American Express Tries to Head Off More Surprises : Finance: It has made some bold moves under Chairman James D. Robinson III. But a string of fiascoes has made stockholders impatient.
In the grand scheme of things, it wasn’t a blockbuster disclosure--just the type of embarrassing surprise that has been cropping up all too regularly for American Express and its Shearson Lehman Bros. unit.
Shearson’s brokers aggressively hawked America West Airlines’ stock on the basis of an enthusiastic “buy” recommendation from the brokerage’s airline industry analyst. The analyst changed it to a “sell” June 26, the day before the airline filed for Chapter 11 bankruptcy protection. By then, Shearson customers, many of them individual investors, held about 13% of the airline’s sharply devalued stock.
A few days later, American Express suffered another black eye when Standard & Poor’s lowered the credit rating on the company’s senior debt. It was the first lowering of the venerable firm’s ratings in a decade. The change came as American Express officials were maintaining that Shearson had surmounted its biggest problems. S&P; not only cast doubt on the claim, but predicted that the parent company might have to inject still more capital into the securities unit.
Negative surprises like these have cropped up regularly in recent years, proving that American Express, the financial services giant, has a knack for shooting itself in the foot. James D. Robinson III, chairman, chief executive and “chief quality officer,” has weathered the embarrassments so far. Several business magazine profiles have given him the sobriquet the “Teflon executive.”
But there are clear signs that big institutional holders of American Express stock are losing patience, even though the company still has a tremendously strong core franchise. A few analysts and institutional shareholders are wondering out loud whether Robinson, 55, will be able to ride out what now amounts to a prodigious list of fiascoes, especially if unpleasant surprises continue to pop up.
“Were the management decisions good under Robinson? No. They were awful,” says David N. Dreman, chairman of Dreman Value Management, a New Jersey-based mutual fund company that at the end of 1990 was the 15th-largest institutional holder of American Express stock.
Dreman criticizes the company’s attempts to diversify into securities, insurance and commercial banking. He notes that several prominent subordinates have been ousted because of faulty decisions. But, says Dreman, “in the end, the final decision in running the company falls on the chief executive officer.”
Indeed, a number of big institutional investors are said to have substantially reduced their American Express holdings recently. The giant Fidelity group of mutual funds held 9.8 million shares at the end of the first quarter, making it the fourth-largest institutional holder of American Express stock. But sources say Fidelity’s fund managers essentially gave up on the stock in late June, selling all but 700,000 shares.
Other big sellers included the Wisconsin Investment Board, a state employee pension fund. It sold 4.1 million American Express shares, 78% of its holdings, over the six months from Sept. 30, 1990, to March 31 of this year.
John Keefe, an analyst with Lipper Analytical Securities, said that when American Express stock rose briefly from its doldrums to more than $30 a share earlier this year, buoyed by a rise in other financial services stocks, several other longtime institutional holders also used the occasion to sell. “Some of them are sufficiently annoyed that they’re not shareholders any more,” he says.
The stock has since fallen back. It closed Friday at $23.875.
Robinson says he knows American Express stockholders aren’t pleased. “I understand the comments that are being made by the institutional guys you’ve talked to,” he said in a telephone interview. “Am I troubled by it? Well, I’d rather not be in a position of being criticized. But do I understand the criticism and accept it? The answer is yes.”
In 1990, the company’s net profit was a paper-thin $181 million, down from $1.16 billion in 1989, mainly because of huge writeoffs from Shearson. This year profit is due to bounce back, but probably not to previous levels, mainly because of the effects of the recession and the sharp drop-off in travel that began shortly before the Gulf War. The company earned $264 million in the first quarter. Second-quarter earnings are expected this week.
To be sure, Robinson has had some noteworthy successes since taking the company’s helm in 1977. The core businesses of credit cards, travelers checks and travel services have grown by leaps and bounds, although the credit card business now faces unprecedented competition. An expansion into data processing for other companies has been a huge success. So was the 1984 acquisition of IDS Financial Services, a mass marketer of financial planning, mutual funds and other investment products to middle-income investors.
But the list of embarrassments in recent years helps explain why these achievements have been eclipsed:
* The company is still suffering the negative effects of its purchase of the Wall Street firm E. F. Hutton & Co. for nearly $1 billion in 1988. Robinson calls the acquisition a “mistake.” After Hutton was merged into Shearson, American Express discovered that Hutton had huge hidden liabilities. And Hutton’s business never recovered from the October, 1987, stock market crash. Shearson ended up laying off huge numbers of Hutton’s big network of retail and institutional brokers and closing down much of what it had bought.
* Shearson, with problems magnified by Hutton, has been the biggest drag on American Express’ earnings in recent years. American Express bought Shearson in 1981, hoping to turn itself into a financial services supermarket. The company later acquired the prestigious Lehman Bros. investment bank and merged it with Shearson. But since 1987, the unit has had one setback after another, even after efforts to pare costs and change strategy.
In 1987, American Express sold one-third of Shearson to the public and was looking to get rid of the rest. But deteriorating market conditions and fear that Shearson might collapse in 1990 forced American Express to reverse course and buy back nearly all of the Shearson stock it didn’t own. In all, American Express had to sink an additional $1.2 billion into Shearson. The unit in 1990 reported a $900-million first-quarter loss, the biggest ever by a securities firm.
* This spring, just as Shearson was showing improved operating results, the California insurance commissioner upset the apple cart. He seized First Capital Life Insurance Co., in which Shearson holds a big stake, because the insurer suffered huge losses from junk bond investments. Not only does Shearson own a 28% stake in First Capital’s parent, but Shearson brokers were Wall Street’s biggest sellers of First Capital’s policies. American Express has said it will take a $144-million charge to second-quarter earnings related to First Capital. Shearson also faces lawsuits filed by policyholders, and analysts say additional liability to the company may be considerable.
All of this comes on top of additional problems in recent years. American Express admitted in 1989 that it had mounted an international smear campaign against Edmond Safra, who left as American Express Bank chairman to start a rival international bank, by planting false stories in foreign newspapers about drug trading and money laundering.
A few years earlier, American Express Bank ran up huge losses from loans to developing countries. And the company was embarrassed when it revealed that Boston Co., a money management unit of Shearson, had falsely inflated the profit it reported for 1988 by $30 million.
At least for the moment, American Express’ 20-member board of directors seems willing to be patient, supporting Robinson’s efforts to resolve problems and put the company back on a steady path. But John J. Byrne, a board member who is also chairman and chief executive of Fund American Cos., said, “I think the individual directors are well aware of the fact that major owners are not particularly thrilled with their return over the last three or four years.”
Management, he says, has told the board that the big problems are over. “In the absence of any more unpleasant surprises, we’re going to have pretty sunny skies here for the next couple of years,” Byrne says. “As far as I can see, the board is solidly behind Mr. Robinson.”
American Express began life in 1850 as an express freight carrier. It slowly transformed itself into a financial services company, initially by selling money orders. Exactly a century ago, it introduced the traveler’s check. Its other best-known product, the charge card, came along in 1958. From then on, the company enjoyed sizable growth in revenue and exceptionally wide profit margins.
When Robinson took over in 1977, the company was riding the crest of earnings growth from the charge card and traveler’s check business, as well as from the property and casualty insurance business of Fireman’s Fund, which it acquired in 1968.
The Robinson years, however, began inauspiciously with two failed acquisition efforts. A hostile attempt to take over the publishing company McGraw-Hill Inc. failed, as did an effort to buy Book-of-the-Month Club.
The acquisition of Shearson was supposed to have revolutionized American Express. Before, the company got the business of consumers who were spending money, such as by charging travel and purchases on American Express cards, using the company’s travel agencies and buying insurance. With the expansion into the brokerage and investment banking business, the company would now also capture the dollars consumers were investing. With Wall Street in unprecedented ascendancy at the beginning of the ‘80s, it seemed a reasonable strategy, and for a time it worked.
The ill-fated purchase of Hutton and the depression in the securities industry after the 1987 market crash left the company with the formidable job of turning Shearson around. “The school is still out on our capacity to make Shearson so well that it is (again) a powerhouse on the Street,” Robinson says, but adds: “If we’re not there yet, we’re sure as the devil closing in on it.”
American Express officials say that despite the recent setbacks, they have made big progress, particularly by drastically slashing Shearson’s costs. The leading ax-wielder is Howard L. Clark Jr., a senior American Express executive who was made chief executive of Shearson after the ouster of Peter A. Cohen, the unit’s longtime head.
Through massive layoffs and attrition, Shearson has cut its work force by 5,400 and closed or merged 108 branch offices since the end of 1989. Clark expects Shearson’s fixed overhead costs to be $200 million less in 1991 than last year. And American Express officials confirm that they are pressing for even deeper cuts.
Like other Wall Street firms, Shearson has benefited from an upsurge in new stock offerings. Trading profit also is up, and the firm’s public finance business is booming. The rise in profit from current operations gives the company a chance to carry forward a big tax loss from previous years. The firm also managed to sell off a $1.2-billion portfolio of junk bonds.
“The key question people ask us is how current operations are doing, and the answer is that they’re doing very, very well,” Clark says.
But a big chunk of Shearson’s capital is still tied up in a $500-million “bridge loan” it made to finance the Prime Computer leveraged buyout in 1989. The loan was supposed to have been converted into junk bonds and sold to investors within months of the buyout. But the collapse of the junk bond market intervened. Despite persistent efforts, Shearson still hasn’t found a way to get the loan off its books.
When it lowered its rating of American Express’ debt, S&P; said Shearson’s capital--used as a cushion against losses--remains perilously thin, even after the parent company took one severely troubled asset, the Balcor real estate unit, off Shearson’s books and placed it on the parent company’s. The credit rating agency says there is a good chance that, despite improved operating results at Shearson, American Express will have to pour in more capital, especially if a default occurs in the Prime Computer loan or if more liability pops up in the First Capital insurance debacle.
American Express has protested the ratings lowering, asserting that the ratings agency’s analysis was flawed.
Critics of Robinson’s strategy say his preoccupation in the early 1980s with Shearson caused top management to ignore significant problems cropping up elsewhere in the company.
For example, in 1980, Fireman’s Fund was the single largest contributor to earnings. But the insurance unit was branching into riskier types of insurance and made a grab for customers by offering low premiums. Without warning, it began to hemorrhage in 1982, racking up losses that by the end of 1983 totaled $452 million. American Express poured $417 million in new capital into Fireman’s Fund before eventually selling it, mainly through public stock offerings.
For now, American Express’ public relations staff is working hard to direct attention to the company’s low-profile subsidiaries that have become major contributors to earnings. Its information services unit, which does back-office data processing for other companies, is growing rapidly. Paradoxically, the unit’s biggest business is servicing American Express competitors: It is the nation’s largest third-party processor of MasterCard and Visa accounts for banks. The Information Services unit just bought a large processor of credit card accounts in Britain, Signet Ltd., for $235 million.
Now, Robinson says, the company is going to stick to the businesses it is in. After weeks of strategy meetings mapping out a new three-year plan for the company’s main units, he says, “We’re not branching out into any new businesses. We’ve got enough to focus on.”
There is, in fact, much to focus on in the company’s Travel Related Services unit, which contributes about 65% of earnings. TRS is the umbrella for the credit card, traveler’s check and travel businesses.
The unit has been battered by the downturn in the economy and the dramatic drop-off in travel during the Gulf War. Although people are traveling more, the levels remain depressed compared to before the Iraqi invasion of Kuwait.
Edwin M. Cooperman, co-chief executive of TRS, says the recession has more strongly affected white-collar workers, more of whom tend to be American Express cardholders. “The number of people who have told us they’ve lost their jobs is the highest we’ve ever seen it,” Cooperman says.
American Express officials tend to downplay the competition from Visa and MasterCard and newcomers such as Sears’ Discover Card. Company officials portray their card as a prestige product, largely above the squabbling for business among bank cards. Yet clearly American Express is having to scramble to hold on to its franchise.
After spurning tie-ins with frequent-flier mileage programs that bank cards have offered for some time, American Express announced in June its “Membership Miles” program, which allows card users to earn frequent-flier miles on a variety of airlines. Kenneth I. Chenault, a TRS executive, says the program is part of a slew of new “enhancements” that will be announced in coming weeks.
And although American Express’ charge card business continues to grow, some analysts say that the rate of growth is showing a significant drop-off. Kurt Peters, editor of Credit Card News, a Chicago-based industry newsletter, says that in 1990, American Express’ domestic charge volume grew a healthy 8.5%. But the same year, MasterCard’s was up by 12% and Visa’s 18%.
In addition, American Express is seeing the first small inroads against a business it so far has managed to keep almost entirely to itself--corporate charge cards. Visa and MasterCard have launched an aggressive attempt to get into this business, offering lower fees and customized features that American Express doesn’t.
To make matters worse, there have been scattered signs of unrest among merchants, who believe that the fees American Express charges them are excessive. A few months ago, a group of Boston restaurants threatened to stop accepting the card. And more recently, some mail-order catalogue companies threatened a similar revolt.
As American Express makes its way through another difficult year, board members who agreed to be interviewed expressed strong support for Robinson.
Frank P. Popoff, who is also chief executive of Dow Chemical Co., says: “The bottom line is that American Express set out on a strategy that was pretty expansive in the ‘80s. Some of those strategic elements have proven to be successful, and some have not. . . . I think Jim Robinson is doing a good job in a tough set of circumstances.”
It remains to be seen whether Robinson will be able to put all the bad surprises behind him.
Harry L. Freeman, a former close Robinson adviser and senior American Express official who resigned and took part of the blame for the Safra affair, insists that Robinson has been unfairly blamed for strategic mistakes.
“I think the prospects are good, and I doubt if much more (bad news) is coming,” he says. “It’s hard to imagine what more can happen.”
American Express’ Main Businesses * Travel-related services: By far the company’s biggest earnings contributor, this includes American Express’ flagship businesses--the charge card, travelers’ checks and travel services. Also includes direct-mail merchandising and certain types of insurance.
* Shearson Lehman Bros.: The company’s Wall Street brokerage and investment bank. Shearson also owns Boston Co., an investment manager for large institutional investors and private banker for wealthy individuals. Has had huge losses, in part from ill-fated acquisition of E. F. Hutton & Co. in 1987.
* American Express Bank: This unit has undergone major transformation after heavy losses from loans to developing countries. It now focuses on private banking for wealthy individuals, especially overseas, and trade financing.
* IDS Financial Services: Acquired in 1984, this unit has provided steady growth in earnings. It offers financial planning and sells investment products such as mutual funds, investment certificates and insurance to middle-income clients and small businesses.
* Information Services Corp.: The nation’s largest third-party processor of Visa and MasterCard accounts. Also provides data processing for a variety of businesses, including mutual funds, hospitals and the cable television industry, as well as telephone marketing services to a wide range of businesses.
American Express Bottom Line Below are American Express earnings and revenues for the last five years. Figures are in billion of dollars. 1986 Revenues: 14.65 Net income: 1.25 1987 Revenues: 15.96 Net income: .53 1988 Revenues: 20.90 Net income: 1.04 1989 Revenues: 25.05 Net income: 1.16 1990 Revenues: 24.33 Net income: .18
