04/20/19 THE 'COCA-COLA OF PERSONAL FINANCE'

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THE 'COCA-COLA OF PERSONAL FINANCE'
The possible synergies of Citigroup are many, but so are the obstacles--laws, for instance
Perhaps the best word to describe the Citicorp-Travelers Group Inc. merger is audacious. John S. Reed, America's top banker, and Sanford I. Weill, America's top financial services dealmaker, on Apr. 6 proposed a $70 billion merger that defies existing law. Banks such as Citicorp can't own property & casualty insurers such as Travelers, and are limited in their ability to acquire brokerages. No matter: Reed and Weill believe that by acting aggressively, they can persuade legislators to knock down Glass-Steagall barriers and create a new kind of global financial paradigm.
''It's a very gutsy move that only two titans could make because they're taking regulatory risk,'' says Jack H. Nusbaum, a partner at Willkie Farr & Gallagher. Former Federal Reserve Vice-Chairman Manuel H. Johnson Jr. says he was ''amazed'' by the brazenness of the proposed merger.
MAKING HISTORY. In addition to chutzpah, Reed, 59, and Weill, 65, are propelled by their shared desire to go out in a blaze of glory. Both are nearing the end of their careers and seem intent on making history by creating the first successful, fully integrated financial services behemoth. Says a clearly ecstatic Weill: ''The last major thing that we are going to do is to make this happen.'' Adds Reed: ''We don't have to do this. We wanted to create this great enterprise together.''
Can it work? The agreement to create Citigroup came together in just five weeks, and many major decisions remain to be made. James Dimon, the co-chief executive of Travelers' Salomon Smith Barney, says he doesn't know yet what his job will be in the new entity. And Reed is still learning the names of Travelers' businesses. For example, Reed mispronounced Primerica at the Apr. 6 press conference as ''Prime America.'' Weill later good-naturedly chided him: ''Remember, John, it's not two words.''
But Weill, who aggressively wooed Reed, was able to sell the Citi CEO on the strong fit between the two companies. The logic of the deal is threefold. First, with $698 billion in assets and $48 billion in revenues, the new Citigroup will be the largest financial institution in the world. That will give it ample wherewithal to make further acquisitions and costly investments, such as building more elaborate computer systems. Being bigger also reduces its cost of capital. ''Size matters,'' says Gerard L. Smith, a managing director at Donaldson, Lufkin & Jenrette Securities Corp.
So does diversification. Combining the two institutions will make them less dependent on volatile earnings streams. Assuming the deal goes through, earnings of Salomon's trading operation, for instance, will fall from an estimated 17%-to-27% range of Travelers' operating earnings to about 8%-to-13%, estimates Sanford C. Bernstein & Co. analyst Sallie L. Krawcheck. And Citicorp's Asian emerging markets income, which was 22% of earnings in 1997, will be only about 12% of Citigroup's earnings.
Finally, there is the central justification of the deal: cross-selling each other's products, mainly to retail customers. Over the next two years, Citigroup ought to be able to generate $600 million more in earnings because of cross-selling, says Bernstein's Krawcheck. Citigroup hopes to double its $7.5 billion in revenue in five years. ''We want to be the Coca-Cola of personal finance for the ordinary American and to take that global,'' says Deryck C. Maughan, co-chief executive of Salomon Smith Barney.
COMPLEMENTARY. The arrangement could solve Citicorp's and Travelers' biggest problems. Reed gets a stronger U.S. direct-sales force to market Citi checking accounts, mutual funds, and credit cards. In addition, while Citi has private bankers catering to the very wealthy, Travelers has 10,300 Salomon Smith Barney brokers, 80,000 part-time Primerica Financial Services insurance agents, and 100,000 agents that sell Travelers insurance.
At Travelers, Weill is drooling over Citicorp's 750 branch offices outside the U.S.; some 464 in Europe, 166 in Latin America, and 93 in Asia. Citi's global reach instantly transforms Travelers into an international player. Take Japan. Citi has enormously popular 24-hour automated teller machines and multicurrency savings accounts, and the bank is expected to win approval to link its 65 ATMs to the 20,000 terminals at post offices throughout Japan. Citi is already generating annual growth of 40% in Japan, Reed claims.
Travelers can also benefit from Citi's U.S. outlets. For example, ''We have $800 million of new mortgage origination each year,'' says Alvaro A.C. de Souza, an executive vice-president in North American consumer banking at Citi. ''Twenty percent of that requires property and home insurance. Today we ask the customer, 'What is your insurance company?' In the future we will say to the customer, 'Here's an insurance package for you.'''
Citicorp's private bankers also offer clients such services as trust and estate planning, which Salomon Smith Barney doesn't have. For example, Dimon says a Salomon Smith Barney broker recently lost a $20 million account because the company didn't have the expertise to value and set up an art trust for the client. It's a business in which Citi's private banking group is expert.
On the institutional side, Travelers wants to build on Citi's banking and trading relationships with 1,700 institutions all over the world. Citi, meanwhile, has a weak investment bank and does little equity underwriting. But Salomon Smith Barney is the third-largest U.S. equity underwriter, and its investment bankers may be able to turn some of Citi's corporate clients into equity underwriting customers.
In the past, cross-selling has not paid off for most financial-service companies--including the Citigroup partners. Travelers has had some success at Primerica Financial Services, but Citi has little to show for its efforts. ''Has Citi effectively sold Citi banking products to their own credit card holders? The answer is no,'' says David S. Berry, a banking analyst at Keefe Bruyette & Woods Inc.
And there is great potential to upset the two institutions' web of partners and clients. For instance, Salomon Smith Barney's investment banking affiliate in Buenos Aires, Merchant Bankers Asociados, might pull out of the partnership because its asset management, private banking and bond trading activities overlap with Citibank's. Says Chairman Alejandro Reynal: ''If the new organization is too large or inefficient, we will have to decide'' whether to stay on.
Many other major issues haven't been addressed. For starters, Reed and Weill will almost certainly find it a challenge to run Citigroup together. Who will run board meetings? And who will get to put his candidates into the top jobs? Will Weill have to sacrifice his intensely loyal general counsel, Charles O. Prince III, so Citicorp's crackerjack John J. Roche can help navigate Citigroup through the formidable bank regulators? ''If it works, it will be awesome,'' says one competitor. ''But for three to four years, there will be lots of unhappy people.''
The betting on Wall Street is that the co-CEO arrangement can't last, and that Weill and his close-knit team will eventually run the entire show. But a minority believes that Weill and Reed will sublimate their considerable egos and make it work. If they do, they may each be able to take credit for creating quite a revolutionary institution.
By Leah Nathans Spiro, with Debra Sparks, in New York; Andrea Mandel-Campell in Buenos Aires; Brian Bremner in Tokyo; and Owen Ullmann in Washington

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