Investing Guidelines: Management Tenets 91American Express
Buffett’s association with American Express dates back some forty
years, to his bold purchase of its distressed stock in 1963, and the astro-
nomical prof its he quickly earned for his investment partners (see
Chapter 1 for the full story). Buffett’s faith in the company has not di-
minished, and he has continued to purchase its stock. A big buy in 1994
can be traced to management decisions, both good and bad, about the
use of excess cash.
The division of the company that issues the charge card and travel-
ers’ checks, American Express Travel Related Services, contributes the
lion’s share of prof its. It has always generated substantial owner earn-
ings and has easily funded its own growth. In the early 1990s, it was
generating more cash than it needed for operations—the very point at
which management actions collide with Buffett’s acid test. In this case,
American Express management did not do well.
Then-CEO James Robinson decided to use excess cash to build the
company into a f inancial services powerhouse by buying other related
businesses. His f irst acquisition, IDS Financial Services, proved prof-
itable. But then he bought Shearson Lehman, which did not. Over
time, Shearson needed more and more cash to carry its operations.
When Shearson had swallowed up $4 billion, Robinson contacted Buf-
fett, who agreed to buy $300 million worth of preferred shares. Until
the company got back on track, he was not at all interested in buying
common stock.
In 1992, Robinson abruptly resigned and was replaced by Harvey
Golub. He set himself the immediate task of strengthening brand
awareness. Striking a familiar tone with Buffett, he began using terms
such as franchise and brand valueto describe the American Express
Card. Over the next two years, Golub began to liquidate the company’s
underperforming assets and to restore prof itability and high returns on
equity. One of his f irst actions was to get rid of Shearson Lehman, with
its massive capital needs.
Soon American Express was showing signs of its old prof itable self.
The resources of the company were solidly behind Golub’s goal of build-
ing the American Express Card into “the world’s most respected service
brand,” and every communication from the company emphasized the
franchise value of the name “American Express.”