American Express plans to spin-off financial advisory unit

[DHK]

Thank goodness I decided to leave them! I'd end up being some of the first to go in a corporate restructure/sell-out.

http://www.nytimes.com/2005/02/02/business/02amex.html

American Express Plans to Spin Off Wall St. Unit

By JENNY ANDERSON

Published: February 2, 2005

Financial supermarkets are not looking so super anymore.

The American Express Company announced yesterday that it was spinning off its financial advisory business in an effort to focus on its card and travel services operations.

The company's decision reflects a growing trend on Wall Street to unwind the giant financial supermarkets built over the 1990's. For example, Citigroup, perhaps the leading supporter of the one-stop shopping model, agreed on Monday to sell its life insurance business to MetLife for $11.5 billion, and Merrill Lynch and Citigroup are looking at alternatives for their own asset-management units.

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"What's critical is that you have strong focus" now in core businesses, said Kenneth I. Chenault, the chief executive of American Express. "The marketplace is more dynamic."

His company's brokerage business, American Express Financial Advisors, while profitable, has been a drag on the faster-growing charge card and credit card operations and a payment network business that processes more than $400 billion in payments worldwide. Splitting off the advisory unit, executives said, will allow both companies to grow more quickly.

The spinoff is expected to be completed in the third quarter, and American Express will then be free to concentrate on its card business and the payment network. Those businesses had revenue of $22 billion and profit of $2.7 billion in 2004.

The revamped company is expected to generate earnings growth of 12 percent to 15 percent a year and have a return on equity of 28 percent to 30 percent, compared with 18 percent to 20 percent now. The spinoff will enable American Express "to concentrate its investment resources in these high-growth, high-return areas," Mr. Chenault said.

Investors appeared to share his optimism. The company's shares rose $3.40, or 6.4 percent, to $56.75.

"American Express investors are buying the stock for the card and the payment networks; that's why you saw the stock rally," said Ed Groshans, a specialty and mortgage finance analyst at Fox-Pitt Kelton. "They were happy to get rid of the poor performer." American Express Financial Advisors will be spun off to existing shareholders and will eventually be renamed. It will compete directly with the Smith Barney unit of Citigroup, Morgan Stanley and Merrill Lynch. The American Express group will be run by James Cracchiolo, president of the global financial services unit and chief executive of the advisory business. The unit, which has 12,000 financial advisers and $410 billion in assets under management, generated $7 billion in revenue and $700 million in net income in 2004. By comparison, Merrill Lynch has 13,500 financial advisers and $1.3 trillion in assets under management.

Mr. Chenault said the separation of the businesses, which have different needs, would allow both to improve their profitability. While the advisory unit demands intensive investment in capital and employees for growth, the payment network business does not require heavy investment and can continue to grow by adding more customers to the infrastructure already in place.

Last week, American Express said its profit rose 17 percent in the fourth quarter, the biggest jump in two years. Net income was $896 million, or 71 cents a share, compared with $763 million, or 59 cents a share, in the period a year earlier. The company has increased quarterly earnings by more than 10 percent for three years, the longest streak of any company in the Dow Jones industrial average.

Both Mr. Chenault and Mr. Cracchiolo said the timing of the spinoff was related to the company's strong financial results last year and a court decision that allows American Express to compete more effectively in the credit card business.

In October, the Supreme Court declined to hear an appeal from MasterCard Inc. and Visa U.S.A. after a federal court sided with the Justice Department and rejected rules forbidding their members to work with other brands, including American Express.

The decision, a result of an antitrust lawsuit, "is transforming the payments industry," Mr. Chenault said. "We have the opportunity to work with a range of banks - small, medium and large - to help drive their growth."