CORPORATE AMERICA American Express to spin off financial advisory sector
The move will allow the company to focus on more profitable divisions.
NEW YORK (AP) -- Financial services giant American Express Co. said Tuesday it will spin off its financial advisory business so it can focus on the faster-growing charge and credit card, payments processing and travel businesses. Its shares rose 7 percent.
The announcement by the New York-based company comes a day after Citigroup Inc., the nation's largest financial institution, said it was selling its Travelers life insurance and annuity business to MetLife Inc. for $11.5 billion.
Both moves are aimed at improving the profitability of the parent company and suggest that the "supermarket" approach to financial services that was so popular in the 1980s and 1990s may be proving cumbersome.
American Express said its shareholders would get all of the shares of the new company, which will include the American Express Financial Advisors unit, based in Minneapolis, as well as Threadneedle Asset Management, which American Express acquired in 2003.
The spinoff is to be completed in the third quarter, American Express said.
American Express shares rose $3.75 to $57.10 -- surpassing their previous 52-week high of $57.05 -- in afternoon trading on the New York Stock Exchange. Citigroup shares advanced 41 cents to $49.46, also on the Big Board.
American Express stock was depressed in 2002 and 2003, in part because of investment losses in the advisory unit. Its share price has improved this year as American Express has begun capitalizing on court rulings that forced Visa and MasterCard associations to allow their member banks to issue American Express and Discover cards.
James Cerruti, president of Vivaldi Partners, a marketing strategy firm in New York, said the American Express announcement was an acknowledgment of the difficulty of cross-selling products to different economic groups.
"Their advisers business was always a middle-market business," he said. "They thought, let's cross-sell these investment services to our card holders. But it turns out our card holders are a more-upscale crowd and have a lot of other options, so it doesn't work."
The Citigroup decision to sell its Travelers insurance business, Cerruti said, had more to do with the difficulty of "retooling sales forces" to cross-sell products and the fact that Citigroup wanted better earnings than insurance was yielding.
Both deals are expected to improve the companies' earning leverage.
American Express Chairman and Chief Executive Offer Kenneth I. Chenault told a conference call with analysts that the company could raise its target for return on equity to a range of 28 percent to 30 percent from the current 18 percent to 20 percent. Citigroup, meanwhile, was expected to free up $6 billion of capital for future deals while raising its return on equity.
The American Express financial advisory business provides financial planning and advice, asset management, insurance, annuities and related businesses through a network of more than 12,500 advisers. It generated revenues of about $7 billion and earned about $700 million in 2004.
"This spin-off will create two distinct businesses and allow them to capitalize on their respective growth opportunities," Chenault said.
American Express will be left with businesses that earned $2.7 billion on revenues of $22 billion last year. For all of 2004, American Express, including the financial advisory, earned $3.4 billion on revenues of $29 billion.
Chenault called it "a critical turning point in the strategic development of American Express" so the company could capitalize on changes in the card and card-processing industries.
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