collapse, these fees can result in significant payouts, as exemplified by AT&T’s staggering $6 billion payment to T-Mobile after their takeover attempt fell apart in 2011 due to opposition from the U.S. Department of Justice.

Observers of the Capital One-Discover deal are keeping a close eye on regulatory approval. Recent years have seen regulators intervene in various industries on antitrust grounds, and navigating such hurdles, especially during an election year and in an environment perceived as hostile to bank mergers, poses challenges.

In a typical scenario for bank deals, neither party owes a breakup fee if regulatory approval is denied. However, last year saw Canadian lender TD Bank agreeing to shell out $225 million to First Horizon after their takeover plan was derailed by regulatory scrutiny.

During a conference call on Tuesday, Capital One CEO Richard Fairbank expressed confidence in obtaining approval, emphasizing that both companies have kept regulators in the loop.

Approval for the deal hinges on securing clearance from the Federal Reserve and the Office of the Comptroller of the Currency. Additionally, the Justice Department holds sway over the acquisition and could potentially litigate to block it.

The deal between Capital One and Discover came about after Capital One directly approached Discover, bypassing a broad search for other potential buyers, as revealed by insiders.

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