Marcial Law: Barely Credible Rumor Boosts American Express

Business Week Friday revived the market's interest in the Marcial arts, igniting a rally in a widely followed stock with a report that scarcely seemed credible.

American Express (AXP Quote - Cramer on AXP - Stock Picks) jumped more than 7% after talk of a Citigroup (C Quote - Cramer on C - Stock Picks) takeover hit the Street. Citing policy, both companies declined to comment. But the buzz had some financial experts scratching their heads.

Gene Marcial's oft-derided Inside Wall Street column in BW speculates that Citigroup CEO Sandy Weill is "determined" to acquire American Express, the company he aspired to run years ago. But Robert Napoli, analyst at ABN Amro in Chicago, says the deal makes no sense, financially or operationally, for Citi. Meanwhile, American Express has long indicated it prefers to remain independent. Additionally, Dan Goldfarb, a brokerage exec featured as a source in the article, downplays the speculation, saying the rumor has bobbed around the financial markets for years.

"I don't think there is anything to it," says Napoli. "I don't think the rumor is true."

Hard to Figure

Even at first glance, the list of cons seems to far outnumber the pros of such a deal. First and foremost, buying American Express would be quite pricey and hugely dilutive, even for Citigroup, says Napoli. He estimates Citi, which is currently trading at 14.4 times estimated 2001 earnings, would have to pay 20 times earnings for American Express, or about $50 a share -- a significant premium to Amex's recent $41.35.

Additionally, Citigroup already has a thriving card business, with 49 million cardmember accounts worldwide. Core income in its card business grew 17% in 2000, to $1.38 billion. That accounts for about 9% of Citi's overall core income of $14.14 billion, based on the 2000 annual report. Combining those accounts with American Express' 52 million cards would create a huge, fast-growing business. But it could also entail divestitures that "would be even more dilutive to Citigroup," says Napoli, who rates the stock add and whose firm has no underwriting relationship with American Express.

Marcial's column also pegged Morgan Stanley Dean Witter (MWD Quote - Cramer on MWD - Stock Picks) and insurer AIG (AIG Quote - Cramer on AIG - Stock Picks) as possible buyers. Neither firm would comment on rumors. But these names "make even less sense" than Citigroup, says Napoli, noting, "I don't think AIG wants to be in the credit card business."

Independence Day

And far from expressing interest in being acquired, American Express has been making it clear it is on the hunt for potential acquisitions. A few months ago, American Express snapped up a $226 million card portfolio from Pacific Century Financial with the goal of issuing its cards directly to customers of a U.S. bank for the first time.

Furthermore, the result of an antitrust suit against the nation's dominant card issuers, the bank associations Visa and MasterCard, is yet to be decided. Brought by the Justice Department in 1998, the suit alleges unfair competition and seeks to do away with a Visa/MasterCard rule that blocks the roughly 6,000 banks in their distribution networks from issuing American Express or Discover cards. A decision against Visa and MasterCard could expand growth opportunities at American Express.

Goldfarb, a managing director at David L. Babson in Cambridge, Mass., whose comments were featured prominently in Marcial's column, says rumors of a Citi-Amex linkup have been resurfacing "on and off for years now." Goldfarb, whose funds own about 2 million American Express shares, says he can think of nothing specific that prompted the renewed speculation, adding, "I tried to provide reasons for why it would make sense."

Morgan Stanley Dean Witter was lately down 40 cents to $53.28, while AIG rose $1.85 to $79.96. Citigroup was slipping 28 cents to $44.42 and American Express was up $2.44 to $41.40.