Amex's IDS Idea

Moving into mutual funds

The marathon secret negotiations started in April with a visit by Alleghany Corp. Chairman Fred Kirby II to American Express at the invitation of Chairman James Robinson 3rd and President Sanford Weill. The talks progressed into July and were partly conducted by radio telephone between Kirby's isolated summer retreat in the Adirondacks and American Express headquarters in Manhattan. At one point, Kirby used a pay phone in a country hotel to call Weill, who told the Alleghany boss he was not "going to negotiate a billion-dollar deal on the telephone." Thus the executives met face-to-face in New York City last week and sealed the deal in a final 4 1/2-hour discussion. American Express will buy one of the nation's major marketers of mutual funds and life insurance for a hefty $1.01 billion in stock.

The proposed purchase of Investors Diversified Services, the principal subsidiary of Alleghany, continues American Express's push into financial services. In addition to its own credit cards and traveler's-check business, the company already owns Shearson, a leading Wall Street securities firm; Fireman's Fund, a large insurance company; and the non-U.S. banking subsidiaries of Switzerland's Trade Development Bank. The deal puts American Express back into the mutual-fund market, which it left in 1975. IDS is one of the top ten American managers of mutual stock-and money-market funds. It runs 14 pools with total assets of $9.6 billion, manages pension portfolios worth $4.1 billion, and underwrites and sells life insurance and annuities. In all, IDS owns or manages assets valued at $17.6 billion.

Under the proposed agreement, Alleghany will become an investment holding company whose principal asset is American Express stock. The deal will make Alleghany the largest single stockholder of the financial conglomerate with about a 10% stake. Alleghany will receive 15.3 million shares of American Express, nearly three times its book value. Says Robinson in defense of the deal: "It's a high price, but it's got the sales force and management in place. You've got to pay a premium for that."

The proposed IDS acquisition would expand American Express's customer base and put it in direct competition with another new financial giant, Sears, Roebuck, for the middle-income market. IDS customers are mostly Midwesterners with incomes in the $30,000 to $65,000 range, slightly less affluent than the typical American Express client, who earns upwards of $50,000. This file is automatically generated by a robot program, so viewer discretion is required.