Preferred Issues: Citi-Amex Again? Why Story Won’t Die

Some stories, true or not, are simply too good not to repeat.

And repeat.

The last few weeks have seen a flurry of published stories devoted at least in part to pondering just what a perfect couple Citigroup and American Express would make. Neither Citi nor Amex has commented, but the frequency of the story and the roster of publications running it, including The Wall Street Journal, Fortune, and most recently Business Week, make it impossible to ignore.

So it’s time once again to consider whether two iconoclastic companies, each of which has spent countless dollars and hours building brands and business models unlike any other in America, often bumping up against the credit card establishment and occasionally the old Glass-Steagall rules in the process, could possibly share one corporate home without driving each other crazy.

The idea of plugging the American Express card into the Citigroup marketing machine was attractive enough to bring the companies’ former heads John S. Reed and Harvey Golub to the table years ago to talk it over. Their answer was no, but one of the key obstacles then — who would run the combined company — is no longer an issue. It’s hard to see how Sanford I. Weill, having wrested control of Citi from Mr. Reed, would not run a combined Citi-Amex for as long as he chose.

The allure of Amex is obvious. American Express is widely viewed as one of the crown jewels of financial services brands, a power evident in its market premium. (Gains on Friday pushed its share price to 19 times earnings, versus 16 for Citigroup.) Mr. Weill’s personal history with Amex, where he ascended to president but resigned in 1985 without attaining the top post, may compound that allure.

But that value also serves as a major source of risk, even a potential obstacle, given how delicate brand value can be. Another consideration, as one analyst put it, is how anyone can assume he would run the company’s assets better than Amex’s fairly well-regarded current management.

But there are meaningful contributions a large buyer like Citigroup — or for that matter American International Group, the insurer also occasionally named as a potential bidder for Amex — would bring to the relationship, according to Bradley Ball, who covers American Express for Prudential Securities.

“It’s fair to say that one thing American Express has sought to become is a more consistent and stable earner,” he said. “And while they’ve undergone a transformation, they haven’t been able to rid themselves of cycle risk.” A wholesale banking parent would help balance Amex’s advisory, asset management, and cards businesses, the cyclical natures of which are “certainly what you’re seeing in the stock price lately,” Mr. Ball said.

Also, Citi’s reputation abroad in the banking business would be a significant complement to Amex’s efforts to build its international business, he said. “American Express’s international bank image isn’t particularly powerful.” Joining with Citi could boost the private banking and commercial potential for Amex abroad, he said.

On a nuts-and-bolts level, there is also the opportunity to shift Citi’s card portfolio over to the Amex system, which would give the company all the revenues associated with charges. Or, Citi could try to operate its credit card portfolio alongside Amex’s. Impossible under current association bylaws, that would seem just the kind of challenge Citi has not been able to resist, under either Mr. Reed or Mr. Weill. Mr. Reed’s battles with Visa are the stuff of industry lore, and the Travelers-Citibank merger anticipated an act of Congress.

As far as what makes now a good moment, look no further than Amex’s stock price decline. Prior to the Business Week story, Amex shares were down nearly 40% from their 52-week high, a markdown more severe than that suffered by many banks, which alone could make it a compelling buy.

“If you’re Sandy Weill, you see a chance to buy what is a high-quality blue chip name at $40, which in my mind is way cheap,” said Philip Orlando, chief investment officer of Value Line Asset Management. Mr. Orlando said that even without an event like a takeover, “I have done the work that shows [Amex] gets to $70 a share, this year.”

Not everyone thinks the valuation has hit a can’t-ignore point. ING Barings analyst Andrew B. Collins said Citi would probably not be interested unless it could avoid dilution in its own earnings per share. That would rule out any significant premium to Amex’s current stock price.

But some investors argue that there’s no time like a down market to contemplate such a deal. “The question is, do you want to wait to try to capture the peak or take the buyers’ currency when it’s undervalued?” said Dan Goldfarb of David L. Babson, a money-management firm that counts both Amex and Citi as significant holdings.

He gave several reasons he prefers now to later. Gains taxes are one consideration in a purchase deal, and even in a pooling deal, because investors often trim holdings in the combined company and therefore are exposed to gains. Another consideration is that moving now “helps mitigate the execution risk, for the simple reason that you’re less likely to overpay."