Amid faltering economic conditions that are not
boding well for US card issuers, American Express (Amex) has
received a timely $1.8 billion windfall from card network rival
MasterCard in exchange for dropping an anti-trust lawsuit alleging
that MasterCard had illegally blocked Amex from the bank-issued
card business in the US.
Amex’s settlement with MasterCard ends a
four-year-long litigation battle which pitted Amex against
MasterCard and Visa, with the three-party network seeking monetary
damages from its two larger rivals for “lost business opportunities
that resulted from the illegal conspiracy to boycott American
The $1.8 billion MasterCard settlement comes 8
months after Visa also agreed to settle with Amex over similar
claims and pay Amex up to $2.25 billion. The combined anti-trust
settlement is the largest in US history, although under the terms
of both settlement agreements, Amex will be paid in quarterly
instalments over three years.
Together with the previously announced payments
from Visa, settlement payments represent $880 million annually for
Amex over the next three years, starting in the third quarter of
2008 and running until mid-year 2011. Amex would receive two
subsequent quarterly payments of up to $70 million from Visa in the
latter half of 2011.
Although Amex CEO Kenneth Chenault stated the
settlement “represents a very satisfactory resolution of our
lawsuits against the country’s two major card associations”, he
also acknowledged that the settlement payments would provide a
buffer from weakening business conditions in the US.
“So far this month we have seen credit
indicators deteriorate beyond our expectations,” Chenault
“While it is too early to assess the impact of
these indicators, the anti-trust settlement we’ve reached with
MasterCard provides us with a multi-year source of funds that
should, among other things, help to lessen the impact of this
weakening economic cycle and, when conditions improve, give us the
ability to step up investments in the business.”
However, the payments from both MasterCard and
Visa are subject to Amex achieving certain quarterly performance
criteria in its US Network services business. Despite the weakening
US economic outlook, which has led some industry analysts to cite
Amex as being in a weaker position than its larger rivals as it
issues cards directly to consumers and carries card debt, Amex is
“highly optimistic about its ability to meet those performance
requirements. Proceeds from a possible settlement with MasterCard
were not built into the American Express 2008 financial plan,” the
company said in a statement.
Amex originally filed its lawsuit in November
2004 on the heels of the 2004 US Department of Justice ruling which
struck down Visa’s bylaw and MasterCard’s rule prohibiting banks
from issuing cards under other network brands, namely Amex and

. Following Amex’s settlement with Visa and the
dismissal of all bank defendants also named in the lawsuit,
MasterCard was the sole remaining defendant. The case will now be
Sanjay Sakhrani, an equity analyst at Keefe,
Bruyette & Woods, told CI: “We certainly think this is a big
win [for Amex] as it provides an additional cushion to contend with
the implications of a weaker US economy.”
But he also noted that Amex is “likely going to
have to back off its earnings per share guidance of 4 percent to 6
percent growth for 2008, particularly as it would like to spend to
take share in the current environment”.
Meanwhile, Moshe Orenbuch, an analyst with
Credit Suisse First Boston, told CI that the case will also have
significant bearing on Discover’s litigation against Visa and
MasterCard (see CI390).
“There is no assurance that [Discover] will
prevail as the growth in Discover’s network has been smaller,”
Orenbuch said.
“In addition, we do not believe Visa and
MasterCard have much incentive to settle before trial in September
2008. If Discover does prevail, it must pay Morgan Stanley
[Discover’s former parent] the first $700 million, plus 50 percent
of any amount recovered above $1.5 billion, up to a cap of $1.5
billion. This will likely significantly limit the recovery that
Discover could realise.”
However, Sakhrani said in light of MasterCard’s
and Visa’s willingness to settle out of court with Amex, Discover
may be in a stronger position.
He added: “We believe the Discover case is next
in line and the probability of settlement is greater ahead of the
case going to trial. Recall, MasterCard, Visa and Discover are in
[non-binding] mediation on this case.”