Within hours of American Express Co.'s announcement that it would spin off its financial advisory unit, the industry's version of the exit poll - Amex's stock price - revealed the decision to be a winner on Wall Street, where focus has lately trumped diversity.
The response reflected a range of motivations. Some saw in it another debunking of the overhyped grail of cross-sales. Others highlighted Amex's new sense of its prospects now that the Visa/MasterCard trial is over. Still others keyed in on a wide disparity in returns on equity between the advisory unit and the rest of the business. For his own part, Amex chief Kenneth I. Chenault framed it in terms of a desire to make the company more "spend-centric."
"This is not a defensive move, it's an offensive move," he said several times during a for-the-most-part upbeat conference call with investors.
One naysayer was Standard and Poor's Corp., which put Amex on review for possible downgrade of its A-plus credit rating. The firm said the spinoff would "leave the company less diversified and … eliminate a significant source of income and cash flow that is currently available to service debt."
Dwarfed was any recollection of why the two businesses were once considered to be a decent fit. The idea was that when the economy and consumer spending dipped, the advisory business would provide stable fees, and that its substantial portfolio of fixed-income securities would lend counter-cyclical strength. But the nation's economic performance was solid last year and should be again this year if economists have it right.
Also, the idea that the businesses would act as natural feeders to each other never really panned out, by Amex's own admission.
"There were relatively few strategic linkages between the two businesses [cards and financial advice] that create a compelling case for keeping them together," Mr. Chenault said.
The decision, analysts said, will make much higher returns possible for the nation's fourth-largest issuer of cards, but will also expose it to more risk.
During Tuesday's call, Amex executives said that after the divestiture the company should make a return on equity of 28% to 30% over time, up from a current target of 18% to 20%. "This spinoff will enable American Express to focus on its card, payments, and network processing businesses and concentrate its investment resources in these high-growth, high-return areas," Mr. Chenault said.
The announcement sent shares of American Express up 6.7%. Equity analysts, some of whom had called for a split of the companies, mostly concurred with Mr. Chenault's decision.
"What you're seeing is the card business reshaping in response to the different rules environment," said Howard Mason, an analyst at Sanford C. Bernstein. "Amex sees a tremendous opportunity in the U.S. network service business and wants to focus on it."
It was also noteworthy that during the economy's last soft patch, in 2001, the unit did more harm than good to the bottom line, partly because of writedowns of high-yield securities. Indeed, its erratic results had a doubly problematic effect, not only hurting overall returns but actually increasing volatility, analysts at UBS AG said in a research report.
Edwin Groshans, an analyst at Swiss Reinsurance Co.'s Fox-Pitt, Kelton Inc., said the advisory unit provides services to about one-third of American Express credit card holders, but "that's where the synergies ended."
The advisory unit had difficulty selling services to card customers, and the card side of the company had difficulty selling cards to financial advisory clients, Mr. Groshans said. Matthew Park, an analyst at A.G. Edwards, said that "when the company was talking up that synergy, there were a lot of skepticisms about it," because Amex's card clientele is more affluent than that of the advisory business.
Craig Maurer, an analyst at Fulcrum Global Partners LLC in New York, said that Amex did not need financial advisers to market its credit cards because affluent, desirable customers would already be receiving solicitations in the mail.
And on the financial advisory side, "I don't know that the Amex brand name carried much weight … [compared to] Fidelity or Putnam," Mr. Maurer said.
The spinoff plan calls for shareholders to get 100% of the shares in the new American Express Financial Corp. in a tax-free transfer it expects to complete in the third quarter. The business includes the company's life insurance and annuity, asset management, and retail brokerage operations, as well as about 12,000 advisers serving 2.5 million clients.
The advisory business generated $7 billion of revenue in 2004, or about 24% of the company's total, and $700 million in profit, or about 21% of the total.
Some analysts saw risks in the businesses Amex is choosing to focus on. One that a couple of analysts emphasized was increased competition on the transaction network level - competition that could put pressure on fees, known as the merchant discount, that the company charges merchants to accept the card.
"There's a big risk that's new that American Express becomes heavily dependent on the merchant discount," Mr. Park said. "Any backlash" against such fees "could have a materially larger impact on the company," Mr. Park said.
Amex's announcement came a day after Citigroup Inc. said it had reached a deal to sell its Travelers insurance and annuity division to MetLife for $11.5 billion. Like American Express, Citi officials said they want to reallocate the capital to areas with more lucrative returns.
The back-to-back divestiture announcements made it "clear that the capital requirements of the life insurance and annuities business are increasing," Mr. Mason said. "The parent companies had higher-return options elsewhere - in the case of Amex, in their network services business."
Meanwhile, Mr. Chenault said American Express' desire to invest in the best opportunities constrained the financial advisory business from expanding as it might have wanted.
"Financial Advisors is both a more capital- and people-intensive business," he said, and it competes in an industry "where scale is becoming increasingly important." But as part of a larger company, it had to compete for capital with other, higher return units.
James Cracchiolo, who runs the unit now, will stay on as chairman and CEO. Other members of his team also will join the spinoff.
American Express bought the former IDS Financial Services Inc. in 1984. The unit remained headquartered in Minneapolis and until 1995 kept the IDS name.
The unit generated nearly half of Amex's profits in 1994.
