How Citi Fixed Its M&A Business

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The effort pitted Citi against the white-shoe banking business long dominated by Goldman Sachs, Morgan Stanley, and JPMorgan Chase (JPM). Goldman and Morgan Stanley, however, deployed their resources in a somewhat different fashion. They invested heavily in building their own private equity, hedge fund, and proprietary-trading operations, while Citi did not. Citi's chief operating officer, Robert Druskin, acknowledged the point on June 20 in a conference call with a Deutsche Bank (DB) analyst: "We have never really had a very effective alternatives business," Druskin said.

But Druskin says Citi's scale and scope can help each business grow. "Having the corporate bank, with a beachhead in 102 countries…it's very helpful. Because you have space, you have infrastructure, you have knowledge of the local markets," he said. "I think there are lots of ways they can work together."

That global capacity helped Citi win several major accounts, Yeary says, citing Citi's work on Phelps Dodge's 2006 bid to buy mining companies Inco and Falconbridge. (Phelps was acquired this year by mining giant Freeport McMoRan Copper & Gold (FCX).) The bank also has represented Endesa (ELE), the Spanish utility that has fielded takeover bids from Spanish, German, and Italian suitors, and is still up for grabs. Citi worked on nine of the 10 largest global deals of 2006, and is on track to pull off the same feat this year. Those transactions include AT&T's (T) $102 billion acquisition of BellSouth, the largest deal of 2006, and Barclays' (BCS) $90 billion acquisition of ABN Amro Holding (ABN), the largest deal to date of 2007.

Big deals keep on rolling

The bets were well placed. Overall M&A activity came roaring back, growing at a compound rate of 41% over the last three years, according to Dealogic. The market is on track to reach $5.2 trillion this year, up from $1.8 trillion in 2004. But the market for large deals worth $5 billion or more is growing more than twice as fast, at a compound rate of 87%. There is some evidence that riskier deals with lots of low-level junk-bond debt are having a tougher time getting funded, but there's still plenty of investor demand for big deals with investment-grade or higher-level speculative-grade debt.

Analysts expect the M&A business to keep growing, even if the market cools. "We believe the robust equity market and strong M&A activity will help drive growth," Standard & Poor's Equity Research said in a June report on Citi. (Like BusinessWeek, S&P is owned by The McGraw-Hill Companies (MHP).)

Citi's lack of proprietary trading may have hurt in recent times, along with a flat share price and a 300,000-plus-member workforce that many analysts consider bloated. CEO Chuck Prince has sought to trim costs, only to minimal effect. In May, Edward S. Lampert, the billionaire hedge fund manager known for investing in distressed companies, took a small stake in Citi, fueling speculation that Lampert's ESL Investments could herald a major Citi restructuring or even breakup (see BusinessWeek.com, 5/16/07, "What Does Lampert Want With Citi?"). Lampert declined comment to BusinessWeek.

But when it comes to the M&A trade, Citi’s financial supermarket approach is confronting the white-shoe rivals squarely—and winning.

Rosenbush is a senior writer for BusinessWeek.com in New York.