04/20/19 THIS MERGER WILL MAKE BIG WAVES

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THIS MERGER WILL MAKE BIG WAVES
The creation of Citigroup makes other financial houses wonder if a takeover lies in their future
Ready or not, the race is on. The creation of Citigroup from the merger of Citicorp and Travelers Insurance Group is forcing every major financial institution in the world to check how its competitive position has changed. The banks, securities firms, and brokers all face a fresh wave of mergers as they each scramble to keep up with Citigroup's enormous array of products and its unparalleled worldwide presence. ''Just sit back and watch,'' says Credit Suisse Group Chief Financial Officer Richard E. Thornburgh. ''There are going to be more major transactions coming.''
If U.S. regulations change and the deal goes through, the Citigroup model will influence financial-services markets worldwide. The $698 billion behemoth, boasting a market capitalization of more than $140 billion, is likely to be the first of several new financial giants formed in the U.S. from insurance companies, banks, and brokerage houses as they struggle to maintain competitive levels of capital.
SUPERMARKETS. Even giants such as Merrill Lynch & Co. and Morgan Stanley Dean Witter & Co. have their worries. Do they now need a tie-up with a commercial bank to gain more capital and access to corporate clients? If they forgo such links, will they see their deal flows dry up?
Meanwhile, U.S. banks such as Chase Manhattan Corp. and NationsBank are probably wondering whether they need to own securities firms to create products to sell to their customers. McKinsey & Co. estimates that U.S. lenders have excess capital to finance $1 trillion worth of deals. In ballpark numbers, that means the top 100 American banks could gradually shrink to a mere seven.
Outside the U.S., the impact of the Citigroup merger is likely to be strongest in the world's emerging markets. It's in Asia and Latin America that Citicorp has already carved out substantial market share by targeting the savings of an expanding middle class. Citigroup says it will consider major insurance deals in emerging markets, where the business accounts for just 2% of gross domestic product, compared with 8% in the U.S.
Citicorp CEO John S. Reed and Travelers' head Sanford I. Weill are especially interested in Asia, where Citi is already the most sophisticated player and where financial turmoil has created fresh opportunities for expansion. That ups the stakes for competitors such as HSBC Holdings PLC and the Japanese banks. HSBC will have to keep pumping money into technology and new offerings. In Japan, fear of losing customers to Citi's one-stop shopping may force Japanese firms to consider new alliances with foreign partners, says Keiko Honda, a McKinsey consultant in Tokyo.
SPACE RACE. Not all institutions in Asia see the Citigroup combine as a threat. ''Citigroup will be a very formidable financial supermarket,'' says Marc Sylvain, managing director of Fidelity Investments in London. ''That is good news for top mutual funds, who can fight for space'' on Citi's shelves. Fidelity, which already distributes through Citi in Southeast Asia, figures its funds may gain new prominence as the newly formed Citigroup spreads its distribution channels.
For the most part, however, Citigroup's role will be as a catalyst and a model for change. For example, neither Travelers nor Citi is a big player in Europe. But together, Reed and Weill think they can gain ground as the consolidating European financial services industry prepares for the introduction of a single currency in 1999. Citi's relatively customer-friendly approach is already a big hit in Germany, where giants such as Deutsche Bank risk losing ground if they continue to take clients for granted. ''If a customer goes in to [a Deutsche branch] saying he wants a loan for a child's wedding, the banker may give him a lecture on why he hasn't planned for it sooner,'' jokes Reed.
Reed and Weill may be smiling. But it's likely to be some time before their competitors will be in a laughing mood.
By Stanley Reed in London and Kerry Capell in New York, with Thane Peterson in Frankfurt

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