American Express: Ready to Deal?

It should come as no surprise that American Express Co. (AXP ) is being courted. Persistent market rumors put Citigroup (C ), Morgan Stanley (MWD ), and American International Group (AIG ) among its suitors. Although none will comment, AmEx' global presence, high-end consumer clientele, and relationships with corporations and small businesses could be attractive to each. And right now, AmEx is vulnerable.

Since Kenneth I. Chenault took the helm in January, the company's stock has fallen 20% to trade in the low $40 range. Over the same period, the Standard & Poor's banking index has risen 2%. AmEx' fall is partly due to dwindling earnings expectations. On Jan. 22, the company pared 2001 profit forecasts, citing weak financial markets and a general economic slowdown. Then, on Apr. 2, it reported a $185 million loss to its high-yield portfolio, which ultimately drove down first-quarter net income 17%. And on June 7, Morgan Stanley analyst Kenneth A. Posner further shaved 2001 estimates, warning that slowing overseas business would hurt the company's bottom line. As corporations worldwide cut back on travel and entertainment costs, AmEx is directly affected.

At the same time, investments that AmEx made last year aren't panning out yet. In 2000, it bumped up human resources spending in its Financial Advisors unit 20%, to $2.1 billion, in part to revamp the business--but AmExis still waiting to harvest any returns. "The environment remains relatively challenging," says Bradley G. Ball, a Prudential Securities Inc. analyst. "We're not looking for payback [for the Financial Advisors investment] until 2002."

The turn of events is especially tough on Chenault, who was named CEO four months ahead of schedule. At the time, then-CEO Harvey Golub's early resignation was seen as an example of a perfect handover. But now, it looks more and more as though Golub ducked out just before things started to get messy. And that Chenault, after 13 years at the company, finally has won the top spot at what might be exactly the wrong time.

OLD MISTAKE? Now, Chenault is under the gun. At an Apr. 25 UBS Warburg conference, he stressed to investors and analysts that although first-quarter results were disappointing, he was optimistic about new corporate card accounts and cost savings. He assiduously avoided addressing the question of a merger. American Express will not elaborate on its 2001 business plan for this story, says spokeswoman Molly Faust, because the company does not want to comment on merger rumors.

Selling out may not be Chenault's only option. Despite the rounds of megamergers in the financial-services industry, there's no real reason why American Express can't stand on its own--and no compelling reason for it to pair up, analysts say. In fact, if AmEx were to merge with a broker, it could just be making an old mistake all over again. In 1993, American Express sold off brokerage Shearson, and then in 1994 it sold Lehman Brothers Inc. as part of a restructuring spearheaded by Golub. "What has changed?" asks Brad Berning, a U.S. Bancorp Piper Jaffray Inc. financial-services analyst. If Chenault knows, he's not saying.

By Heather Timmons in New York

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