According to Berkshire Hathaway's
In my past studies of Berkshire's purchases of M&T Bank
It's hard to imagine now, but American Express was in very bad shape in the early '90s. According to an NYU Stern case study by Richard Freedman and Sharon Simon, American Express had engaged in "diworsification," which left the company with too much debt and no focus. The company was rapidly losing credit card market share.
Bringing in the cavalry
In 1992-1993 -- the period when Buffett appears to have started buying -- the stock's price had been cut in half. More importantly, Harvey Golub became CEO in 1993. From Golub's appointment until his retirement in 2001, American Express shares increased nearly six times in value -- which I calculate as a 25% annualized return. Not bad.
Within, not without
I think Buffett's purchase of American Express stock mirrors his purchase of Coca-Cola
Many of Golub's strategies were centered on internal improvement. Instead of looking for external acquisitions, Golub improved the company's focus by divesting non-core businesses, cutting out unnecessary personnel and costs to make the company leaner and more responsive, and concentrating on improving the American Express brand's strength.
Simple strategies, simple goals
According to the NYU case study, Golub declared three strategic initiatives and two goals. That's it. The three strategies were to expand internationally, broaden the card network, and increase the depth of financial services AmEx offered. The goals were to increase earnings per share by 12%-15% annually and achieve an 18%-20% return on equity.
The best part about these strategies and goals is that they are simple, clearly defined, and well aligned. By simple, I mean that any employee in the organization could understand them. Clearly defined means that the goals are easily measurable and leave little room for misinterpretation. And well aligned means that if the company achieved its strategies and goals, it would grow its moat and improve its brand, and employees, managers, and shareholders alike would be happy.
Again, it's important to note that the strategies weren't too far-fetched (e.g., to become the world's financial supermarket) and the goals were defined and quantifiable. The manager could thus paint a bull's-eye around the results, rather than be held accountable to predetermined goals.
Learning from mistakes
When American Express turned down an offer from American Airlines to partner on a credit card, American Airlines turned to Citibank
According to the NYU case study, analysts at the time thought American Express was too late to the co-branding game. However, American Express realized its mistake and turned a weakness into a strength -- the NYU case study mentioned that industry experts later credited co-branding as a major driver of the company's revival.
I've heard that Buffett prides himself on being able to quickly size people up. And Golub seems to have many of the personality traits that Buffett likes to see: ambition, competence, and intelligence. He'd surely notice those characteristics rather quickly.
Before being named CEO, Golub had already proved his mettle by successfully running AmEx's IDS division. He was also clearly ambitious and wanted the CEO job. He intelligently sought out the facts, and according to a Harvard Business School article by Laurie Aron, Golub told his people he was less interested in people having the right answers than in their thought processes. In this way, he followed the "process, not results" method of focusing on having a strong underlying process rather than short-term results, a hallmark of value investing.
Golub also once said: "Try to work at the margins of your ignorance -- that's how you grow." That's a concept similar to the value-investing principle of expanding one's circle of competence. Again, that's a trait that Buffett would certainly applaud, and it points to the management skills that helped turn American Express around.
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.