April 03, 2008
I am at the point in my Business Associations class where we are discussing the landmark acquisition cases--Unocal, Revlon, Paramount/Time, etc. Although it did not come up in class, I was tempted to note how not too much later Time-Warner would engage in what is one of the most value-destructive mergers ever--AOL Time-Warner. A couple of years ago Steve Case, AOL's co-founder, essentially apologized for the merger : "Yes, I'm sorry I did it."
Today I read another mea culpa over another merger--the merger of one of my former employers, Citibank, with Travelers. I had left Citi's trading desk for law school a few months before the deal was announced, so I fortunately missed the apparently ugly attempt to combine Salomon's trading floor with Citi's (ex-Salomon/now Citigroup traders were rumored to be still answering their phones by saying "Solly" instead of "Citi" some months after the merger).
So what is the verdict on the Citigroup merger? John Reed, Citi's CEO and (with Travelers' Sandy Weill) the driver of the deal, says in an interview that "the specific merger transaction clearly has to be seen to have been a mistake. 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." Reed attributed the failures to "a general weakening of the management fabric . . .. The core of what was happening was a lack of supervision and structure at the managerial level." Sandy Weill, commenting on Reed's remarks, was quick to point out that any weakening occurred after his watch--in other words, while Chuck Prince led Citigroup.
Vikram Pandit, Citi's new CEO, has a difficult job ahead. Citi's organizational problems would be daunting enough; however, they are now overshadowed by the larger debt crisis. Reed and others think that Pandit should sell off some of the businesses, thereby producing needed liquidity and creating a more manageable organization. We've been reminded for a couple of weeks now the crucial role that confidence plays in financial stocks (and now the SEC is investigating alleged efforts to bring Bear down through false rumors). Perhaps, as has been speculated, Citi will need to restructure to restore the market's trust.
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1. Posted by Elizabeth Brown on April 4, 2008 @ 7:49 | Permalink
I am not sure what Travelers has to do with Citigroup's current organizational problems. Travelers was spun off from Citigroup in 2002. Since early 2004, its return to shareholders came to nearly 47%. When compared to other companies in its peer group, only Goldman Sachs, Chubb, and ACE exceeded its performance. Travelers has not been touched (at least so far) by the subprime mortgage crisis.
Whether Travelers would have done as well if it had remained with Citigroup is hard to say. Nevertheless, it is hard for me to see how the Citigroup/Travelers merger is having any residual effects on Citigroup today since they haven't been one company for over six years.
2. Posted by Paul Rose on April 4, 2008 @ 8:17 | Permalink
Travelers was spun off, but the merger certainly brought more in from Travlers' end than the insurance underwriting side of the business that was later spun off. Most of the other parts of the business are still with Citigroup, such as the remnants of SSB. My point (and Reed's comment) was not about how well Travelers has done, but rather about how Citi has fared, which is rather poorly in comparison to its rivals. Citi had a large run up in the years after the merger, outperforming JP Morgan and BofAm significantly. However, it has suffered much more than either of those firms, largely because of subprime problems, but also because of a bloated organization and related costs (as Al-waleed bin Talal complained of last year).
