"Measuring Corporate and IT Performance" Co-authors Dr. Tan & Garly Benoit

This paper will look at the conglomerate corporate organization named American Express and its financial disclosure and performance for the past decades. A much deeper look will be in regard to the 2005 and 2006 years of the organization’s performance. This paper will serve as an investigative tool for analyzing the financial strengths and weaknesses of fortune 500 organizations. From the various risks concepts discussed in class to gain depth in deciphering its four financial instruments: a) Income statement, b) Balance sheet, c) Assets and liabilities, d) Stockholder equity. This paper will consist of the following sections: abstract, introduction, background, method, literature review, in-depth analysis, current trends, recommendations, limitations, and a conclusion:

Keywords: Asset and liabilities, balance sheets, financial statements, stockholder equity, and net profits.

Research question: Understanding IT controls and how they helped drive Amex's success with Kenneth’s leadership.

Introduction

Financial institutions such as American Express, the Company, a multibillion-dollar company have been steadily growing. Henry Wells founded American Express in New York in 1841 (www.amex.com). From the safe transport of valuables, goods, and material services, the organization grew normally into the new business streams of money transfers and bank checks. From there, AMEX developed its agency for traveling customers, and its operations, as well as the credit card side of the business, which grew rapidly yet organically. The merger and acquisition of Shearson Lehman Hutton boosted further the bottom line of the organization to even greater heights, expanding return earnings (www.amex.com). Under various leadership management, the early and late 1990s was a period of a constant growth spurt, which was above 400 percent for these three business segments, travelers, banks checks, and credit cards (www.google.com).

Background

The success of American Express has been nothing but stellar since 1891 with the travelers business, 1882 with the money order business, and finally the 1950s with the credit card business. With constant cost reduction, diversification, innovation, and stellar leaders and decision-making abilities, the corporation has been rated the top firm in America in fortune Forbes magazine (www.fobes.com). American Express is arguably one of the most well-known, iconic, and symbolic payment service corporations of the payment industry surpassing both its major competitors like Visa and MasterCard American Express Company operates one of the World’s widest payment processing networks and provides jobs to approximately 30,000 US and 30,000 non-US employees, totaling almost 65,000 employees.

Methods

This paper will survey and measure the current financial position of The American Express organization from a qualitative and quantitative perspective. More so, this paper will use a three-approach system: a) a literature review of the current position of the firm, b) mathematical calculations and concepts, and c) a comparative analysis of the scope of the firm from both qualitative and quantitative perspectives. These facets will be the crux of the paper, which will help shed some light on the future of the organization.

Literature Review

Three Financials worth Buying: American Express by James Cullen (2008). James made several claims on the financial positions of the firm through this article. He made various observations and calculations, which show the organization has been progressively growing and reassuring shareholders’ value. The fact of the matter is that American Express is one of the oldest iconic names in the industry stated James (2008). He made the case that credit card companies and credit card

agencies run similar business cases, strategies, and risks. He explained: “like the rating agencies, having a small number of credit card providers means that reputation is supreme in the business, and Amex is intimately aware of that.” The other aspect that he touched on is the network of its merchants, who actually accept the Amex card. Merchants get their businesses triple with remarkable rewards to form the organization. Consequently, the organization has averaged a 24% return on equity in the last decade stated James (2008). In other words, the organization has consistently surpassed its target growth rate of 15%. More importantly, the organization after spinning off its financial planning division to Ameriprise Financial, the organization was heading to even greater heights to a return of 36%. American Express to spin off financial advisors business by Bill Catlin (2005).

With the purchase of Minneapolis-based investors' diversified services, a giant mutual fund industry, American Express Financial Advisors, or AEFA has become a much stronger financial planning organization than ever before. AEFA provides financial planning and advice, asset management, insurance, and annuities through a network of 12,000 advisers. The problem that Bill has made clear to the readers in this article is in regard to the AEFA performance measure. He made the point that the spin-off at first was slow and provided very little result to the organization. Nevertheless, progress has been steadily improving since 2001, right after September 11. According to Bill (2008) and the CEO, Ken Chenault, the ranking of the firm went from 29th place to 21st. Hence, the organization is indeed recognized as a major money management organization as well as its card services.

Analysis

American Express produced its Annual report on December 31, 2006. The organization has a very comprehensive financial reporting structure, which is reported by a third party. The report is very extensive from small details like administrative fees to tax structures. American Express's balance sheet represents a “snapshot” of the comprehensive board of directors’ financial report. The comprehensive report shows the four financial instruments of corporate reporting: a) income statement, b) Balance sheet, c) Assets and liabilities, and d) Stockholder equity the left-side assets that the organization owns. The corporate report is structured pretty much the same way as the balance sheet with rows mostly on the left margin. The right side shows the organization’s liabilities and equities, which in essence are the claims pushing against these assets. Brigham (2005) made the remark about the two types of debts or liabilities, that all organizations have. American Express corporate liabilities are in essence of two types as well which can be divided into two major categories: current liabilities or short-term debts and long-term liabilities or long-term debts. In greater detail, the balance sheet is typically viewed in this fashion:

Financial Analysis General Growth

The general consensus is that the organization has made significant head gains each and every single year, if not in a different segment but in a different business venture. For instance, Ken Chenault came up with various new ideas for the organization’s business card portfolios. One of its major ideas was the introduction of new cards for small business owners and opportunities, which has raised the organization’s bottom line or return on equity by roughly 24%. For several years the company derived about 60% of its total net income from its U.S. card services operations, 22% from its international card commercial services, and the remaining 18% was contributed by its global merchant services, which can still be viewed as outstanding. Analysis of December 2006 shows a 10-year span of:

• Market Cap has grown exponentially vs the company’s stock by over 20%

• Market growth was $70+ billion with over 1.24 billion of new shares buyback

• Shareholders' Equity and book value was quite good and thus exceeded the market forecast

• US stock book value is at $8.50 per share (1.25% growth on FY2005)

• ROE is/was at 35.3%, averaging about 26.2%pa in the last 5-10 years

• Return on total Assets is 2.90%, averaging about 2.3%pa in the last 5-10 years

• Balance Sheet Total assets US 127.85 B versus total liabilities of $117.34 B

Financial Analysis Specific Growth 2006 versus 2005

(Per Million) 2006 2005

Card billed business in billions $333 $293

Total card activity in millions 562 484

The basic card in force in millions 35 24

Average basic spending $11,521 $10,996

Segment capital in billions $5 $5.1

The total credit card activity has shown to increase by 10%, which has been a dramatic increase. This can be the sound reasoning for the average basic spending to increase by 1% as also. The volume of credit activities have reestablished the organization as a primary leader in the service industry as it consistently introduces new cards in the market.

Conclusion

In conclusion, American Express is in better shape than ever before. IT executives must look for greater depth in their selection processes because all the key points discussed are quite common in the business world regarding these current issues, topics, and applications. More specifically, the financial statement of the organization shows strong growth and a much more prosperous future than ever before.

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