Markets & Finance

Citi: Back in the M&A Game?


Citigroup (C) has a green light to make deals again. A little more than a year ago regulators banned the world's largest financial institution from making any large acquisitions. In a letter dated Apr. 3, William L. Rutledge, executive vice-president of the Federal Reserve Bank of New York, informed Citigroup's Chief Executive Officer Charles O. Prince that all restrictions have now been lifted. The banking industry's largest regulator had barred acquisitions after growing leery of Citi's regulatory missteps worldwide, and feared that Citi had already become too big to manage.

In light of Prince's "significant progress" in implementing a risk-management program, he's now free to get back into the mergers and acquisitions game, which happens to be booming. "We are very happy," Prince told Business Week on Apr. 4. Prince said he was given the news the day before by the bank's general counsel, Michael S. Helfer, whom he immediately hugged. "This issue is now resolved."

BESIEGED BY SCANDAL. Citigroup has been besieged with one regulatory disaster after another during Prince's three-year tenure, with scandals erupting in Britain and Japan. His outfit has paid billions in fines to U.S. regulators for mutual-fund timing scandals and conflicts regarding research and investment banking. And he has had to bow before Japanese officials in a humbling gesture of contrition for lax governance and poor money-laundering controls in its private bank operating there.

The worst may finally be behind Prince with the lifting of the ban -- but the future holds its own unique challenges. Retail banking, consumer credit cards and the mortgage industry, for instance, are cutthroat businesses where margins are shrinking and new nimble entrants, like Google (GOOG) and PayPal (EBAY), are gaining ground.

Many of Prince's rivals are picking over the same acquisition targets, hoping to spur new revenue growth. Just the same, don't expect Prince to start writing big checks for a major bank deal any time soon. Richard X. Bove, analyst with Punk Ziegel & Co. wrote in an Apr. 4 note: "Now that the Fed is no longer restraining Citigroup from making big deals, do not expect a number of big deals. This is a different company than in the days of [Prince predecessor] Sandy Weill. It is more disciplined and better run." (See BW, 2/20/06, "Rewiring Chuck Prince".)

OVERSEAS MARKETS. As the relatively new steward of a banking behemoth that was created by serial mergers, Prince's overall game plan is to push into new markets, preferably overseas, and get existing customers to buy more services and products (see BW, 3/30/06, "citibank's New Saving Grace").

In a note on Apr. 4 to the company's employees, he thanked them for their "hard work and commitment" and for strengthening the bank's controls, compliance and culture. He credits the lifting of the Fed ban to his Five-Point Plan, which, among other things, emphasizes new standards for training, development, compensation, and annual reviews, all designed to encourage and monitor good conduct. "One of the key focuses for us is on the Five-Point Plan," Prince told Business Week. But "it wasn't a one-year wonder and we've got to keep our focus on organic growth. We can't depend on transactions for growth. Deals will be supplemental to organic growth, not the primary focus."

If there's a deal to be done, it's more likely striking a partnership with a foreign bank, or making an investment in one. Citi, for example, was rumored to be in the running for a piece of the Turkish financial group Finansbank, but National Bank of Greece may have edged them out of the bidding. Wall Street analysts expect Prince to scour some of the fastest-growing consumer banking markets for entrée into their burgeoning middle- and working-class customers. Top on the list are Brazil, China, India, Korea, and Mexico (see BW, 2/23/06, "Cashing In On India's Banking Boom").

EYEING FRANCHISES. Prince is also keenly interested in building the bank's U.S. franchise, but he emphasizes that prices are still too dear. Bank analysts have speculated for years that Citi would want to combine with a West Coast institution, such as Washington Mutual (WM) or Wells Fargo (WFC) to extend its retail branches across the country.

At the moment, Citi is a global institution that is essentially a New York bank in the U.S., with 60% of its deposits coming from the greater New York area. Prince said last December at an analyst conference that any deal will have to benefit the bottom line in Year One, and returns must reach the high teens over a three-year period. He still feels the same: "Retail branches are interesting, but most U.S. retail networks are wildly overpriced. I'm trying to build the international side of the business."


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