Barclays On Why PayPal Buying Discover Is 'Unlikely'

• Discover Financial Services DFS shares are down 18 percent year-to-date, while shares of Paypal Holdings Inc PYPL have lost 3 percent.
• Barclays’ Mark C. DeVries believes that value creation through strategic shifts is unlikely or ill-advised for US credit card companies.

After recording strong performances for several years, the US credit card segment underperformed in 2015, analyst Mark DeVries mentioned. He added that this underperformance has made investors search for “activism that could yield positive catalysts.”

DeVries said that although several strategic initiatives are possible, value creation through them is unlikely. Discover Financial’s current management believes that having its own network helps drive brand recognition and awareness. “In addition, management sees option value from expansion into B2B and the emerging payments area,” the Barclays report noted.

While foreign networks would find it difficult to get the approval to buy a US payments company, the option of buying Discover Financial’s legacy network does not make strategic sense for an existing payments company like PayPal or a technology firm like Apple Inc. AAPL, DeVries commented.

Discover Financial’s management has indicated that it has no plans to expand its credit box as it sees the risk of a potential default likely outweighing the reward of incremental loan growth. Instead, the company intends to focus on its core prime revolver base and increase the wallet share of its legacy card loan book.