Will Citi Upstage BofA's Big Deal?


By Amey Stone Remember back in 1998, when First Union's $17 billion bid for CoreStates Financial seemed like an epic deal that would transform the global financial landscape? Until, that is, just a few months later, when Travelers' $82 billion merger with Citibank was announced. That one really did reshape the financial world by forming Citigroup (C).

Will history repeat itself now that Bank of America (BAC) and FleetBoston (FBF) have struck their $47 billion pact (see BW Online, 10/27/03, "BofA's Bet That Bigger Is Better")? Is Citigroup about to up the ante with an even larger deal of its own? Not likely in the near term, say analysts and industry participants.

NO PRESSURE. For starters, with Fleet gone (Citi is widely rumored to have sat down at the negotiating table with Fleet), not too many other large banks are left in play that could really change the naturee of the financial-services behemoth. "Citi is so large, it's very difficult to see what they would buy that would substantially move the needle," says Jeffrey Lane, chief executive of asset management firm Neuberger Berman, which is being acquired by Lehman Bros. (LEH).

Besides, Citi is already big enough, with $1.2 trillion in assets, and strong enough in financial performance (it has earned $13 billion on $57 billion in revenues in the first nine months of 2003), not to feel pressured. "My view is that Bank of America had to do a deal of consequence if it wanted to compete with Citi and J.P. Morgan," says Lane. Since it remains No. 1 in assets, even after the Bank of America/Fleet deal, "Citigroup doesn't have to do a deal to compete with anyone."

It certainly doesn't have to do a deal if it doesn't like the price. Bank of America is paying a 40% premium to acquire FleetBoston, which Citigroup may not have been willing to match (Citigroup declines to comment on merger negotiations). "A hallmark of the success of Citigroup is not overpaying," says Tom Taulli, founder of the mergers and acquisitions advisory Web site MergerForum.com.

WHO'S NEXT? The stock market is hardly calling for more deals. Investors, worried that the Fleet purchase could kick off a new round of combinations that might not create shareholder value (most mergers don't), drove down the stocks of potential acquirers, including Citi, Wells Fargo (WFC), and Wachovia (WB), on Oct. 27. But investors appear to be hedging their bets. They're also pushing up the stocks of midsize regional banks that are likely targets, including SunTrust Banks (STI), PNC Financial Services Group (PNC), Comerica (CMA), and Keycorp (KEY).

Citi could have a few reasons why doing more deals may not be its primary focus right now, argues Richard Bove, an analyst at research boutique Hoefer & Arnett. Although it continues to talk publicly about M&A as one of its main strengths, lately it seems to be concentrating on becoming more efficient, rather than getting bigger. That could partly explain why Citigroup Chairman Sandy Weill, who is known to love the excitement of doing deals, was willing to turn over the reins on Oct. 1 to successors Charles Prince, now CEO, and Bob Willumstad, now president.

"I think the change in command is due to recognition that Citigroup has gotten too fat and too cumbersome, and has to be rationalized," says Bove. "That's something Sandy might find boring."

If merger momentum were to start building, Citi might jump into the fray -- especially if the right opportunity at the right price presented itself. Willumstad, who heads its consumer businesses, has spoken about the desire to expand further into large markets in California, Florida, and Texas. Says Taulli: "The M&A ethos is still very strong at Citgroup."

EYES ON ENGLAND. Since Citi doesn't have a large retail branch system, "the sky is the limit in terms of potential areas where they could go," says David Kungl, director of banking as financial data firm SNL Financial in Charlottesville, Va. "There's no deal that would be too difficult for them to swallow."

The most likely target, believes Bove, is England's Barclays Bank. That's because Citi is first and foremost an international bank, and England's Barclay's is for sale, he believes. "I don't think they are actively looking," he says of Citi. "But if something drops in their lap, they will take it."

Citi likely hasn't sworn off deals either. But it's in a position where it can sit back and pick and choose. "Every company that's up for sale in the financial-services sector goes to Citi and says, 'Are you interested?'" says Bove. Just because Bank of America paid up for Fleet, doesn't mean Citi will start saying yes. Stone is senior writer for BusinessWeek Online in New York


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