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AMERICAN EXPRESS.
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History, nature of business, expansion, place in financial services industry, management, outlook & potential problems. Financial analysis. 3 charts.... More...
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Paper Abstract:
History, nature of business, expansion, place in financial services industry, management, outlook & potential problems. Financial analysis. 3 charts.
Paper Introduction:
Introduction
One of America's oldest corporations, American Express has changed its mission, vision and corporate strategy many times over its 150 year history. Formed originally as a freight forwarder by Wells and Fargo (along with other partners), the company has since become notable for its participation in the "stored value" marketplace. Examples of this are traveler's checks, which the consumer pays for at the time of purchase and which "store" the value of purchase until they are used. American Express is now recognized as a charge card company as well as a travel services company. During the 1980s and 1990s the company went through a series of changes in strategy which were eventually completely undone, and the company is now refocusing its operations on its core business units. This research considers the comp
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At its annual meeting in 2 , the company approved a two-for-onestock split (its first in 13 years) for each shareholder of record as ofApril 24. As consumers increase the number of transactions that arecompleted from their homes and offices, there is increased competitionamong credit and charge card companies to have their products accepted byon-line retailers. 38). The restaurants threatenedto boycott American Express because of the high discount rate. As the following chart shows, American Express has shown considerableprice appreciation over the past five years (1999 Annual Report, 2 , p.61). 6 ). In addition, the company's stock price hasappreciated considerably in the past five years, providing investors withan excellent return which offsets the loss in income (relatively speaking)from the company's dividend policy, and which has provided the company withincentive to issue a stock split in Spring 2 . His relationship with American Express goes backmuch farther, however. In1993, the board of directors replaced Robinson with Harvey Golub; thisfollowed a loss of more than two million cardholders in the early 199 s.Golub quickly divested the company of its brokerage, investment-banking andlife insurance units, reducing the company's claim to a "financialsupermarket," and focused the company's activities on the more profitable(and core strengths) of credit cards and travel and financial services.During the first year of his tenure, Golub cut more than $2 billion fromthe company's $13.4 billion cost structure. During the198 s, the company issued its own credit card, the Optima card, whichoffers cardholders the same benefits as credit cards from competitors.There is an annual fee for the card, but preferred customers pay as littleas 12 percent interest on outstanding balances, compared to rates as highas 18 and 19 percent for bank credit cards (Woolley, 1992, p. Thisstock is ideal for investors who are looking to realize reasonable gainsover a several year period, but who are also somewhat risk tolerant due tothe swings both in the market and in this particular stock. Internet address:http://home3.americanexpress.com/corp/latestnews/succession.asp. Computerworld, p. Conclusion Investors considering American Express need to take into account thehighly competitive nature of this industry where competition is fierce andwhere American Express competes in several different niches. Succession planning at American Express. While this is a significant drop, it still remainedsignificantly above the discount rate associated with Visa, which hoveredat approximately two percent in 1998 (Greenwald, 1998, p. Ken Chenault moved into the president's position at American Expressin 1997; the position had been vacant since 1995 when Jeff Stieflerresigned. Revenues increased only three percentfrom 1995 to 1996, a period which was particularly difficult for thecompany as Golub's innovations were only beginning to take effect. TheLehman Brother brokerage house was purchased in 1984 and E.F. After two and ahalf years, he moved to the travel unit where, two years later, he waspromoted to president of the company. Ashleyresponded publicly by announcing that being dropped by American Express hadno impact on its Christmas sales in 1991 (the season following the rift)(Teitelman, 1992, p. 61). When considering the annual revenues, it is important to note that thefigures reported above are the "Non-GAAP" figures reported by the company.Golub authorized the company to engage in a series of financial accountingstrategies which are in keeping with generally accepted accountingprinciples (GAAP), but which put the company's performance in asignificantly different light than if these procedures were not used. The company was the first in the financial servicesindustry to publish its policies for protecting customer privacy; it did soin 1974. Fireman's Fund was one of the company's first problems during the198 s. New York: AmericanExpress Corporation. Chenault," 1997, p. A quiet coup atAmerican Express. 1). The first American Express card was issued in 1958. Kenneth I. At the sametime, American Express has not changed its dividend policy in the last fiveyears, which means that shareholders are enjoying a far lower yield than inthe mid-199 s. Morgenson, G. 6 -62. The newpolicy, developed by 42 American Express executives, includes a high-levelset of principles, specific policies for individual business units, a codeof behavior for employees, and internal audit processes (Moad, 1998, p.85). Maxx proved a challenge to American Express, whichhad to fend off a move by the retailers to stop accepting the card in 1991. Over the next several years,Golub continued to reduce costs through downsizing and rewriting procedures(Greenwald, 1998, p. The result was that the more profitable TRS was supporting theless profitable banking and financial services. 7). Management Under Golub, the company increased the number of cardholders to morethan 42.3 million in 1998, and American Express was accepted at more thanfive million merchants at that time. Donaton, S. The newcredit card suffered financial troubles during the 198 s, however, andposted losses of more than 155 million during 1991 (Spiro and Byrne, 1992,p. At the meeting, participants attended seminars on bestpractices in retail operations and consumer preferences as well asopportunities and challenges that the Internet poses. American Expressis now recognized as a charge card company as well as a travel servicescompany. In 1977, he assumed the role ofchairman. Those same investors who held the stock at the end of 1999would have realized a yield of only one-half of one percent, a significantdrop. (1991, November 11). As head of the charge card unit, Chenault oversaw theimplementation of the Optima Gold card and numerous other cards, includingsome intended for use only outside of the United States. Both retailers entered into negotiations with American Express after bothhad tested not accepting the card at several of their locations. In the early 198 s,bank cards had rigid and low spending limits while the American Expresscard did not; in addition, the American Express card was generallyperceived as "exclusive" and was carried by some as a kind of status symbol(Morgenson, 1991, p. As aresult of the negotiations, both retailers chose to continue acceptingAmerican Express (as well as Visa and MasterCard). (1991, May 2 ). The company courted several entertainment companies, including thethen-stagnant Walt Disney Company, but seriously considered McGraw-HillPublishing. Forbes, pp. In 1998, the company heldits first annual American Express Retail Summit, an event which the companyuses as a way to reinforce the concept of partnering with its retailcustomers. 3 ). Hutton in1987; these were added to the Shearson brokerage house acquired in a 915million dollar stock swap in 1982. This represents strong performance on the part of thecompany, particularly considering the amount of promotion in which thecompany has been engaged. Key merchants will receive follow-up visits by Discoverrepresentatives, and Discover will take the additional step of encouragingmerchants to accept only Discover. 42). TravelRelated Services (TRS), as the two came to be known, were the core businessof the company. WhenAmerican Express discovered the tactic, it dropped the chain. The cardwas also not widely accepted; the company positioned it to be exclusiveamong retailers as well as consumers (Donaton and Levin, 1992, p. (1999, July). Amex chief: MasterCard, Visa playing losing hand. The industry itself is in a state of flux as the Internet affects theways in which customers interact with retailers and also with their creditcard companies. History and Nature of American Express' Business American Express was begun in 185 ; the traveler's check was inventedin 1891. Image vs. These financial advisors work withindividuals and families to develop long-range financial goals forretirement, education, illness, disability and estate planning (LaPlante,1998, p. Also, unlike bank credit cards,there was no pre-set spending limit on the card, and it was marketed as an"exclusive" card which was difficult to obtain. 1). and Byrne, J. In addition to the federal lawsuit, major retailers have filed alawsuit against Visa and MasterCard challenging debit card acceptancepolicies. Research and Development Under Golub, American Express has attempted to chain both its imageand its relationship with its retail partners. Robinson was agraduate of the Georgia Institute of Technology and the Harvard BusinessSchool. Power shift. (1992, December 21e). Recognizing that clients required more timely information and servicethan the current system was offering, American Express now usesAdvisorLink, a Windows-based "umbrella" application that ties together in-house development projects as well as third party software. Where it was oncepositioned as a freight forwarder, the company is now positioned as acharge card organization which also offers financial services to itscustomers. 1 ). Restaurants that generate less thanten million dollars had their rates reduced to 3 percent from 3.25 percent(Halverson, p. The company competes with Visa and MasterCard, along withvarious other credit cards, and has introduced a wide variety of cards inthe past several years designed to capture specific niche markets. The American Express card was not a credit card in thatthe balance had to be paid each month. The late 198 s and 199 s were particularly volatile for the companyand represented a period of time during which the company made itself overinto a "financial supermarket," and then abandoned that strategy. Leader, not boss. In addition to the limited number ofoutlets where the card is accepted, American Express also faced stiffcompetition in the form of its annual fees, which begin at 55 dollars peryear and can range to 3 dollars. According to company surveys, consumers wereable to use the cards 92 percent of the time that they wanted to in 1998(compared to 72 percent in 1993). 1). The incident with the retailers followed a tense period for AmericanExpress with more than 1 Boston restaurants. A financial plan would be generated as much asthree weeks later; this plan would be mailed to the advisor, who would thenmeet with the client and seek to tailor the plan to the client's specificneeds (LaPlante, 1998, p. Robinson saw an opportunity to combine its interest inpayment and spending systems into one entity. This includesreviewing and approving business unit strategies, monitoring the progressof these strategies, and resolving issues that involve more than onestrategic business unit. While these two companies must contend with the antitrustsuit brought by the Department of Justice, their sheer size in the industrymeans that American Express (and others such as Discover) must commitsignificant resources to compete effectively. In the late 199 s, the company reworked its privacy policy toreflect the increased number of transactions on the Internet. 38). 62). This stock is not for conservative investors who are looking for acompany with a secure long-term revenue stream, but neither is it for thoseinvestors who are expecting sharp increases in short periods of time. Although none of these strategiesis contrary to standard accounting practices, and Golub was forthright inexplaining why the company chose these strategies, the combination ofstrategies can have the effect of overstating the company's position. Until 1965, American Express was operated as a joint-stockassociation in which shareholders were directly responsible for losses.The company was not immune to scandal under Clark's tenure: it sufferedthrough a salad oil swindle involving a warehousing subsidiary in 1963, butClark was able to show an operating earnings increase through hisretirement in 1977. Charge! American Express is highlighting customer service anddata mining (providing targeted information about customers to retailersand others), while Discover is seeking to position itself as a viable thirdalternative to MasterCard and Visa. Within the credit card arena, American Express faces competition fromVisa, MasterCard, Discover and, of course, cash and checks. In addition to Golub and Chenault,the OCE includes three other vice chairman (Corporate Services, AmericanExpress Relationship Services and the Chief Financial Officer).Collectively, the OCE provides the company with its corporate leadershipand determines the strategic direction for the organization. For Visa andMasterCard, those percentages are typically 1.5 percent to 2.5 percent.However, this discount has ranged from 3 percent to 4.25 percent forAmerican Express, and can be enough to cause some merchants to stopaccepting American Express in favor of the other, less expensive cards(Morgenson, 1991, p. Maxx have all been targeted as possiblecandidates for accepting the cards, and the latter two, clothingdiscounters, have already been signed up. K-Mart, Wal-Mart, Sears, Marshalls and T.J. Two retailers in feud with amex overhigher discount rates. New York: American Express Corporation. When American Express responded by reducing premiums, it sufferedhigh levels of claims which further damaged its financial position. As a result, the companypurchase IDS, the Boston Company, several regional brokerage firms and thereal estate brokerage Balcor Company in 1982. His comments in 1996 regarding the business policies ofMasterCard and Visa helped to launch a lawsuit by the Department of Justiceagainst the two companies which may well change the entire credit andcharge card industry. References 1999 American Express Annual Report. PC Week, p. 38). and Levin, G. Each card company receives apercentage of each transaction involving their cards. 61). Visa also targeted the traditional American Express cardholder: thewealthy American. American Express, by contrast, wasaccepted at approximately three million locations, and cash withdrawalscould be made at only a total of 41,5 locations (including cash machines)(Morgenson, 1991, p. Duringthe early 199 s, Chenault was credited with helping the company diversifyits credit card offerings, increase its merchant coverage, and redesign itscost base and business processes ("Kenneth I. 39). 1, 47. Forbes, pp. In 1992, analysts valued those interests atapproximately 2.5 billion dollars (Teitelman, 1992, p. Chenault was also instrumental in helping Golub reshape AmericanExpress. The Industry Harvey Golub has taken a different approach to the company than hispredecessors. This is more than double the numberof consumers within that income bracket for American Express (Morgenson,1991, p. 41). 16. Shearson generated a six percent return on equity duringits peak years, while the credit card unit was returning more than 27percent. Internet address: http://ir.americanexpress.com/ireye/ir_site.zhtml?ticker=AXP&script=2 &layout=7. During the 198 s and 199 s the company went through a series ofchanges in strategy which were eventually completely undone, and thecompany is now refocusing its operations on its core business units. 47). Secondly, McGraw argued that since AmericanExpress functioned as a bank in that it extended credit, it should besubject to the same regulations as banks. The company was subject to extreme cycles as the property andcasualty business as a whole was. In a poll of consumers in 1991, Visa was chosen by 37 percent ofrespondents as the most popular card, followed by MasterCard (23 percent)and American Express (8 percent). In1986, the Securities and Exchange Commission formally censured AmericanExpress for misstating earnings of Fireman's Fund during 198 and 1981,further eroding confidence in the insurer (Teitelman, 1992, p. Thetraveler's check and the American Express card formed the staple ofAmerican Express business for the period leading up to 198 . Examples of this aretraveler's checks, which the consumer pays for at the time of purchase andwhich "store" the value of purchase until they are used. 62). 55). He worked at Morgan Guaranty Trust, then at an investment bank,and he joined American Express in 1968. Signingup new merchants represents a distinctly new strategy for the organization,but a strategy which has had considerable influence on the company'srevenue structure. In return,their rate dropped from 4.5 percent to 3.98 percent. 55). Internet address: http://home3.americanexpress.com/corp/latestnews/kchenault.asp. Under Clark, the company kept a lowprofile and concentrated its efforts in the highly successful TRS businesssegment. To qualify, retailers must have less than 2 million dollars incharges annually, and transmit their charges electronically. A key problem for American Express is that the company's competition(including Visa and MasterCard) continue to pose formidable and costlycompetition. Time, pp. In December 1979, Robinson was successful in acquiring 5 percent ofWarner Amex Cable. In addition, the company is using theInternet to enhance its financial planning service (LaPlante, 1998, p. Thisremains the case in large part because of American Express' continuedability to position itself as the card of choice for business travelers andothers who rely on the various cards from American Express for largepurchases (Greenwald, 1998, p. During this period, the company spentmore than 3.5 billion dollars on new businesses, much of it financedthrough issuing additional shares of American Express stock (Teitelman,1992, p. Spiro, L. Amex heads downscale.Advertising Age, pp. From 1995 until 1997, Chenault was vice chairman of theorganization and also served as a member of the company's Office of theChief Executive (OCE). At the time, Fireman's Fund contributed half of thecompany's earnings (Teitelman, 1992, p. Netincome has increased by at least 22 percent in each of the past five years,with an increase of 25.3 percent from 1998 to 1999 (1999 Annual Report,2 , p. The financial advising unitcontinues to provide a significant source of revenue to the organization,and the company has demonstrated that it is able to continue to expand itsreach among card holders and merchants. The more optimistic the assumptions, the greater the amount ofmarketing costs that can be written off. In another move,American Express used a "gain on sale" to book expected profits from loansit converts to securities and then sells. New York: AmericanExpress Corporation. James Robinson III succeeded Clark in 1977 and it was under Robinsonthat the company went through its most tumultuous years. Change in Mastercard, Visa policies 'inevitable.' (1999, April 3 ).Australian Banking and Finance, p. 55). The total number of consumers using the service increased by fourpercent in 1999, and one-third of consumers who use this service areAmerican Express cardmembers, a source of consumers which the companyrecognizes as critical to its long-term success. Today, thefinancial advisor still gathers the goals and other information directlyfrom the client, but the new software allows the advisor to create a customfinancial plan directly rather than relying on the mainframe and remotedata entry. American Express has long positioned itself as a premier providerwithin the industry, and it has sought to reinforce that image with itsprivacy policy. However, although Golubhas had one of the shorter periods of chairman than others in recent years,he has left an indelible impression on the organization and is personallyheld responsible by numerous observers for the company's turnaround inrecent years. Moad, J. 31). Shortly after the repurchase, Warner sold two-thirds of itsinterest in MTV and 19 percent of its interest in Showtime/TMC to Viacomfor 51 million dollars. At that time, the company had posted operatingearnings increases each year for 3 years (Teitelman, 1992, p. In addition, the new software allows the client to see theeffect of different "what-if" scenarios on the financial advisor's laptop.Adjustments can be made in the field where the analyst can answer thequestions of the client immediately. American Express dropped itsinterest in the company after gaining poor publicity, and the former McGraw-Hill director resigned from American Express within months. This will have the net effect of increasing the number of shareson the market, which may potentially dilute the shares, but will have theimmediate effect of bringing the price of the stock down into a price rangewhich is more accessible to individual investors. This, combined with Discover's push tosign up additional card holders, is designed to help that company gainparity with Visa and Mastercard. Visa and MasterCard members typicallypay a maximum of 5 dollars (Morgenson, 1991, p. American Express is seeking additional merchants, including those itwould not have considered during the 197 s and early 198 s. However, the company has justified this action by notingthat it is reinvesting its profits into the business rather than payingthem out as dividends. Halverson, R. In early 1999, Golub announced that he would remain as Chairman untilApril 2 1, at which time Ken Chenault (the company's current president)will become chairman. 36). (1998, January 12). (2 , March 2 ). As a result, Fireman's Fund lost marketshare. 1 ). (2 , April 28). Maxx nor Marshalls are likely to qualify for thisplan, with sales of 1.7 billion dollars and 2.1 billion dollars,respectively, in 199 (Halverson, 1991, p. 38-39. These cardsare sometimes referred to as "electronic check cards." Often, transactionson these cards are guaranteed by the customers' credit card accounts sothat if there are nonsufficient funds in the customer's bank accounts, thetransaction is automatically charged to the corresponding MasterCard orVisa ("Amex Chief," 1999, p. 2). (1998, October 19). The company has not had a stock split during that time, which is oneof the reasons that the stock has climbed as high as it has. Business Week, pp. Robinson met with Harold McGraw, chairman of the target in1979, but underestimated McGraw's tenacity. At the time that Golub made the announcement, heindicated that he did so in order to eliminate speculation about succession(something which can plague other companies, such as Disney), and to giveChenault time to increase his span of responsibility within theorganization ("Succession Planning," 1999, p. 3, 1 . Introduction One of America's oldest corporations, American Express has changed itsmission, vision and corporate strategy many times over its 15 yearhistory. Debit cards are used by customers in place of credit cards, andresult in funds being deducted directly from customers' checking accountsrather than being charged to a customer's credit card account. (1997, December 1). American Express has taken a leadership role in the financial servicesindustry with summits and retreats designed to position itself as abusiness partner to the various merchants who accept its cards. (2 ). The early 198 s saw American Express shift its focus fromcommunications to financial services. Don't let us down, Harvey. The company's recent financial performance has been strong, but thecompany has used creative accounting practices in order to put its recentperformance in the best possible light. In addition to issuing the Optima card, which is accepted at the sameoutlets which accept the traditional American Express card, the companyalso began to reposition its familiar charge cards. The analyst would then return to a regional officewhere a data entry clerk would enter the information into a mainframe(located in Minneapolis). Discount Store News, pp. Aside from Golub and Chenault, the company depends on its OCE forguidance at the senior executive level. LaPlante, A. 1 ). The company has not split itsstock in recent years, which has resulted in a stock price which is outsidethe reach of many small investors (a two-for-one stock split was announcedfor stockholders of record as of April 24, 2 , the first split in 13years). Itscurrent CEO, Harvey Golub, has already announced that he will be retiringin 2 1, and has named his successor (the company's current president).Such a strategy makes the succession question vanish and enables investorsand business partners to proceed with confidence into the future, secure inthe knowledge that there will not be a significant upheaval when Golubleaves the organization. (1998, July 2 ). The company did not chargeinterest on outstanding balances, but did have a high annual fee tocardholders which outpaced the fees of traditional credit cards. Hismanagement style is recognized as one of providing leadership, but alsosharing credit, and numerous subordinates have commented on his ability toconvey his vision for a particular project and let the subordinatesimplement that vision. Inaddition, the company has taken a leadership role with regard to e-commercetransactions and its own Web site, where customers can participate in anumber of different business transactions. Shook, C. 3 -31. Thisresearch considers the company's performance, the industry, and thecompany's management, and whether this company would make an attractiveinvestment option. Robinson was to oversee the company through scandal and itsfirst operating loss, and analysts consider his presence to be assignificant a factor in the company's performance during the 198 s andearly 199 s performance as nearly any other influence (Spiro and Byrne,1992, p. Woolley, S. The companyhas demonstrated that it is concerned about stability after the CEOretires, and it has already generated a succession plan which should resultin little or no change in the stock price due to the succession in 2 1,which makes this stock attractive for a three- to five-year period. In the mid-199 s, company employees wouldmeet with clients at their home or office and would gather the appropriateinformation regarding the client's assets and liabilities as well as theirgoals and objectives. Specifically, American Express capitalized the cost of developingsoftware while other companies typically expense them. The company intended to sell financial products throughcable television, but also was responsible for MTV Networks andShowtime/The Movie Channel (TMC). Greenwald, J. As of mid-1999, Discover hadapproximately 46 million cardholders, and analysts consider that it wouldneed 1 million before merchants will seriously consider exclusiverelationships with the company ("Amex Chief," 1999, p. Neither T.J. This still lagged behind Visa, with6 million cardholders and acceptance at more than 14 million merchants,but represented a significant increase over the pre-Golub years. A poker-faced amex plays a new cardgame. Teitelman, R. An alternate source forthe cash generated by TRS would have been to purchase back some of theoutstanding stock, which by 1992 had reached more than 476 million shares. (February 1992). (August 24, 1992). Stock quote. 61). Chain Store Age Executive withShopping Center Age, p. Traditionalcredit card companies are not faced with the same problems that the chargecard companies are, and American Express now competes effectively in both.However, its bad debt is low, and the stock market has rewarded thenumerous changes that the company has made in the 199 s with a stock pricethat is high relative to the mid-199 s. This is still higherthan Visa and MasterCard, but represents a significant gain for theretailers. Unlike the American Express card,consumers do not have to pay the balance in full at the end of each month.The Optima card offsets some of these challenges, but is only accepted at alimited number of outlets. The company was cash-rich atthe time and, like other large companies at the time, moved to diversify. In 1988, the Boston Company subsidiary ofShearson acquired a small Zurich bank. The stock's dividendwill be altered as well in order to support the new stock price (decreasingto approximately 45 cents per share when adjusted for the stock split). Despite the wider use of the cards,American Express was able to maintain higher average charges, as well, withaverage charges of $6, in 1996 compared to $3,2 for Visa. 36. 36-47. Chenault began his career at American Express in1981 when he joined the company as director of strategic planning. Chenault also wasresponsible for divesting Shearson Lehman Brothers, and helped consolidateAmerican Express' ten operating centers into four facilities. TDB formed a joint venture with agroup of former Chemical Bank traders but was sold in 199 . Although 2 has been a tumultuous year for the stock market as a whole, and althoughAmerican Express has lost some of its value from its 1999 high, thecompany's stock closed at 149.5 on April 28, 2 ("Stock Quote," 2 , p.1), which represents more than a threefold increase of the high price in1995. Under lock and key. The company has lowered its discount rate (which is therate that it charges merchants) from an average of 3.22 percent in 199 to2.74 percent in 1998. Chenault appointed president and chief operating officer ofAmerican Express Company. American Express has invested significant resources in order to deployits financial advising service. In 1991, Visa counted more than 4.5 cardholders withincomes in excess of 1 , dollars. At the end of 1999, thecompany managed assets of more than $262.5 billion as part of thisoperating segment (1999 Annual Report, 2 , p. 52-53. However, these same investors have realized considerable priceappreciation in lieu of dividend yield. Forthe purposes of this analysis, the less optimistic numbers were used (itshould be noted that the company included both in its annual report)(Condon, 2 , p. 39). The following chart illustrates key financial data for the companyover the past five years: [pic] The company's earnings per share have outpaced the increases in thecompany's book value over the past five years, indicating that thecompany's management is able to realize profits efficiently. Business Week, pp. Robinson began his career withAmerican Express in charge of the American Express Bank. 65). (1999, April 26). However, during the early 198 s,American Express kept the company's prices up even while the underwritingindustry entered a downturn. The cable operation was beset by thehigh capital requirements of that industry during the start-up phase, andAmerican Express opted to sell Warner Amex back to Warner Communications in1985 for 45 million dollars (the original purchase was for 15 milliondollars). The retail summit isdesigned to help American Express establish and maintain a reputation as atrue business partner for retailers, and to provide retailers withinformation that helps their operations become and remain profitable. Investors who purchased the stock at its 1995 close of $29per share but who received a $ .9 per year dividend were realizing a yieldof 3.1 percent. (1997, February 27). Afternegotiations with the company, the discount rate was dropped to 2.75percent from 3.25 percent for restaurants which generate at least tenmillion dollars per year in charges. Laura Ashley, an upscale retailer of women's clothing, encouragedcustomers to use Visa or MasterCard over the American Express card. 55. (1999, April 13).American Banker, pp. 42). Outlook and Potential Problems The pursuit of "everyday" merchants by American Express provedsuccessful during the 199 s. In the last quarter of the 1999fiscal year, American Express realized a one-time gain (offset by lawsuitsettlements) when it changed the assumptions regarding annuity owners andhow long these owners will hold onto their investments before redeemingthem. The goal of much of thisadvertising was to attract new card members (advertisements featuring JerrySeinfeld targeted "everyday" consumers using the card for day-to-daypurchases), The company also paid an estimated $3 million to Tiger Woodsfor a multi-year endorsement contract (Greenwald, 1998, p. Such a customer profile can also be helpful to winning over merchantswilling to accept the various cards. For example, in 1996,American Express spent more than $266 million on advertising, a figure 21percent higher than Visa's advertising budget. Forbes, p.62. Thistype of meeting provides retailers with additional benefit in becomingpartners with American Express and helps justify the company's feestructure ("Building Relationships," 1999, p. In 1984, AmericanExpress Banking consisted of a London bank, a Swiss bank and TDB (based inGeneva). In the mid-199 s, Visa and MasterCard wereaccepted at more than nine million locations throughout the world andcardholders could obtain cash at more than 347, member bank branches andmore than 6 , cash machines. The acquisition of TDB in 1983 and the management of the bankingbusiness segments within American Express illustrates the company'sinability to remain focused on its non-TRS businesses. Golub is not shy about expressing his desire tocompete more directly against MasterCard and Visa, and has noted thatoutside the United States, 43 banks work directly with American Express(within the United States, banks are prohibited from entering into suchagreements with American Express due to MasterCard and Visa bylaws)("Change in Mastercard," 1999, p. Condon, B. 39). When Robinson assumed the helm in 1977, some considered that thecharge card business was in a maturation phase while others cited thevolatility and cyclical nature of the Fireman's Fund operation as apotential problem. New York: American ExpressCorporation. The entry into the financial services market proved costly forAmerican Express. In addition, the OCE provides long-term strategicleadership to the organization and implements the vision of Golub (andpresumably, Chenault when he takes over as CEO in 2 1) ("Kenneth I.Chenault," 1997, p. 64-65. (October 12, 1992). The chairman publiclydenounced the integrity of American Express in going after the publishersince one of the senior American Express executives had served on McGraw-Hill's board of directors. In 1999, Discover sent a letter tomore than three million merchants noting that the strategy of Visa andMasterCard to charge numerous fees results in higher fees being paid bymerchants than if they accepted (and encouraging consumers to use) theDiscover card. Marshalls and T.J. 85. Shearson formed a joint venture with American Express Bank in1986 for securities trading. 52). 38). This suggests that Chenault will be widely acceptedby employees as the new CEO when the time comes, and the fact that thecompany has announced the succession so far in advance should result invery little upheaval in the company's operations (Shook, 1997, p. In 1983, American Expresspurchased the Trade Development Bank (TDB) for 525 million dollars. The credit card environment changed during the 198 s, and by the mid-199 s, bank cards routinely offered spending limits as high as 1 , dollars to their best customers. The company now sought to makeitself into a "financial supermarket" that would provide different types offinancial services. Making an announcementsuch as this a full two years ahead of time also means that Golub may become to be seen as a "lame duck" chairman who is increasingly distancedfrom the internal operations of the organization. Visa continued to lose market share, falling to 48.85 percent in thefirst half of 1997, and American Express regained some of the market sharethat it had lost earlier, moving up to 18.9 percent in the by 1997. Howard Clark became chairman of American Express in 1961, havingworked for the company since 1948. 1, 7. [pic] Summary American Express is a company which has reformed and reshaped itselfover the 15 years that it has been in business. 1). Financial Analysis The following chart shows the company's revenue and income performancefrom 1995 through 1999: [pic] Net revenues increased by 13 percent from 1998 to 1999, the highestincrease in the five year period. Institutional Investor, pp. Building relationships. 16). Formed originally as a freight forwarder by Wells and Fargo(along with other partners), the company has since become notable for itsparticipation in the "stored value" marketplace. Following the incident,American Express announced a decrease in the top rate that small retailerspay. At the same time, the company has maintained a steady dividendpolicy, which means that investors are receiving a lower yield than theydid previously. reality at AmericanExpress. Under Golub, American Express has also expanded its financial planningand financial advisor network. At the end of 1999, American Express employed more than 11,4 financial advisors and the business unit as a whole enjoyed an increase innet revenue of 17 percent, and an increase in net profit of 14 percent over1998.
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