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INVESTMEN Team Details:

Aditya Dhingra
Chitranjan Jain

T Sai Shravanth Reddy

Yatharth Agarwal

MEMORANDU
M
October 2019
 Table of Contents

Section 1. EXECUTIVE SUMMARY

Introduction…………………………………………………………………………
The Company………………………………………………………………………
Industry Overview………………………………………………………………….
Transaction Overview………………………………………………………….….
Transaction Considerations……………………………………………………....
Selected Financial Information…………………………………………………...

Section 2. INDUSTRY OVERVIEW

Current Scenario…………………………………………………………………..
Is Discover set for next downturn?................................................................
Stress Testing……………………………………………………………………..

Section 3. COMPANY OVERVIEW

Challenges………………………………………………………………….……..

Section 4. CORPORATE STRUCTURE

Corporate Organization……………………………………………………..……
Management……………………………………………………………..………..
Competition……………………………………………………………...…………

Section 5. ACQUIRER COMPANY’S OVERVIEW

History………………………………………………………………………………
Challenges…………………………………………………………………………
Synergies and Benefits…………………………………………………………..

Section 6. FINANCIAL PERFORMANCE

Peer Analysis………………………………………………………….…………..
Comparative Valuation…………………………………………………………...
Financial Projections……………………………………………….……………..
Synergies and Growth Prospects……………………………....……………….
DDM Valuation…………………………………………………….……………....
Recent Transactions…………………………………………….………………..
Accretion – Dilution Analysis…………………………………….……………....
Illustrative Contribution Analysis…………………………………………..…….

Section 7. ANNEXURES

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1. Executive Summary

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EXECUTIVE SUMMARY
Introduction Sears introduced the Discover credit card in 1985 in
conjunction with real estate franchise Coldwell, Banker &
Company and brokerage firm Dean Witter Reynolds.
Altogether, these companies operated under the banner
Sears Financial Network. In 1993, Sears sold off its financial
services branch with Dean Witter Reynolds in charge of
Discover. This independent company was called Dean Witter,
Discover & Co. In 1997, Dean Witter, Discover & Co. merged
with investment banking house Morgan Stanley. In December
2006, Morgan Stanley announced it would spin off Discover
by the end of August 2007. On June 30, 2007, Discover was
spun off as an independent, publicly traded company called
Discover Financial Services. Discover Financial Services, Inc.
is an American financial services company that owns and
operates Discover Bank, which offers checking and savings
accounts, personal loans, home equity loans, student loans
and credit cards. It also owns and operates the Discover and
Pulse networks and owns Diners Club International. Discover
Financial Services annual revenue for 2018 was $12.848B,
11.29% increase from 2017.Annual Net Income for 2018 was
$2.689B, a 32.4% increase from 2017.

Discover Financial Services is the fourth-largest, credit-card

issuer behind Visa, MasterCard and AMEX. The company
pioneered new features, stepping up as one of the first
companies to offer cash rewards and no annual fees.
Discover has evolved into one of the United States most
recognized financial brands, with its well-known "It pays to
Discover" tagline and more than 50 million card members.
With the integration of Discover, PULSE and now Diners Club,
they process billions of transactions every year, with 4,400
financial institutions and point-of-sale terminals all throughout
the United States and a bigger global reach through Diners
Club International payment network.

Discover is focused on growth in key areas: total loans,

consumer deposits and partnerships to expand their global
network. They are making significant investments in new
capabilities such as data analytics and machine learning,
digital payments and the upgrade of technologies to be a
prudent lender and control their expenses.

EXECUTIVE SUMMARY

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The Company Discover Card was unveiled during the 1986 Super Bowl
when a "Dawn of Discover" commercial featured a rising
sun and a simple message: "Very few things cost you
nothing to get and pay you back every day. But now the
Discover Card does. “By 1989 Discover Network signed its
1 millionth merchant. The next decade proved to be
lucrative for the company, first spinning off with Dean Witter
Financial Services Group, Inc. on March 1993, and then
going on-line in September 1995. In 1997, Discover
entered a $23-billion merger with an investment bank,
Morgan Stanley. Discovery capped the decade with its
U.K. expansion and renaming its processing partner, Novus
Services, Inc. to Discover Financial Services, Inc. in 1999.

Until the third quarter of 2007, Discover was part of Morgan

Stanley, the revered New York-based investment bank.
Although the Discover unit made some respectable
contributions to the investment bank's bottom line, Morgan
Stanley's soul was never in the credit card business. The
firm spent 2006 whipping it into shape, resulting in record
net revenue of $4.3 billion, a 24-per cent increase from
2005. Discover's credit quality and bankruptcy rates
improved as well, and delinquencies and loan losses were
at a 10-year low. It also launched a new debit card
program and entered into several new agreements with
merchant acquirers in an effort to increase Discover's
acceptance at small-size and mid-size businesses. The
spin-off was completed in the third quarter of 2007.

The first big strategic move after the spin-off was in

February 2008, when Discover announced that it was
selling its the U.K. credit card business, Goldfish, to
Barclays Bank for about $70 million. Discover CEO David
Nelms said that by selling the losing stake, they were able
to reduce funding and earnings risk and managed to
increase the capital ratio. In July 2008, Discover completed
the acquisition of Diners Club International from Citi for
$165 million. The move brought more than $30 billion per
year in spending volume outside of North America, dealt
with 44 licensees that issued Diners Club cards and
established a network in 185 countries. Diners Club
launched the first general-purpose credit card in 1950 and
since then, has grown a wide-reaching global payments
network.

EXECUTIVE SUMMARY

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Industry Overview By the end of 2018, the U.S. banking system had $17.9
trillion in assets and a net income of $236.8 billion. The
sector supports the world’s largest economy with the
greatest diversity in banking institutions and concentration
of private credit anywhere in the world. Financial markets in
the United States are the largest and most liquid in the
world. In 2018, finance and insurance represented 7.4 per
cent (or $1.5 trillion) of U.S. gross domestic product.
Leadership in this large, high-growth sector translates into
substantial economic activity and direct and indirect job
creation in the United States. JP Morgan Chase, Bank of
America, Citigroup and Wells Fargo are the Top 4 Banks in
the United States by Assets.

The Characteristics of the changing industry are listed

below:

● Rise of Cryptocurrency and prevalence of

Blockchain
● Artificial Intelligence is on the rise
● Changing consumer behavior leads to a changing
branching network
● Uncertainty in regulation and deregulation
● Increasing Cost of Compliance

EXECUTIVE SUMMARY
American consumers collectively are juggling $1.08 trillion
in credit card debt as of mid-2019, according to the Federal
Reserve consumer credit report. The top 10 card issuers
held 81.5 per cent of credit card balances outstanding in
2018. There were some 41 billion U.S. general-purpose
credit card transactions in 2018 (based on cards issued by
the four major networks – Visa, Mastercard, American
Express, and Discover), accounting for about $3.8 trillion in
dollar volume. General-purpose credit card payments
value had grown from $3 trillion in 2016 to $3.32 trillion in
2017. And the total number of credit card transactions in
the U.S. was 40.8 billion in 2017, up from 37.3 billion in
2016, according to the 2013 Federal Reserve Payments
Study.

Visa is the largest of the four major U.S credit card

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 networks. At the end of 2018, Visa’s U.S. credit payments
volume was $1.95 trillion, up from $1.77 trillion in
December 2017. Mastercard’s U.S. credit purchase
volume was $811 billion at the end of 2018, up from $743
billion the previous year. American Express also saw
growth from year to year, as U.S. cardholders spent $776
billion in 2018, up from $708 billion the year before. Finally,
the Discover network had a credit purchase volume of
$143 billion in 2018, up from $133 billion in 2017.

One major threat that continues to impact cards in

circulation is security. Rippleshot reported that 7.6 million
existing credit card users were fraud victims in 2017, up
from 6.6 million in 2014.13 Credit cards in the United
States have traditionally used a magnetic stripe, but a
nationwide migration to EMV payment technology is now
underway. EMV– which stands for Europay, Mastercard
and Visa – is a global standard in which cards have
computer chips that dynamically authenticate transactions
instead of relying on easy-to-copy magnetic stripes.

EXECUTIVE SUMMARY
Transaction Overview The Management of Discover Financial Services have
recognized that the company is at a critical juncture. Having
achieved their targeted results from successful integration
and improvement efforts, the group wishes to see The
Company expand its growth horizon through a more
aggressive approach to new business development in its
core and ancillary markets including a comprehensive
strategy for growth through acquisition. As a result, the
shareholders have engaged Team Infinity as exclusive
financial advisor. In certain circumstances, members of
Management may consider re-investing a portion of their
proceeds from the contemplated sale. Any transaction will
be structured as a sale of the stock of Discover Financial
Services.

Transaction Considerations Prospective investors may wish to consider the following in

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their evaluation of the Company and the contemplated
transaction:

Mission Driven
Volunteerism and commitment to helping others are an
important part of the Discover culture. Discover employees
taught financial literacy to nearly 8000 students, filled
thousands of backpacks with supplies, built homes and
playgrounds, conducted clothing and food drives and
packed 140,000 meals for the hungry. Through their
Pathway to Financial Success program in 2018, they
invested more than $5 million to bring free financial
education curricula to high schools across the country.

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EXECUTIVE SUMMARY
Selected Financial Information
Post-acquisition, Discover Financial Services is expected to
see a decrease in its cost of funding which in turn will lead
to potential annual savings of approximately $300 million.
marketing and other overhead costs for Discover could be
almost completely eliminated, and total employee costs will
shrink considerably as Discover’s credit card and personal
loan divisions would be absorbed by the respective Wells
Fargo units.
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2. Industry Overview

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INDUSTRY OVERVIEW
Current Scenario The door is opening for increased banking and capital
markets mergers and acquisitions (M&A) activity in 2019.
Many organizations are willing and prepared to do deals.
Numerous drivers for M&A in 2018 are tax reform,
business-friendly regulatory environment, increasing
interest rates, and ample capital levels look to remain in
place. However, building macroeconomic pressures
including being deep into the current market cycle may
foreshadow a potential downturn as soon as 2020.
Organizations contemplating both market opportunities and
uncertainties will need to decide: Is 2019 the time to shed
assets we don’t need, buy capabilities we want, and get our
M&A house in order? Late-2018 stock market gyrations
have put many organizations on edge. However, they may
have an upside in 2019: Lower bank valuations might
broadly entice sidelined buyers to engage in deal-making,
especially those who have seen their stock prices increase
in value relative to peers. Still, bank stress tests are
projecting a slowdown in economic activity over the next
18–24 months.

On the borrower side, a cooling economy may lead to more

defaults, more charge-offs, and more pressure on bank
earnings. How might this translate into M&A? Larger banks
may continue to shed noncore assets and markets; smaller
banks may consolidate.

The prospect of a slowdown coupled with pent-up demand

and a pro-business regulatory environment may encourage
players with healthy capital levels and strong stock
valuations to move quickly to fill gaps in their geographic
footprint, product portfolio, or technology capabilities.
Meanwhile, two large bank mergers in late January and
early February may be harbingers for more “mergers of
equals.” In both cases, investors reacted favorably and not
just for the acquired, which is often the case, but also for
the acquirer.

Those deals, in turn, will put more pressure on smaller

banks facing increased competition. Many may see only
two options: Double down on efficiency improvements, or
merge and find savings and technology upgrades with a
partner.

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INDUSTRY OVERVIEW

The characteristics of the changing industry are as below:

Cybercriminals targeting US financial Institutions:

A broad range of cyber threats are facing the global finance

industry, which represents a one-stop shop for attackers,
providing essential funding for the underground economy.
By targeting financial services institutions, criminals steal
sensitive data that can be used to open fake accounts and
lines of credit they need for survival. Among financial
services firms, banks lost $16.8 billion to cybercriminals in
2017. Attacks on SWIFT—the leading global network for
money and security transfers—alone cost $1.8 billion year-
to-date. Costs of cybercrime also include regulatory fines,
litigation, additional cybersecurity following the breach, the
need to respond to negative media coverage, identity theft
protection and credit monitoring services to customers
affected by breach and lost business due to reputational
damage.

According to Ponemon Institute’s consumer sentiment

study, data breaches are in the top three of incidents that
affect reputation, along with poor customer service and
environmental incidents.

US financial services organization Capital One revealed a

breach affecting 106 million customers in North America
and an estimated cost of $100 million and $ 150 million for
the hack including customer notifications, credit monitoring
and tech costs and legal support due to this act.

On September 7, 2017, Equifax announced a cybercrime

identity theft (Identified on July 29, 2017), an event that
impacted approximately 145.5 million U.S. consumers.
Information accessed by the hacker (or hackers) in the
breach included first and last names, Social Security
numbers, birth dates, addresses and, in some instances,
driver's license numbers. Credit card numbers for
approximately 209,000 U.S. consumers, and certain
dispute documents with personal identifying information for
approximately 182,000 U.S. consumers were also
accessed. Eventually Equifax agreed to pay $700 million to
settle federal and state investigations into how it handled a
massive data breach that affected almost 56% of
Americans.

Regulation: A new era of global regulatory divergence:

In the United States, the focus on refining or even replacing

existing regulations remains. A new bill, Economic Growth,

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INDUSTRY OVERVIEW
Is Discover set for the next downturn?
Regulatory Relief, and Consumer Protection Act, amending
certain provisions in the Dodd-Frank Act was signed into
law. Notably, the statutory systemically important financial
institutions (SIFIs) asset thresholds for enhanced prudential
regulations, such as stress tests and capital and liquidity
ratios, were increased, giving the most relief to banks with
assets between $50 billion and $100 billion. One of the
most notable developments has been the US tax Cuts and
Jobs Act, which has already had a meaningful impact on
banks’ financials. Without the lower tax rate, net income for
the banking industry in the second quarter of 2018 would
have increased only by $5.6 billion year over year instead
of the $12.1 billion realized.
Payments: Diversify Growth, bolster security and
restructure the organization
Driving volume-based fee growth in payments is expected
to become increasingly challenging for card issuers in
2019. Cheaper digital solutions from nontraditional players
and expensive reward programs may make it difficult for
card issuers to increase fee income. However, focusing on
growing the card portfolio for its predictable interest income
is still paramount.
Furthermore, incumbents are expected to differentiate
customer experience in areas fraught with friction—cross-
border payments and B2B payments being prime
examples. For example, Visa recently acquired Fraedom, a
software-as-a-service solution, to expand in the growing
B2B payments space.
Ancillary services should be another focus area. Data-
driven insights to help merchants and consumers in their
decisions should be valued, such as Mastercard’s tool to
analyze retailers’ purchase data to determine new store
locations.
For the first time in over a decade, Discover's loan losses
as a percentage of total credit card loans are higher than
every major U.S. card issuer other than Capital One, which
is more willing to lend to consumers with less-than-perfect
credit than other mainline card issuers. It's an unusual
position for Discover, the nation's fifth-largest credit card
lender, which traditionally has been a cautious card lender.
The relatively high loan losses raise questions about
Discover customers' ability to withstand the coming
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 downturn, whenever it happens, compared with the
borrowers at other big card companies.

Charge-offs quintile is based on the following screens: Loan loss charge-offs to gross loans – higher
implies more loans are being written off.

Years of Loss Reserves – the number of years of reserves the bank has to cover loans in jeopardy of
default – higher is better quality. Scoring is relative to a regional universe by size (i.e. USA large cap)
and based on breaking the universe of companies into 5 quintiles. Companies that score "Poor" are in
the top quintile.

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INDUSTRY OVERVIEW
It's counterintuitive, but in one respect Discover's higher-
than-usual loan losses now are a sign of health. Credit card
loans on Discover's balance sheet have grown faster than
its rivals' in recent years. New borrowers generate more
losses than is typical in the year or two after they become
customers just because the company isn't yet intimately
familiar with their spending habits and financial
management. Discover's credit card loans have grown 45
percent from the third quarter of 2008 through the end of
April. JPMorgan Chase, the largest card issuer in the
country, saw its total loans dip slightly in that decade-plus
and stood at $150 billion at the end of March. Capital One,
traditionally the industry leader in card growth, has grown
47 percent in that time.

The risk Discover is taking in this cycle is that it's focused

on customers who need to borrow on their card, while
many larger players in the industry like Chase and Citibank
have focused more on high-earning consumers who
choose their cards based on the rewards they offer and
tend to pay off their balances each month.

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3. Company Overview

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COMPANY OVERVIEW
Challenges Economic conditions can reduce the usage of credit cards
and the average purchase amount of transactions industry-
wide, including Discover’s cards, which will reduce interest
income and transaction fees. They rely heavily on interest
income from their credit card business to generate
earnings. Their interest income from credit card loans was
$8.8 billion for the year ended December 31, 2018, which
was 83% of net revenues (defined as net interest income
plus other income), compared to $7.9 billion for the year
ended December 31, 2017, which was 80% of net
revenues. Economic conditions combined with a
competitive marketplace could result in slow loan growth,
resulting in reduced revenue growth from their core direct
banking business.

The core issues facing Discover Financial Services are:

● They incur considerable cost in competing with

other consumer financial services providers,
and many of their competitors have greater
financial resources than we do, which may place
us at a competitive disadvantage and negatively
affect their financial results. Competition is
intense in the credit card industry, and customers
may frequently switch credit cards or transfer their
balances to another card. We expect to continue to
invest in initiatives to remain competitive in the
consumer financial services industry, including the
launch of new cards and features, brand awareness
initiatives, targeted marketing, online and mobile
enhancements, e-wallet participation, customer
service improvements, credit risk management and
operations enhancements, and infrastructure
efficiencies.
● Adverse market conditions or an inability to
effectively manage our liquidity risk could
negatively impact our ability to meet our
liquidity and funding needs, which could
materially adversely impact our business
operations and overall financial condition. In the
event that our current sources of liquidity do not
satisfy our needs, we would be required to seek
additional financing. The availability of additional
financing will depend on a variety of factors such as
market conditions, the general availability of credit
to the financial services industry, new regulatory

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 restrictions and requirements, and our credit ratings.
Disruptions, uncertainty or volatility in the capital,
credit or deposit markets, such as the volatility
experienced in the capital and credit markets during
the financial crisis of 2007, may limit our ability to
repay or replace maturing liabilities in a timely
manner.
● The financial services and payment services
industries are rapidly evolving, and we may be
unsuccessful in introducing new products or
services on a large scale in response to these
changes. Technological changes continue to
significantly impact the financial services and
payment services industries, such as continuing
development of technologies in the areas of smart
cards, radio frequency and proximity payment
devices, electronic wallets, mobile commerce, data
analytics, machine learning and artificial
intelligence, among others. Rapidly evolving
technologies and new entrants in mobile and
emerging payments pose a risk to Discover both as
a card issuer and to the payments business.
● Fraudulent activity associated with our products
or our networks could cause our brands to
suffer reputational damage, the use of our
products to decrease and our fraud losses to be
materially adversely affected. The risk of fraud
continues to increase for the financial services
industry in general. We incurred fraud losses and
other charges of $83 million and $89 million for the
years ended December 31, 2018 and 2017,
respectively. Credit and debit card fraud, identity
theft and related crimes are prevalent, and
perpetrators are growing ever more sophisticated.
Our resources, customer authentication methods
and fraud prevention tools may be insufficient to
accurately predict or prevent fraud. High-profile
fraudulent activity could negatively impact our brand
and reputation. In addition, significant increases in
fraudulent activity could lead to regulatory
intervention (such as mandatory card reissuance)
and reputational and financial damage to our
brands, which could negatively impact the use of
our deposit accounts, cards and networks and
thereby have a material adverse effect on our
business.

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Plans to use digital technologies

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4. Corporate Structure

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CORPORATE STRUCTURE
Corporate Organization The Discover Card was actually launched by Sears. In
1985 Discover was launched with no annual fee and
offered a higher-than-normal credit limit. This were
features that were disruptive to the existing credit card
industry. Today, most cards with the Discover brand are
issued by Discover Bank, formerly the Greenwood Trust
Company. Discover Card transactions are processed
through the Discover Network payment network. Chosen
Payments handles Discover card processing as a courtesy
pass-thru to the Discover Network. Discover has 44 million
accounts as compared to Amex, the third largest card
brand who has 120 million accounts.

At the time the Discover Card was introduced, Sears was

the largest retailer in the United States. It had acquired the
Dean Witter Reynolds brokerage firm as well as Coldwell,
Banker & Company (real estate) in 1981 in an attempt to
add financial services to its portfolio of customer service
offerings. The Discover Card (and its issuing bank, the
Greenwood Trust Company, owned by Sears), was named
the Sears Financial Network.

In 2007 Discover Financial Services became an

independent company. Other retailers resisted it, as they
believed they would be helping their competitor. With
strong competition from Walmart, Sears began to face
difficulties in the late 1980s. The Discover Card’s
introduction was costly; Sears’s Discover credit card
operations accounted for a loss of $22 million in the fourth
quarter of 1986, and a loss of $25.8 million in the first
quarter of 1987.

Sears sold its financial businesses in 1993, and began to

accept Mastercard and Visa in addition to its store credit
card and the Discover Card. The Discover Card became
part of the Dean Witter financial services firm. Dean Witter
Discover merged with Morgan Stanley in 1997. In 2000,
Greenwood Trust changed its name to Discover Bank.

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CORPORATE STRUCTURE
Management
Discover manage their business activities in two segments:
Direct Banking and Payment Services.

Discover Direct Banking segment includes consumer

banking and lending products, specifically Discover-
branded credit cards issued to individuals on the Discover
Network and other consumer banking products and
services, including student loans, personal loans, home
equity loans and deposit products.

Payment Services segment includes PULSE, Diners Club

and their Network Partners business, which provides
payment transaction processing and settlement services on
the Discover Network. The risk management philosophy is
through five key principles that guide their approach to risk
management: Comprehensiveness, Accountability,
Independence, Defined Risk Appetite and Transparency.
Governance structure is based on the principle that each
line of business is responsible for managing risks inherent
in its business with appropriate oversight from our senior
Competition management and Board of Directors.

Discover competes with other consumer financial services

providers, including non-traditional providers such as
financial technology firms and payment networks on the
basis of a number of factors, including brand, reputation,
customer service, product and service offerings, incentives,
pricing and other terms. Their credit card business also
competes on the basis of reward programs and merchant
acceptance. They compete for accounts and utilization with
cards issued by other financial institutions (including
American Express, Bank of America, JPMorgan Chase,
Capital One and Citi) and, to a lesser extent, businesses
that issue their own private label cards or otherwise extend
credit to their customers.

In comparison to their largest credit card competitors, their

strengths include cash rewards, conservative portfolio
management and strong customer service. Competition
based on rewards and other card features and benefits
continues to be strong. Their student loan product
competes for customers with Sallie Mae and Wells Fargo,
as well as other lenders that offer private student loans.
Their personal loan product competes for customers
primarily with Wells Fargo, Citi and non-traditional lenders,

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including financial technology firms and peer to peer
lenders. Their home equity loan product faces competition
primarily from traditional branch lending institutions, credit
unions and other home equity installment lenders, as well
as providers of cash-out refinance loans and home equity
lines of credit. Although their student and personal loan
receivables have increased, their credit card receivables
continue to represent a majority of their receivables.

The credit card business is highly competitive. Some of

their competitors offer a wider variety of financial products
than they do, which may currently position them better
among customers who prefer to use a single financial
institution to meet all of their financial needs. Some of their
competitors enjoy greater financial resources,
diversification and scale than they do, and are therefore
able to invest more in initiatives and technology to attract
and retain customers, such as advertising, targeted
marketing, account acquisitions and pricing offerings in
interest rates, annual fees, reward programs and low-priced
balance transfer programs. In addition, some of their
competitors have assets such as branch locations and co-
brand relationships that may help them compete more
effectively. Another competitive factor in the credit card
business is the increasing use of debit cards as an
alternative to credit cards for purchases.

Merchant acceptance of the Discover card has increased in

the past several years, both in the number of merchants
enabled for acceptance and the number of merchants
actively accepting Discover. They have made investments
in expanding Discover and Diners Club acceptance in key
international markets where an acceptance gap exists. In
their payment services business, they compete with other
networks for volume and to attract network partners to
issue credit, debit and prepaid cards on the Discover,
PULSE and Diners Club networks. They generally compete
on the basis of customization of services and various
pricing strategies, including incentives and rebates. They
also compete on the basis of issuer fees, fees paid to
networks (including switch fees), merchant acceptance,
network functionality, customer perception of service
quality, brand image, reputation and market share. The
Diners Club and Discover networks’ primary competitors
are Visa, MasterCard and American Express, and PULSE’s
network competitors include Visa’s Interlink, MasterCard’s
Maestro and First Data’s STAR. American Express is a

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particularly strong competitor to Diners Club as both cards
target international business travelers.

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5. Acquirer Company’s
Overview

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ACQUIRER COMPANY OVERVIEW
History Wells Fargo & Company is a diversified financial services
company with $1.3 trillion in assets, providing banking,
insurance, investments, mortgage and consumer finance
through more than 10,000 stores, over 12,000 ATMs and
the internet across North America and internationally.

Wells Fargo & Company is an American multinational

banking and financial services holding company with
operations around the world. Wells Fargo is the fourth
largest bank in the U.S. by assets and the largest bank by
market capitalization. Wells Fargo is the second largest
bank in deposits, home mortgage servicing, and debit
cards. In 2011, Wells Fargo was the 23rd largest company
in the United States. Wells Fargo is headquartered in San
Francisco, California, with "hubquarters" throughout the
country.

In 2007 it was the only bank in the United States to be

rated AAA by S&P, though its rating has since been
lowered to AA− in light of the financial crisis of 2007–2012.
The firm's primary U.S. operating subsidiary is national
bank Wells Fargo Bank, N.A., which designates its main
office as Sioux Falls, South Dakota.

Low Productivity

The bank, which employs more people than any other in

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ACQUIRER COMPANY OVERVIEW the U.S., generated about $330,000 of net revenue per
employee last year, sliding behind most major peers. By
Challenges the end of last year, Wells Fargo ranked 15th among the 24
companies in the KBW Bank Index, which tracks big U.S.
commercial lenders. Five regional banks have surpassed
Wells Fargo by that measure since the company scrapped
sales targets and incentive programs in 2016 that fueled
both growth and abuses.

Winning new businesses

Wells Fargo’s consumer bank has begun seeing signs of

customer growth after flat lining in the wake of its
unauthorized consumer accounts scandal, but its other
lines of business have been slower to add new clients.
Wholesale bank, which caters to corporate and institutional
clients, has struggled to add new business.  Wells Fargo
was the only large-cap U.S. bank to not increase the
number of loans or deposits over the last two years.

Discover is currently the 5th largest credit card issuer in the

U.S. While Wells Fargo has the largest loan portfolio
among all U.S. banks, its credit card business is extremely
small in comparison, with the bank being ranked 8th in
Synergies and benefits terms of card loans outstanding. The bank has mentioned
on several occasions that its long-term growth strategy
involves focusing on issuing cards, which makes sense
given the high yield margins on credit card loans when
compared to other loan categories. And taken together, the
combined card portfolio would make Wells Fargo the third
largest player in the U.S. card industry after JPMorgan
Chase and Citigroup.

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Wells Fargo also has a negligible presence in the country’s
payment processing industry. In fact, its substantially
smaller rival U.S. Bancorp generates much higher payment
processing fees. This would also change if Wells Fargo
were to acquire Discover, as the latter is the 4th largest
payments processing network after Visa,
MasterCard and American Express. The combined entity
would be able to leverage Wells Fargo’s strong retail
banking presence as well as Discover’s end-to-end card
processing capabilities.

The biggest hurdle to a potential acquisition of Discover by

Wells Fargo will be the intense regulatory scrutiny it will
attract. Regulators have been known to be averse to
inorganic growth by large banks, and as Wells Fargo is a
global systemically important financial institution it would
have to go through a stringent regulatory review. The
account opening scandal has already called into question
the bank’s internal control processes, which would only
make getting approval more difficult. Also, the sharp
increase in card charge-off rates could continue in the
future – presenting a sizable downside risk to Discover’s
existing card loan portfolio. While this is definitely a
possibility, we believe that any increase in card industry
charge-off rates will be subdued in the future.

Key Synergies:

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 The combined company will be able to leverage the
scale and financial capabilities to make additional
investments in innovation and technology to
address technological disruption in the industry and
improve customer offerings and service.

 The consistency of the transaction with Discover’s

business strategies, including achieving strong
consumer deposits growth, reaching new markets,
improving customer attraction and retention,
developing technology capabilities and focusing on
cost management.

 Discover’s and Well Fargo’s shared belief in a

purpose-driven and thoughtful approach to the
combination and the resulting company, structured
to maximise the potential for synergies and positive
impact to local communities and minimize the loss
of customers and employees and to further diversify
the combined company’s risk profile compared to
the risk profile of either company on a stand-alone
basis.

 Wells Fargo is one of the Top US issuers of Visa &

Mastercard Credit Cards and bears a significant
expense in the form of transaction fees for
payments volume on Visa & Mastercard credit
cards. These costs will cease to exist post
acquisition as Discover is a Universal Credit Card
solution provider. This will lead to annual operating
expenditure synergies of $300-500 million.

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6. Financial
Performance

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FINANCIANCIAL PERFORMANCE
Peer Analysis
Discover earnings have grown consistently at a rate of.
With an operating margin of 48% relative to 39.27%
average of its closest peers, it is second only to Synchrony
Financial in the credit card industry. It has the second
highest Return on Equity within its sub-sector after
American Express. With a 5.5% earnings growth rate,
Discover is currently among the largest and fastest growing
consumer financial services companies.

Price to book value ratio

(As on Dec-2018)

Price to tangible book value ratio

(As on Dec-2018)

Earnings per share

(As on Dec-2018)

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FINANCIAL PERFORMANCE

Cost of risk ratio

(As on Dec-2018)

Recent Transactions The exit multiples like the EV/EBIDTA multiples for
Discover Financial have been arrived at by considering the
mean and the median of the recent M&A transactions in the
banking industry.

Target Acquirer Announcement Deal Value Recent Trailing Transaction

Date (millions) Earnings Multiple
(P/E)
Legacy Texas Prosperity 06/17/19 2068.3 154.189 13.41
Financial Bancshares
Group
Chemical TCF Financial 01/28/19 3551.9 284.02 12.50
Financial Corporation
Suntrust Bank BB&T Corp. 02/07/19 28282.6 2576 10.97

Illustrative Contribution Analysis

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Using the forecasts and publicly available information, we analyzed the implied equity contributions of
Discover and Wells Fargo to the pro forma combined company based on specific historical and
estimated future operating and financial information of each company, including, among other things,
closing stock prices of each company as of February 4, 2019, average closing stock prices of each
company for the 6 month, 1 year, 3 year and 5 year periods ended February 4, 2019, actual net
income for 2018, and estimated net income for 2019 through 2020.

Based on the number of fully diluted shares of Wells Fargo common stock and Discover Financial
Services common stock outstanding as of February 4, 2019 of 4495 million and 323 million,
respectively, following the consummation of the merger, holders of Discover common stock would hold
approximately 10.76% of the fully diluted shares of the pro forma combined company, and holders of
Wells Fargo common stock would hold approximately 89.24% of the fully diluted shares of the pro
forma combined company. The following table presents the results of this analysis:

Wells Fargo DPS

Outstanding Shares (In
Millions) 4495 323

Closing Share Prices    Wells Fargo DPS

February 4, 2019    48.73 76.6
    89.85%   10.15%
6-Month Average    47.64 79.92
    89.24%   10.76%
1-Year Average    48.48 75.13
    89.98%   10.02%
3-Year Average    53.14 71.5
    91.18%   8.82%
5-Year Average    52.65 65.3
    91.82%   8.18%
Net Income   
2018 Net Income (In Millions)    20689 2716
    88.40%   11.60%
2019E Net Income ( In
Millions)    20847 2889
    87.83%   12.17%
2020E Net Income (In
Millions)    21006 2885
    87.92%   12.08%

Comparative Valuation

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Synergies and growth prospects

Accretion and Dilution

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7. Annexures

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ANNEXURES

This chart compares the peer group's economic returns. The blue bar represents the returns achieved
for the last fiscal year. The pink bar represents the forecasted returns for the next fiscal year, while the
green dot represents the future level of economic returns given the current price. The green dot can be
thought of as the markets expected level of return for this company. CFROI is an approximation of the
economic return, or an estimate of the average real internal rate of return, earned by a firm on the
portfolio of projects that constitute its operating assets. The CFROI is relevant for a specific year, such
as the CFROI earned on this portfolio of projects in 1999. A firm's CFROI can be directly compared
against its real cost of capital (the investors' real discount rate) to see if the firm is creating economic
wealth.

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This field represents adjusted tangible assets divided by adjusted equity. It measures the amount of
permanent capital that supports risky assets. The higher the leverage multiple the higher the
proportional impact of asset losses on equity. Banks are incentivized by regulators and ratings
agencies to keep leverage at conservative levels, however increasing leverage will allow banks to earn
higher CFROE levels, all else equal.

Core Tier 1 ratio is the most conservative measure of capital and is Core Tier 1 Capital divided by
Risk-Weighted Assets (RWA). Tier 1 ratio is the same but using Tier 1 capital in the numerator. The
higher the ratio, the more capitalized a bank is. All of this is under applicable regulatory guidelines.

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 This chart shows the common-sized asset side of the balance sheet.

This chart shows the common-sized liability and equity side of the balance sheet.

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Tier 1 Capital Ratio – a risk-adjusted measure used by regulators to measure a bank's capital level –
higher means better capitalization (Scoring is relative to a regional universe by size (i.e. USA large
cap) and based on breaking the universe of companies into 5 quintiles. Companies that score 'Poor'
are in the top quintile.)

Pri Pri
ce/ ce/
201 202 Price/ Price/T
9E 0E SBV BV
EP EP per sh per sha
Company    S    S    are    re
Bank of America Corporation 10
.0 9. 1.1
   x    0x    x    1.6x
Wells Fargo & Company 9. 8. 1.3
   9x    6x    x    1.5x
U.S. Bancorp 11 11
.9 .2 1.8
   x    x    x    2.4x
The PNC Financial Services Group, Inc. 11 10
.0 .2 1.3
   x    x    x    1.7x
Fifth Third Bancorp 9. 8. 1.1
   9x    8x    x    1.6x
Citizens Financial Group, Inc. 8. 8. 0.8
   8x    2x    x    1.2x
KeyCorp 9. 8. 1.2
   0x    3x    x    1.5x
Regions Financial Corporation 9. 9. 1.1
   8x    1x    x    1.7x
M&T Bank Corporation 11 10
.3 .6 1.6
   x    x    x    2.4x
Huntington Bancshares Incorporated 10
.0 9. 1.4
   x    3x    x    1.8x
Median 10
.0 9. 1.2
   x    1x    x    1.6x

SunTrust            

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 Management Forecasts/Public Information 9. 9. 1.2
   9x    1x    x    1.7x
IBES Median EPS Estimates/Public Information 10
.1 9. 1.2
   x    5x    x    1.7x

Stress testing

Discover has a higher gross loan outstanding to output ratio than the poorly rated firms of the sector
however deposits as a portion of funding are healthy as are the liabilities portion of funding. The
management has been increasing the volume of risk weighted assets against a declining loan quality
amidst a consistently rising market share. This is demonstrated by rising NPA growth. The company
hopes to increase the quality of assets by increasing the no. of loans outstanding. The market implied
risk is decreasing since management undertook this path.

Discover Financial Services

12/2015 12/2016 12/2017 12/2018
NPA to gross loans 94 105 117 127
NPA Asset growth 4 19 21 17

Gross loans outstanding to output ratio

12/2015 12/2016 12/2017 12/2018
American 209.5 210.0 198.9 206.5
express
Capital one 106.0 104.2 104.8 98.9
Discover 152.1 148.6 143.4 133.6
Synchrony 157.2 146.6 145.1 145.5

Deposits as a portion of funding

12/2015 12/2016 12/2017 12/2018
American 36.1 35.2 37.0 37.1
express
Capital one 65.2 66.3 66.6 67.0
Discover 54.7 56.3 58.7 61.9
Synchrony 51.6 57.7 59.0 59.9

Debt as a portion of funding

12/2015 12/2016 12/2017 12/2018
American 32.8 33.1 32.6 32.6
express
Capital one 17.7 16.9 16.5 15.8

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Discover 28.4 27.6 26.3 24.9
Synchrony 28.9 22.3 21.7 22.5

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