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How American Express’s US Business Facilitated an Acquisition Bid

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US Card Services segment

American Express’s (AXP) US Card Services segment contributes almost 60% of the company’s total revenues and continues to be a major source of cash flow generation. Banks looking to expand their card business in the United States could strategically view the acquisition of American Express.

Wells Fargo (WFC) is targeting the expansion of its card business in order to compete with JPMorgan Chase (JPM), Bank of America (BAC), and other major banks.

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American Express’s US Card Service segment’s total revenues net of interest expense rose by 6% to $4.8 billion in 4Q15. This formed 58% of the company’s total revenues compared to $4.6 billion in 4Q14. The rise was mainly due to higher net interest income from growth in its loan portfolio and a rise in cardmember spending.

The company’s net income also rose by 20% to $799 million compared to $665 million in the prior year’s quarter. The division’s profitability rose due to flat expenditures, partially offset by higher provisions.

American Express achieved total revenues of $32.8 billion last year. Here’s how some of the company’s peers in the payment processing industry fared with their revenues last year:

  • Mastercard (MA): $9.5 billion
  • Visa (V): $12.7 billion
  • Discover Financial (DFS): $7.6 billion

Together, these companies account for 2.3% of the Technology Select Sector SPDR ETF (XLK).

Initiative spending

American Express’s co-branding and merchant acceptance agreements with Costco were not renewed in February 2015. A co-branded credit card is jointly sponsored by a bank and a retail merchant. This type of card can generally be issued more cheaply than a private label retail card.

US Costco co-branded accounts generated ~8% of the company’s worldwide billed business in the year ended December 31, 2014. These co-branded accounts were responsible for ~20% of American Express’s worldwide card loans. American Express saw higher cardmember services costs and investment spending, which were maintained in a bid to make up for non-renewed partnerships.

American Express has increased its spending in order to initiate new partnerships. The company was successful in forming partnerships with Charles Schwab (SCHW), one of biggest brokers in the United States, and Sam’s Club, the eighth-largest retailer in the United States.

The company’s expenses also increased due to spending on technology development, marketing and promotion, and higher service costs due to new partnerships.

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