No.3 sued No.1 and No.2 and won settlements in both cases. Replace American Express, Visa and MasterCard for the aforementioned three, and the war between credit-card networks is captured in a nutshell. MasterCard today said it will pay American Express up to $1.8 billion to settle a lawsuit that said MasterCard and Visa blocked banks from issuing cards from their rival.
The agreement will cost MasterCard about $1 billion over three years after taxes, the Purchase, New York-based company said today in a statement. New York-based American Express said the payments would act as a cushion against borrower defaults, which are likely to be more than expected.
American Express sued larger competitors MasterCard and Visa Inc., along with eight banks, in November 2004 after the US Supreme Court ruled they violated antitrust laws by preventing member banks from offering rival cards. Citigroup Inc. and Bank of America Corp., the two biggest US banks, later agreed to offer American Express services.
Beginning in the third quarter, MasterCard will make 12 quarterly payments of $150 million, contingent upon the performance of American Express' US Global Network Services Business. MasterCard will take the $1 billion charge in the second quarter.
"We are pleased to have reached a settlement with terms that will enable us to keep our strong balance sheet intact," said MasterCard president and CEO Robert W Selander. He added that "eliminating the uncertainty" of a prolonged court case is in the best interest of shareholders.
Investors evidently shared his sentiment as MasterCard shares rose $12.33, or 4.4 per cent, to $292.70 on Wednesday morning. The size of the settlement is in line with analysts' expectations, but the deal is positive for the company's shares because it removes an outstanding concern that the market had had about the credit card network, analysts said.
In contrast, American Express' shares fell 40 cents, or 0.95 per cent, to $41.70, amid concern about the credit environment.
''The antitrust 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,'' said American Express CEO Kenneth Chenault in a separate statement.
However, worryingly for investors, he added that ''business conditions continue to weaken in the US and so far this month we have seen credit indicators deteriorate beyond our expectations.''
In November, Visa settled with American Express for about $2.1 billion, in a deal that combined with payments from other parties could net American Express up to $2.25 billion. Thus, with this latest announcement, American Express will be receiving as much as $4 billion through 2011.