04/20/19 COMMENTARY: GREAT BIG COMPANY. GREAT BIG MISTAKE?

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COMMENTARY: GREAT BIG COMPANY. GREAT BIG MISTAKE?

There they are, John Reed and Sandy Weill, wind in their hair, standing on the prow of a giant, unsinkable ship and gazing into a limitless future. On Wall Street, no superlative is too ripe to describe the genius of the proposed merger between their companies, Citicorp and Travelers Group Inc. Why, did you know that Citigroup will have more assets than any other financial-services company in the world? Did you know it will have 100 million customers? The greatest strength of this deal is its sheer size.
Its size, however, also may prove to be its greatest weakness. In finance, as in seafaring, bigger is not always better. Assets can be a heavy weight to bear when they underperform. Citicorp itself was at death's door as recently as 1991 when bad loans torpedoed earnings, its stock sank to single digits, and Reed was sounding out potential rescuers.
Why are these two big companies becoming one really, really big company? Weill and Reed are betting that they can gain what is quaintly known as ''share of wallet'' by creating a worldwide brand and a full gamut of homemade products and services. Their big idea is to use Citicorp's branch network to sell products from Travelers such as insurance and Smith Barney Inc.'s brokerage service, while using Travelers sales agents to push Citicorp products, such as credit cards. For that strategy, scale and breadth are essential.
But there is another way to offer a supermarket of financial services that could make Citigroup look archaic before it gets its first letterhead printed. Instead of trying to be all things to all people, companies such as Charles Schwab & Co. position themselves as trusted intermediaries, providing a menu of the best financial products available from all sources. The companies whose products the distributor sells focus on doing one thing well, whether it's mortgages or credit cards.
Then there's the Internet, which also undercuts the advantage of bigness. Consumers are finding gobs of up-to-date market information and access to all manner of financial services on the World Wide Web. Mouse in hand, they're ferreting out good deals, regardless of how big or small the supplier is. Look at the success of Web sites that allow comparison shopping for insurance and mortgages, or online stock-trading firms like Web Street Securities, Datek Online, and E*Trade Securities Inc.
Customers of Palo Alto (Calif.)-based E*Trade don't mind that it lacks a skyscraper in Manhattan with a giant red umbrella on the side. What they like is that E*Trade charges $14.95 to trade 800 shares of a $20 stock, vs. a $359 commission at Smith Barney. ''In this new virtual community, size matters not,'' says E*Trade president Christos M. Cotsakos. Neither, he says, do many names and symbols that evoked fuzzy feelings in past generations: ''Some of the older brands just don't resonate with the Gen-Xers and baby boomers. A megamerger's not going to change that.''
AMEX, ANYONE? Also, for all the grand visions, financial supermarkets have an inglorious history. Citicorp's original attempt failed expensively on Reed's watch, and Weill was associated with a similar mess at American Express Co. in the 1980s that he wishes people would forget.
Of course, it's possible that this time will be different. For customers who don't like to shop around --and don't mind having all their eggs in one basket--Citigroup may be able to charge a tidy premium for a branded, customized bundle of products.
But it will take years for Travelers and Citicorp to work together as a single marketing machine. Gigantic computer systems must be merged. And managers who are accustomed to maximizing the profit of particular lines of business will need to be reeducated to support cross-product promotions. ''You need compensation incentives internally to do it the right way,'' says James A. Quella, a fan of the deal who is a vice-chairman of Mercer Management Consulting Inc.
Citigroup will be big and powerful, all right. But it also will be extraordinarily difficult to steer. And icebergs lie ahead.
By Peter Coy

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