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Why I Think PayPal And American Express Should Merge Or Partner

There are several strong synergies for both PayPal and American Express in a mutual merger or close cooperation.

Activist investors in both companies could serve as a catalyst, but too many famous investors in the companies (Icahn, ValueAct, Buffett) may complicate negotiations.

Any potential cooperation of the two companies, or a merger, whether together or separately, is my pure speculation and I have no knowledge of any such plans.

Both PayPal and American Express are attractive long-term investments, and I am long both, with PayPal being a higher-conviction bet.

PayPal has excellent organic growth and many future growth drivers, which makes it an attractive long-term investment, even as a standalone company.

I've been a long-time PayPal (NASDAQ:PYPL) user and have been eagerly awaiting the spinoff in order to buy into PayPal. Following the recent pullback toward $33.50, I finally pulled the trigger and plan to hold for a long time as I believe PayPal has a bright future and solid growth ahead, priced at a reasonable multiple given the growth I expect. However, several factors lead me to believe American Express (NYSE:AXP) could realize synergies and value for its shareholders, which makes it an attractive investment, as well. My personal opinion is there is some probability that both companies will merge - either together or each independently. However, this opinion is based solely on my analysis and conclusions. I have not seen any rumors or speculations of such moves. However, American Express' disappointing earnings results could increase pressure to consider broad array of options.

PayPal has a solid position and a very strong brand in the fast-growing and quickly evolving space of online and mobile payments. In addition to current growth, multiple new expansion avenues open for PayPal as a standalone company now. The creation of the quick and easy-to-use one-click payment button One Touch from mobile to online in April this year is one example where future expansion will focus. Potential deals with non-eBay e-commerce providers, such as Amazon (NASDAQ:AMZN), and potential for Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) sites and in-app purchases combined with PayPal's strong past relationships with merchants give PayPal a strong growth opportunity to expand. So far, over half of the Internet Retailer 500 and hundreds of thousands of merchants have enabled One Touch. And that's within months of the service's operations and with One Touch being launched in less than 20 countries, with many more to come. PayPal clearly realizes the importance of instant checkout, and keeping and expanding the wide-moat networking effect it already has.

A recent acceptance of U.S. online gambling transactions is another example of the new opportunities being monetized. So for me, PayPal is an excellent long-term growth stock, and while I would love to buy it cheaper, I don't think a company of this caliber will offer much better entry prices. The recent upgrade by a respected Stifel analyst two days ago put a semi-strong floor under the stock price, unless the broad market outright tanks.

American Express merger or cooperation would strengthen PayPal's ecosystem and boost total margins kept within the ecosystem

Here is why I think it makes sense for both PayPal and American Express to merge with each other, or at least cooperate very intensely, preferably with at least some stock cross-ownership to secure the long-term mutual cooperation and perhaps even some exclusivity or special benefits.

One: Integration of the card network and issuing bank under one ecosystem

PayPal doesn't issue credit or debit cards and doesn't own a credit card network; it doesn't process credit card transactions such as Visa (NYSE:V) or MasterCard (NYSE:MA) do. So it has to pay transaction fees to card-processing networks and card issuers (the merchant banks), as well as the acquiring banks. American Express and Discover (NYSE:DFS) are both a card network and issuing bank.

So, through integration with American Express (or Discover), PayPal would take all of American Express's fees and some of MasterCard and Visa's fees, as well as the issuing and acquiring banks' fees, if PayPal issues and processes the cards themselves. American Express's function as an issuing and acquiring bank enables Amex to have a much more integrated three-way card processing system, as opposed to the traditional five-party processing system that most competitors do due to not serving as an issuing and acquiring bank. PayPal's acquisition of American Express would give it access to this streamlined process and combine it with a cutting-edge digital payment platform. PayPal would become a mighty competitor with a possibility for a closed payment...