Tuesday, August 30, 2005

MBNA-AmEx Relationship Threatened (The News Journal / Bloomberg News)

Loss of co-branded cards could cool American Express CEO's hot streak

BY MONEE FIELDS-WHITE / Bloomberg News, 08/30/2005

Kenneth Chenault, CEO of American Express Co., has been a winner for much of his life. He was junior class president and a star athlete at the Waldorf School, a private school in Garden City, N.Y. He went on to graduate magna cum laude from Bowdoin College in Maine and earned a degree at Harvard Law School.

Since taking over AmEx in 2001, Chenault, 54, has led the New York-based company to 14 straight quarterly earnings increases of more than 10 percent. Warren Buffett, whose Berkshire Hathaway Inc. is American Express' biggest shareholder, with a 12.2 percent stake, praises Chenault's stewardship.

"I need all the help I can get -- and Ken has certainly provided it," Buffett said. Chenault will be hard-pressed to keep his winning streak alive. On June 30, Charlotte, N.C.-based Bank of America Corp. agreed to pay $35 billion for Wilmington-based MBNA Corp., the largest independent credit card issuer and Delaware's largest private employer.

The acquisition threatens a relationship in which American Express and MBNA issue co-branded credit cards that helped boost AmEx's second-quarter profit by 16 percent to a record $1.01 billion.

The U.S. Supreme Court opened the door for such partnerships in October 2004 when it refused to let Visa International Inc. and MasterCard International Inc. block banks from issuing their competitors' cards. Chenault also has completed deals with Citigroup Inc., UBS AG and USAA Federal Savings Bank.

"I've been in the company since 1981 and involved in the card business since 1984, and I believe we are in the strongest position we've been in," Chenault said. "I remain confident in our overall network strategy and our relationship with MBNA going forward."

MBNA and Bank of America officials have yet to say whether the American Express partnership will continue after Bank of America completes its buyout in late 2005 or early 2006.

Chenault has to contend with attempts by Visa and MasterCard to go after his high-spending customers as well. AmEx cardholders on average spent about $9,460 per card last year -- four times more than Visa and MasterCard's customers, American Express said.

AmEx customers pay an annual fee -- ranging from $65 to $395 a year -- for the popular, reward-based charge cards, which offer everything from access to private airport clubs to invitation-only events. While many Visa and MasterCard credit cards offer similar services, some of theirs have no annual fees and give cash advances.

Taking the heat Chenault also must placate merchants who are grumbling about credit card companies' fees. American Express charges businesses an average of 2.54 percent of the price of a purchase to carry out a transaction compared with an average of 2 percent for Visa and MasterCard.

Those businesses accepting credit cards regularly complain about the fees. Walgreen Co., the largest U.S. drugstore chain, threatened in December to end its agreement with AmEx. Some merchants have fought back by filing an antitrust lawsuit against Visa and MasterCard.

"When you are looking at 2 percent- 2.5 percent of sales, that's a substantial amount of money," said Mitchell Goldstone, CEO of 30 Minute Photos Etc., which is listed as a plaintiff in the suit.

Finally, Chenault has taken some heat about doing business in countries that allegedly sponsor international terrorism. In December, the California Public Employees' Retirement System (CalPERS), the largest U.S. public pension fund, sent letters to almost 2,000 companies in which it owns shares, including American Express.

CalPERS requested information on AmEx's business in Sudan, a country the United States says sponsors terrorism. AmEx said it responded in late May, stating it had canceled its operations in the Sudan when U.N. sanctions were imposed in 1995.

Revenue hit record as earnings grew John Augustine, 43, chief investment strategist at Fifth Third Asset Management, which owns 292,646 AmEx shares, said investors are anxious about Chenault's ability to sustain earnings growth.

"Our concern is that if the momentum stops, how that could affect American Express's top-line growth, because it is really a top-line story for investors," he said.

The company's momentum has been building since the end of 2001, the year Chenault became the first black CEO of one of the 30 companies that make up the Dow Jones Industrial Average.
Last year's revenue hit a record $29.1 billion, up 13 percent from a year earlier and up 29 percent from 2001. Profit almost tripled, to $3.45 billion, during the same three-year period, rising 15 percent last year alone.

Total return to shareholders jumped 18 percent in 2004 compared with a 5 percent gain for the Dow Jones index and an 11 percent rise for the S&P 500 Index, according to its 2004 annual report.

American Express generates more than three-quarters of its revenue from its credit card business and travel services. Chenault said his first order of business is boosting the number of cardholders in an industry that has grown three-fold in 10 years. Global spending on credit and debit cards totaled $5.6 trillion in 2004, up 13.8 percent from the previous year, according to the Nilson Report, a newsletter that monitors the industry.

Visa, whose cardholders account for 43 percent of U.S. purchase volume, and MasterCard, with 30 percent, still dominate the market. American Express is jockeying for position, at 21 percent.

The News Journal.