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Travelers, Citicorp to unite
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April 6, 1998: 2:07 p.m. ET
$70 billion merger creating Citigroup would be largest corporate deal ever
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NEW YORK (CNNfn) - Travelers Group Inc. and Citicorp said Monday they plan to merge in a deal worth $70 billion, forming a new company to be known as Citigroup Inc. that would be the number one financial services company in the world.
The new company would have assets of almost $700 billion, yearly revenues of about $50 billion and operating income of approximately $7.5 billion. It would have 100 million customers in 100 countries.
With the merger, Citigroup would vault to the number one financial services position, topping Bank of Tokyo-Mitsubishi Bank Ltd. The deal does face regulatory hurdles.
Travelers chief executive office Sanford Weill proclaimed himself "nervous but excited" about the prospect of managing such a huge firm when he appeared at a New York press conference Monday.
Such nervousness didn't prevent Weill from asserting that he was creating "a model of the financial services company of the future." (191K WAV) or (AIFF)
The merged company's main thrust will be to create one-stop financial shopping for consumers, offering Citicorp's strengths of traditional banking, consumer finance, credit cards, along with insurance and brokerage services from Travelers and its units.
Following the merger, each company's shareholders will own 50 percent of the combined company.
The deal would be accomplished through a stock swap through which Citicorp shareholders will get 2.5 shares in Citigroup for each of their Citicorp shares (CCI). Travelers holders will exchange their shares on a one-for-one basis. (TRV).
The deal values each company at about $70 billion.
John S. Reed, chief executive of Citicorp, and Weill of Travelers will serve as co-chairmen and co-CEOs of Citigroup.
The two, who have known each other for 30 years, were all smiles as they appeared before reports but Citicorp's Reed acknowledged that splitting the top job could present problems.
"Two people sharing a job is inherently difficult," said Reed, who joked that the two would be measuring each others offices to make sure they're identical.
"I'll have to change and he'll probably have to change a little bit too. We understand those kinds of human difficulties," he said, adding he felt these adjustments would be minimal.
Travelers is a New York-based financial services firm whose companies include Salomon Smith Barney, Travelers Life & Annuity and Primerica Financial Services. The new company will retain Travelers' familiar red umbrella as part of its logo.
The deal is expected to close sometime during the third quarter of 1998.
Expanding their scope
Citicorp is the holding company of Citibank, a major international banking player. It is also is the world's largest issuer of credit cards.
It has been rumored for years that New York-based Citicorp would merge with a major investment bank, becoming part of a trend toward consolidation in the financial services sector.
Travelers' Weill said that the increasingly global nature of finance was the impetus behind the merger. For Citicorp's part, Reed said he was getting pressure from his customers for better access to global financial offerings. (180K WAV) or (AIFF)
Additionally, the companies are looking to garner cost savings. A frenetic period of cost-cutting among many firms has squeezed most of the savings out of these companies. As a result, companies have been looking to merge in order to reduce overhead and distribution costs, among others.
It could take at least two years before the companies see any gains in productivity by combining, according to Don Smith, head of the mergers and acquisition group at Houlihan Lokey Howard & Zukin.
"In many respects, these companies are different," said Smith. "Travelers is a big brokerage firm through Salomon Smith Barney, big insurance operations, big money operations. These are all separate, in essence, from Citibank's banking operations."
Regulatory approval looms
Perhaps a more immediate concern for the companies may be getting regulatory approval for the deal. The Glass-Steagall Act of 1933 prevents commercial banks from owning brokerage firms and insurance units, but the companies said they are taking a chance because they expect those laws to change in the near future.
Indeed, legislation is winding its way through Congress which would allow greater flexibility of ownership.
Even without those changes, the law has more and more been interpreted in favor of merging companies. Sen. Alfonse D'Amato, chairman of the Senate Banking Committee, said Monday that most legal obstacles to the Citigroup merger have already been eliminated.
"I see there will probably be questions raised as to dominance in marketplace, whether it runs into Glass-Steagall, but Glass-Steagall has been effectively amended and courts have sanctioned many of those changes by the regulators," said D'Amato.
Robert Froehlich, market analyst at Scudder Kemper Investments, said that the two companies' determination to go ahead with the deal is a clear indicator of their confidence. "The markets lead Washington. Washington doesn't lead the markets," he declared.
"I think this deal is going to force Congress to look at the Glass-Steagall again because this deal will be able to figure out ways to get around that outdated law. It's going to send a signal to Congress to say 'Wake up. It's not 1933 anymore,'" he added.
The merger will also need the approval of shareholders.
Travelers said it will apply to the U.S. Federal Reserve to become a bank holding company. Under present rules, the companies would be allowed to keep operating all its existing businesses for a two-year period.
If, during that time, any of its units would need to be sold, it would then do so. Travelers' Weill said, however, he thought that unlikely. As for job cuts, Weill said that the companies basically had complementary offerings and he expected that jobs would be added, not lost.
Banking on mergers
The financial industry has seen a string of mergers in recent years. Most notably, Chase Manhattan Corp. and Chemical Banking Corp. initiated a $10 billion merger in 1995, creating a firm that leapfrogged over Citibank as the number one bank in the United States.
Additionally, the past year has seen Morgan Stanley merge with Dean Witter Discover in a $10 billion deal and Bankers Trust New York Corp. buy brokerage Alex. Brown & Sons Inc. for about $1.7 billion.
The sheer scope of the Travelers-Citicorp merger could push other smaller firms into similar partnerships, said Barry Hyman, senior equity analyst at Ehrenkrantz King Nussbaum (167K WAV) or (AIFF)
According to analysts, other financial firms looking for partners in the near future could include banker J.P. Morgan & Co. (JPM), along with investment houses Merrill Lynch & Co. and Lehman Brothers Holdings, Inc. (LEH). 
-- by staff writer Randy Schultz
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