Mergers & Acquisitions
Citigroup Finally Unravels...But Not Before Taxpayers Take $45 Billion Hit
February 18, 2009
Washington Post photo
Former CitiGroup Co-CEOs John Reed, left, and
Sandy Weill, center, address the media with former
Treasury Secretary Robert Rubin in this 1999 photo.
Weill and Rubin continued to run Citi until 2006.
The nation's largest commercial banks have been at the epicenter of the credit crisis. Last month, the most troubled of these banks, New York-based Citigroup, announced it was splitting apart into two segments basically undoing the mammoth merger of a decade ago. John Reed, former Citicorp CEO, admits merger was "a mistake."
On April 6, 1998, New York-based Citicorp and Travelers Group announced they were merging in an $82.9 billion deal which at the time was the largest in U.S. history. The new financial behemoth which brazenly combined banking with brokerage and investment services and insurance with assets of $700 billion was called Citigroup.
On January 16, 2009, Citigroup, now with some $2 trillion in assets, many of them troubled, and a stock price of less than $6.00 per share, announced it was splitting apart into two separate businesses - Citicorp, which will house the banking business and Citi Holdings, which will house Citi's other services, primarily brokerage and investment in what amounts to a reversal of the 1998 merger.
Specifically, the company will spin off its Smith Barney retail brokerage into a joint venture with Morgan Stanley, another New York firm that invested heavily in risky mortgage-backed assets but has managed to stay afloat with government help. Morgan Stanley will pay $2.7 billion in cash to Citigroup and will own a 51 percent stake in the venture to Citi's 49 percent, according to a January 16th company filing. Later on, Citi is expected to divest itself of two consumer finance units and the company's private label credit card business, according to the WSJ.
Its logo boldly states, "Citi never sleeps." Yet based on its tumultuous 10-year history (see chart) and recent financial results -- five straight quarterly losses totaling $28.5 billion -- evidence is mounting that the troubled and sometimes arrogant financial institution should probably be put to sleep. Even more appalling than the losses, however, is the manner in which Citigroup executives give the impression that the bank is entitled to survive at the expense of U.S. taxpayers. So far, to the tune of $45 billion.
The combination of Citicorp, formerly known as Citibank, and at the time the nations largest bank, and Travelers Group, a company pieced together by Sanford I. (Sandy) Weill primarily through the mergers of Primerica, an aggressive brokerage firm and Travelers Corp, an insurance company, was intended to create a global financial giant with the capability of providing a smorgasbord of financial services virtually anywhere in the world.
"It's about cross marketing and providing better products to clients," Weill was quoted as saying in the April 6, 1998 press conference, according to an article in the WSJ the next day. For his part, Weill saw "fantastic" opportunities to expand insurance products and services by accessing Citicorp's vast global customer base, according to the article.
Although Weill pushed for the merger, John S. Reed, the well established 59 year-old Chairman and CEO of Citicorp, saw advantages as well: "Now we have the opportunity to serve customers, especially in the United States, with convenient, efficient access to all expertise and the full range of value-added products and services they need." "A capability," Reed went on to say at the press conference, "unmatched by anyone, anywhere," as reported in the Wall Street Journal the day the merger was announced.
Another reason Weill pushed for the merger was wealth, and lots of it. Back in 1986 when Weill took Commercial Credit public after it was spun off from Control Data, a New York computer company, Weill purchased 273,733 shares at $18.00 per share with options to purchase 3.3 million more, according to the book Tearing Down The Walls, by Monica Langley, a former WSJ reporter. Over the course of several strategic mergers -- Commercial Credit acquiring both Primerica and Smith Barney and then Primerica acquiring Travelers Group Insurance -- by March 4, 1998, Weill owned some 14.8 million Travelers shares. After the merger with Citicorp was announced, Weill's shares in Travelers were worth approximately $1.1 billion. Weill was now a billionaire.
But this merger was fraught with risks from the very beginning. Not only were two large, distinctly different cultures and managements being asked to co-exist but the experimental concept of a "financial supermarket" was once again put to the test. A decade earlier, in the mid-1980s, American Express had tried to leverage its position in finance to create the same type of supermarket but largely failed, by most accounts.
Washington Post photo
In March 1998, Weill setup a secret meeting
with Fed Chairman Alan Greenspan.
Greenspan gave the merger his blessing.
In fact, the failed Amex effort at financial dominance came up during the 1998 press conference: "If you want to find out what went wrong at American Express, why don't you talk to some of the people who were there during that time?" Weill asked. After being reminded that he was in fact a senior executive at American Express at the time, Weill responded "I was hoping you'd forget," according to an account published in the WSJ.
Citigroup's dismantling also represents a repudiation of the growth-by-acquisition strategy championed by Weill. In his roughly three years as sole chairman and CEO, Weill continued to feed his passion for deal-making when he used Citigroup's stock to acquire Associates First Capital, the huge consumer lender for $31 billion.
Then Weill went on a veritable global shopping spree spending billions to increase the size and scope of a bank that already had a prominent global presence. He acquired credit card portfolios in the United Kingdom and Canada, financial firms in Asia and ultimately spent $12.5 billion for Grupo Financiero Banamex, the second largest bank in Mexico. Now, it appears Citigroup may be forced to sell Banamex, a unit responsible for as much as half of Citi's 2007 profits, if its financial position deteriortes any further, according to an article last week in the WSJ.
Since the merger in 1998, Citi's size has become an obstacle to success (see "How Important Is Credit Management? Ask These Guys," CreditPulse October 28, 2008). In January 2008, the lead editorial in the WSJ entitled "Too Big to Succeed?" sized Citigroup up this way: "From the sovereign debt crisis of the 1980s, to its entanglement in Enron's fraud, and now subprime and the SIVs, Citi has shown a knack for finding the middle of whatever financial mess is in the news. Over the years, Citi's size has not so much provided stability as a place for problems to hide."
Last April, on the tenth anniversary of the merger in an interview with the Financial Times, Reed gave his assessment of the landmark deal. "The specific merger transaction clearly has to be seen to have been a mistake," Reed said, as reported in the Financial Times. "The stockholders have not benefited, the employees certainly have not benefited and I don't think the customers have benefited because our franchises are weaker than they have been."
Weill was unavailable for comment, according to the FT article.
In early April 1998, before the merger was announced, Citicorp's stock was trading around $135.00 per share. At the close of business on February 17, 2009, it was trading at less than $4.00.
