As American Express Results Disappoint, Tensions Mount Between ValueAct And Berkshire

American Express is in trouble and it appears there will be no activist coming to the rescue. Activist hedge fund ValueAct Capital, run by Jeff Ubben, had a roughly 1.1% stake in the credit card company heading into the fourth quarter.

ValueAct sold all its shares during the fourth quarter, sources with direct knowledge of the matter tell Activist Stocks and ValueWalk.

The reason for the change of heart? Warren Buffett, whose Berkshire Hathaway owns 15.4% of American Express.

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Apparently the activist investor Jeff Ubben and Warren Buffett did not see eye-to-eye on how to fix American Express, according to sources with direct knowledge of the matter.

There was much speculation that Jeff Ubben and his ValueAct Capital could reign in American Express’ bloated cost structure and cut overhead.

Morgan Stanley noted when ValueAct got involved, “...we believe the stock could find some support from activist involvement.Though conspiracy theories abound as to what noted activist investor ValueAct Capital may recommend to AXP, we believe faster expense take out likely makes the most sense. Amex has high expenses relative to peers, and we believe there is opportunity to cut some overhead.”

But more importantly, ValueAct could’ve helped American Express wake up to the digital revolution taking place around it and address the onslaught of digital payments eroding its once “wide moat.”

However, that would likely require a serious management shakeup, with the need to bring in some fresh blood. Note that American Express CEO Ken Chenault has been with the company for close to 35 years and CEO for 15 of those.

For better or worse, management change is something that Warren Buffett does not take kindly to. Especially when it comes to Ken Chenault.

Buffett praised Ken at the 50th Berkshire Hathaway annual shareholder meeting this year. And In 2013, Ken told Wharton in an interview that Buffett was one of his two favorite leaders. The other? Nelson Mandela.

Ken says of Buffett, “He is someone who has an intellectual curiosity and is also incredibly genuine as a person, “He admits that he loves business, but he also engages with people. He can walk down the street in Omaha or New York and will talk to people, tell a joke, sign a dollar bill for them. He has humanity and a steel trap mind. He has a nice swift way to say, ‘No’ — not in a harsh way, but [in a way that] does not waste people’s time.”

In truth, Jeff Ubben and ValueAct Capital never stood a chance. Buffett was going to back Ken and management all the way. Recall when Ken stood in front of shareholders at the 2010 American Express annual meeting and said, “Warren has given me his proxy.” That was on two conditions; one, that Berkshire owns over 5% of American Express, and two, that Ken is CEO.

So is all this really a surprise? Buffett gets cozy with management. We all have weaknesses. Is this Buffett’s greatest weakness?

Note that this isn’t the first time we’ve seen Buffett push back against activist investors. Recall his dealing with David Winters and Coca-Cola (NYSE: KO) and comments about Harry Wilson and David Tepper getting involved with General Motors (NYSE: GM).

American Express Has Issues

Regardless of how Buffett feels about activist investors, American Express has issues. Mobile tech is shifting the payments landscape in the biggest way since the physical card was first introduced. A widespread fall in merchant volume will make American Express even less.

Banks and startups are eating American Express’ lunch when it comes to fees. Ken also said on the 4Q call that “We recognize we’re operating in a new reality.” But does he really? The shift toward prepaid cards with its BlueBird brand and trying to partner up with Wal-Mart (NYSE: WMT) and McDonald’s (NYSE: MCD) aren’t really indicative of addressing the new reality. A new reality of digital payments and ambiguity when it comes to which card to use. It’s about ease and low fees these days.

The rewards playing field is getting murkier. Competitors are offering lower fees and higher levels of rewards to get customer and merchant business.

Companies are getting more competitive as physical card players fight for less business as mobile and digital payments grab more of the spending pie. Take American Express’ loss of Costco as an example. Costco was paying American Express roughly 0.6% per transaction, but will pay Citi almost nothing.

Costco was a large part of the American Express business and a huge loss. As was the Fidelity loss. But that’s all known. However, they’ll likely lose Starwood as well, which a few smart people have picked up on. This comes as the Marriott buyout of Starwood merger will lead to a renegotiation. You see, Marriott has JPMorgan Chase as its branded credit card and Starwood has American Express.

Marriott is likely in discussions with Chase and American Express to see who’s willing to offer the better deal. The issue being, American Express is steadfast when it comes to cutting prices. They’ll likely play hardball here and lose out. This’ll be another big blow, as Starwood houses one of their most loyal cardmember bases, not to mention it’s their second largest co-branded partnership.

Simply moving away from the premium focus isn’t enough and they certainly don’t look to be moving fast enough. The digital wallet will all but have completely eroded American Express’ network effect before Buffett decides to have a real heart-to-heart with Ken.

American Express has an eroding moat on its hands.

Charlie Munger, Buffett’s partner, however, was all over this. At the 2015 Annual Shareholder’s Meeting, Munger said, “American Express has had a long period of very extreme achievement and prosperity. I think they will have a lot of prosperity in the future, but it doesn’t look as easy as it once did.” The stock is down 30% since Charlie made that comment.

But we all know that Warren Buffett loves investing in wide economic moats, companies with sustainable competitive advantages. However, is he slipping of late?

Some of his biggest investments are “wide moat investments,” however, moats can be eroded. That’s what we have with American Express, a dwindling moat. The same can be said for his International Business Machines (NASDAQ: IBM) investment.

On the fourth quarter earnings call yesterday, CEO Ken Chenault said that he plans to pull out $1 billion in costs by the end of 2017. Acting as his own activist investor and doing just what most thought ValueAct would push for.

With the help of Warren Buffett, it appears that Ken Chenault will get his chance to navigate this “new reality.”

Is this latest opposition of an activist investor by Buffett just the latest in his saga to keep defunct management in place, as he watches his once wide moat companies crumble at the hands of the thing he hates most, changing technology?

Sell Side


ValueAct Capital, a highly respected activist investor, announced a $1 billion stake in AXP stock. ValueAct could pressure management to reduce spending, improving AXP’s pre-tax margin and EPS growth potential.


Some of the excitement surrounding activist involvement has to do with the potential break-up of AXP’s closed loop. We get the allure. With the payment networks (V and MA) trading at ~25x and the merchant acquirers (GPN, HPY, TSS, VNTV) trading at ~19x, the idea of splitting up AXP to unlock value given that it currently trades at ~14x warrants further analysis, but we expect activists to ultimately conclude that the network, acquiring, and issuing businesses are not separable.

Conclusion: Activists Will Sniff Around But End Up Walking Away Ultimately, we come back to our view that AXP is a well-run, shareholder friendly organization that will not benefit from activism. Instead, we view activism as more of a potential distraction, and would rather see the management team focus on overcoming the slew of challenges that have hit the company in recent months.


What Do Buffett and Munger Think? We don't know... but here's how the WSJ paraphrased their comments on 5/2/15 from the Berkshire Annual Meeting. According to the WSJ, Buffett says all aspects of the payments industry will be subject to innovation. But he believes American Express is a “very special company” and the CEO has done a good job anticipating trends. American Express has an incredible history of adapting; he adds that he likes what he calls the “very nimble and very smart” approach of the Amex business. We would add: its worth noting that AXP used to own First Data, which it spun in 1992.


“American Express has had a long period of very extreme achievement and prosperity. I think they will have a lot of prosperity in the future, but it doesn’t look as easy as it once did.” – Charlie Munger, Berkshire Hathaway 2015 Annual Shareholder’s Meeting
The stock is down 20% since Charlie made that comment.

Berkshire Hathaway did not respond to a request to comment. ValueAct and American Express declined to comment on the matter.

UPDATE - CNBC has just reported the news as well.

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