Hal Rosenbluth has his work cut out for him. He and his colleagues must convince a skeptical client base to stick with an organization that is going from, in his words, "fiercely independent to fiercely combined" with the company clients most often were trying to avoid when they chose Rosenbluth International.
Both Rosenbluth and president and COO Alex Wasilov said they would spend the near term attempting to convince clients to stay aboard. "I'll stay for as long as it takes for clients and employees to be happy," Rosenbluth said.
The potentially immense rewards, as sources assumed the price American Express will pay for Rosenbluth is somewhere north of $200 million, depend on client retention. "Retaining customers is a key part of this deal, but we're not disclosing any terms," said American Express Global Corporate Services president Ed Gilligan.
Acquisition terms that fluctuate based on some measure of performance are not unusual. Navigant recently made a payment of more than $3 million to the former owners of Sato because an arbiter determined Sato had lived up to expectations.
"It's hard to speculate on client retention components, other than to say they would be a function of how cheap or expensive the deal is," said Sidoti & Co. analyst David Gold.
Amex, which expects to close the acquisition by year-end following regulatory approvals, will finance it through operating earnings. "You won't find it will have a significant impact on our earnings," Gilligan said. "It will be slightly accretive in 2004. We are not planning to discuss the terms."
Rosenbluth International historically is known for a festive employee environment that translates into a customer focus, but scores of clients already were thinking about changing agencies. "That's more speculation than anything else," said American Express Global Travel Services president Charles Petruccelli. "When you're serving large, multinational customers and global accounts, you're bound to have approximately 20 percent to 30 percent out to bid every year. Contracts are three to four years on average."
"Rosenbluth has a mature client base, a fair amount of which is going out for bid," said Partnership Travel Consulting's Andy Menkes. "Rosenbluth saw this as the best opportunity to make a move, and American Express was probably able to negotiate a very competitive price. What remains to be seen is whether the Rosenbluth clients will automatically roll over."
"There is not much support in the marketplace among corporate customers, or other industry participants, for this transaction," said Business Travel Coalition chairman Kevin Mitchell after he interviewed 250 industry contacts.
Clients interviewed by BTN were anything but sure of their plans. "We were going to send an RFP out in September," said a buyer with a major Rosenbluth account. "Now we may have to wait for the dust to settle. I'm afraid to get caught up in the transition."
"Would you want to choose someone in the middle of an integration?" asked another, who now is evaluating potential agency vendors.
"I know folks at a few longtime Rosenbluth accounts who are out to bid," said William Patient, travel buyer with Atofina Chemicals, "and we're one of them. I'm hoping this integration doesn't turn into a situation where they start fighting about which way is right. Everything I hear is that Amex respects Rosenbluth's client-facing organization. The client retention rate at Rosenbluth is ridiculously high, and I think Amex will recognize that."
"My impression and intuition is that Amex would expect to lose some accounts and may even welcome that," said an Amex client. "They probably have some specific accounts in mind." A fourth, large Rosenbluth client agreed that Amex knows it will lose some of the business. A fifth wondered whether midmarket clients would be the most likely to flee.
"As Ed and I think Hal may have said, a business is only as good as its clients," said Blackstone Group M&A senior managing director AJ Agarwal, who advised Rosenbluth on the transaction and is seeking to play a role in further agency consolidation
(see story). "I'd be surprised if there were more than minimal adjustments in the people responsible for clients, both the ones who answer the phones and the account managers."
Two large Rosenbluth clients wondered whether they would be allowed to choose their agents and reps. "Rosenbluth has fine account managers, and not everyone else does," said one. "Several Rosenbluth people I know think this gives them a future where they didn't have one."
"We're not now planning any restructuring or reorganization," Petruccelli said.
"For the Rosenbluth people, there's short-term job stability, but on an individual basis, they need to prove themselves," Menkes said. "Amex is not top-heavy, and you'd think the Amex account managers have a full workload, so you'd expect the Rosenbluth people to move with client base." Menkes said one characteristic that both companies share is they "always have taken good care of their employees."
For the most part, corporate customers don't buy statements by officials on both sides that the two companies have similar corporate cultures. "It's literally Fargo and Wall Street," said one longtime Rosenbluth customer. "Rosenbluth never says 'We don't do things that way.' "
"The cultures couldn't be more diametrically different," said another buyer who formerly worked for both megas. "That's why people chose to work with Rosenbluth."
Since they are less tangible than many aspects of an acquisition, travel managers said cultural differences can be difficult to describe. The best many could offer is that, on balance, Rosenbluth is more entrepreneurial and Amex more opportunistic.
"It's opportunistic," said Amex CFO Gary Crittenden when asked by analysts about the acquisition. "For us, it felt like a nice bolt-on or tuck-in acquisition, depending on how you want to refer to it."
Agarwal said Amex "recognizes what it does well and what it does less well, and an acquisition of Rosenbluth or, before, Travel One, is opportunistic in the regard that Amex can acquire something that's culturally accretive. It takes a long time for people to overcome a feeling that an organization isn't client-focused."
Sources indicated that Amex has been more responsive to client needs in recent years.
"Amex has had much more of an open mind to customer requests," said one client, citing the work of executive vice president of North America Corporate Travel Pam Arway. "They've gotten a lot better in the past year," another said.
While Amex sees the midmarket as a major growth opportunity, it is on the multinational scale that sources have been most confident in an improved customer focus at Amex, particularly with its Global 50 group of top agency and card clients. Rosenbluth had faced difficultly in building a global network.
Among the multinational questions buyers have for the new organization is, "What will happen to the joint ventures Rosenbluth had set up in lieu of a wholly owned infrastructure, some of which Rosenbluth said are not part of the deal?"
"Do we have a choice?" one buyer asked. "For example, there might be JVs we like working with, and we might prefer to retain that relationship and set up a data feed or something."
That's the kind of scenario Amex and Rosenbluth officials said a wholly owned structure avoids, but buyers and others were not convinced about Amex's global capabilities, citing instances where offices that are set up to handle travelers cheques and charge cards miss the boat on corporate travel. "This is not even close to the panacea for global travel management," Menkes said. "Among the global players, Rosenbluth had the least bricks and mortar under total ownership, so this is not adding a lot to what Amex already has, which itself includes a lot of affiliates."
Competitors that have fewer owned locations than Amex downplayed that facet and instead argued that multinational needs can be served as long as there are common standards and practices. "It's not about owned operations, it's about consistent quality of service," said TQ3 Travel Solutions president Jack O'Neill. "Global corporate travel needs a collaborative effort where the economics driving the program are centralized, but the service configuration oftentimes becomes virtual."
"We have a cohesive global network," claimed WorldTravel BTI president Danny Hood. He said the move "made sense" for Amex in that it needed to "right size" revenues following a 38 percent drop in its ARC volume between 2000 and 2002, according to BTN estimates indicating that the addition of Rosenbluth still doesn't bring Amex to its 2000 peak of $11.4 billion.
"You have to keep up your volume and marketshare with suppliers," Hood said. "One challenge is that Rosenbluth's suppliers are different from Amex's." For example, Rosenbluth is by far Galileo's largest agency, yet American Express is closer with Sabre.
Other guesswork on American Express' motivation to buy Rosenbluth centered on eliminating a competitor, obtaining popular technology and—most contentious—feeding its corporate card.