NEW YORK (MONEY Magazine) - Those who were there felt like witnesses to history. On April 6, 1998, the senior executives of Citicorp and Travelers Group gathered at New York City's posh Waldorf-Astoria hotel to announce a merger so brash its approval required an act of Congress and so big that both President Bill Clinton and Fed chairman Alan Greenspan had been consulted beforehand.

Citigroup, the company the merger gave birth to, threatened to dominate every aspect of financial services -- from credit cards to stock brokerage, insurance to investment banking.

The combination had such potential that Travelers CEO Sanford C. Weill seemed to be stating the obvious when he took the microphone that April morning and proclaimed his new company "the model financial institution of the future." In an ever-changing world, he said, Citi would be a company "able to withstand the storms."

From today's vantage point, Weill looks quite sage. Despite gale-force winds battering the financial services industry -- bear market, recession, Sept. 11, Enron, Argentina -- Citi has grown earnings at a 17 percent annual clip over the past three years. More important, the company has rewarded shareholders: Since the fall of 1998, the stock has returned 150 percent, trouncing the Standard & Poor's 500 as well as Citi's biggest rivals in banking, brokerage and insurance.

But what, exactly, defines Weill's "model of the future" -- and what does it mean for both consumers and investors? Is Citigroup truly a revolutionary company? Or is it simply a larger than usual "roll up," as Wall Street calls routine industry-focused consolidators?

Also in this series       Sandy Weill's rise to power What's next for Citigroup?

Weill, now CEO of the merged firm, acknowledges in one of a series of exclusive MONEY interviews with Citi executives, that "a lot of our competitors think our success is a fluke."

Still, as the 800-pound gorilla of financial services, Citi's moves have been closely scrutinized -- and widely emulated -- within the industry.

For consumers, Weill's relentless dealmaking has sparked a wave of consolidation that threatens to overwhelm and confuse even the most attentive account holder, as firms are joined, renamed and reconfigured.

For investors, Weill's efforts promise something more enticing: Financial services is one of the market's key growth sectors (along with tech and health care), yet it has always been shackled with below-average P/E valuations. Fairly or not, investors have long discounted the earnings of banks and securities firms, convinced that the threat of credit crunches and market crashes makes their profits unpredictable.

But Citi's broad base and consistent performance now put it in a position to break out of that history -- to close the valuation gap -- and, in the process, redefine the entire sector. That would enrich not only Weill's shareholders (Citi's P/E of around 14 is well below the S&P 500's 22), but all financial service investors.

Unless, of course, the market concludes that whatever success Citi enjoys is due to Citi and Weill alone -- that it cannot be copied, that in fact it is not really a model at all.

The big question, then, is whether Citi is succeeding in spite of its size rather than because of it. After the Citicorp-Travelers merger, pundits predicted that a handful of behemoths would soon dominate the industry. Other big banks in the U.S. and Europe embarked on what can only be described as a "Field of Dreams" acquisition strategy.

Deutsche Bank,ING, Chase, Societe Generale and UBS, to name a few, spent billions on investment banks, brokerages and asset managers. The theory was that if banks could assemble all the right product offerings under one roof, the customers would come.

But so far Weill is the only one who has managed to make the dream work. The others have seen their businesses -- and their share prices -- slump. Instead, the financial sector's best performers have been focused firms such as credit-card issuer Capital One, investment bank Lehman Brothers, and pure consumer banks like Washington Mutual.

Samuel Hayes, a finance professor at Harvard Business School, compares Citi's success to the bumblebee, whose rotund body and tiny wings defy the physics of flight. "Citi," says Hayes, "is the bumblebee that flew." CEO Jon Boscia of financial firm Lincoln National puts it more directly: "Citigroup has a great franchise, but it's really an anomaly. You'll never see six or seven [financial services] companies with 60 to 80 percent market share."

Perhaps. But if anyone has the stature to change the market's perception of financial stocks, it is Weill. Over the past 15 years, Weill has outpaced the returns of Warren Buffett at Berkshire Hathaway, Jack Welch at GE and Hank Greenberg at AIG. From 1987 through March 2002, a period when the S&P rose 589 percent, Weill delivered 3,151 percent total returns to his shareholders.

That means that if you'd invested $10,000 in Commercial Credit (the Baltimore lender which in 1986 became the first building block to Weill's Citi) and held on through all the subsequent deals, you'd have approximately $325,000. This compares with about $226,000 for Berkshire Hathaway, $170,000 for GE and $149,000 for AIG.

Yet today Berkshire, AIG and GE all trade at significantly higher P/E multiples -- 32, 21 and 20, respectively -- than Citi. Weill, though reluctant to discuss this valuation gap publicly, certainly recognizes it.

"It's been a source of frustration for him," says Neuberger Berman CEO Jeffrey Lane, a former Weill deputy. Other top Citi executives -- from newly elevated president Robert Willumstad to vice chairman Deryck Maughan -- all acknowledge the challenge.

"It is very frustrating," says Todd Thomson, Citi's chief financial officer, who literally bounds out of his chair and rushes to the whiteboard in his office to graph why Citi is underappreciated. "In terms of earnings and cash flow and the creation of real economic value, we are delivering in a big, big way," adds Thomas Jones, who runs Citi's asset management unit. "We ought to get the market multiple we deserve."

Given Weill's history (see more on Weill's rise), it would be natural to see him as a consummate acquirer and his business model as little more than buy a competitor when its price is down, cut costs by consolidating operations, repeat, repeat, repeat. But that would be doing Weill -- and Citigroup -- an injustice, as a close look at two recent transactions reveals.

Early this year, Citi spun off the property and casualty insurance unit of Travelers. Did this indicate that the acquisition-minded Weill was now looking to dismantle the company? Had he given up on the mega-firm model? Not on your life.

Instead, Weill concluded that the P&C business would simply be more valuable on its own. "We drive our company to achieve, on average, double-digit earnings growth," Weill says. "We didn't feel [Travelers' property/casualty business] had the potential for top-line growth over a long period of time."

Plus when Citi attempted to cross-sell home and auto insurance to its retail bank and brokerage customers, the strategy backfired. "The people who ended up taking our insurance policies were those with the greatest risks," Weill says. "We ended up losing a lot of money."

Meanwhile, the executives who ran the P&C unit saw opportunities for acquisitions within their niche -- something they could exploit as a stand-alone company but that would be problematic as part of a larger Citi. (P&C firms tend to carry low-end P/Es, even for financial services concerns, which means adding more P&C exposure to Citi might make it more difficult to close the valuation gap.) So when P&C share prices popped up due to post-Sept. 11 rate hikes, Weill took advantage.

The spin-off netted Citi a $1 billion gain while also giving shareholders a better, more focused exposure to the P&C business. This pragmatic thinking is classic Sandy Weill -- a flexible operator who knows how to get the most from financial businesses.

The second deal, Citi's 2000 acquisition of Texas-based consumer-finance company Associates First Capital, offers a different insight into how Weill's model works. Thanks to its low-cost structure, Citi boasts a 19 percent return on equity vs. just 12 percent for the average financial services firm.

What that means is, if Citi can impose its operating efficiency on a newly acquired entity, profit growth will follow. That is, however, a big if -- especially if you're ponying up $31 billion, as Citi did for Associates.

But Weill's risk was actually far less than it appeared. That's because the year before, Citi had acquired 41 branches from Associates, in what turned out to be a test drive. Citi execs had already doubled sales and cut costs at those branches, giving them confidence that taking on the whole business could work.

Sure enough, a year after the Associates acquisition closed, Citi had increased average revenue per Associates branch from $442,000 to $1.1 million, while reducing total annual operating expenses at the unit by approximately $1 billion.

Weill's office is not in the distinctive, slope-roofed Citigroup building in midtown Manhattan, nor in the Travelers building near Wall Street. Rather Weill has a third-floor perch on Park Avenue and 53rd Street, with a view not only of the headquarters of rivals like J.P. Morgan Chase but also of the Waldorf-Astoria, where his memorable 1998 press conference took place.

"It was one of the most incredible moments of my life," Weill recalls, as we begin what turns into a lengthy and wide-ranging discussion of where he has been with Citigroup and where he plans on taking the company.

Among the many mementos on the walls -- photos of Weill with world leaders, framed magazine covers, a historic program from Carnegie Hall on the day he was born -- is the pen that President Clinton used to sign into law the Gramm-Leach-Bliley Act of 1999. This financial reform enabled the Citicorp-Travelers merger to be completed by formally dissolving the Depression-era restrictions against bank ownership of insurers and securities firms.

The law also served as recognition that Weill's longtime vision of the financial services world -- fragmented and ripe for consolidation -- had belatedly become accepted by everyone else.

Weill discusses this legislative coup as if it were inevitable, which is understandable considering that his whole career has revolved around acquisitions. At the same time, though, he dismisses the notion that visionary strategy has been any more important to his success than attention to detail: "If you don't focus on the nitty-gritty, you won't have the luxury of thinking about strategy," he says.

Weill proceeds to share what he thinks makes Citi distinctive -- pursuing opportunistic acquisitions and striving to be the lowest-cost operator in every business -- and to touch on the things that he believes will drive the company's growth.

His first point, notably, is about the potential for global expansion. "When we think about the next five years, a lot of the focus is on what countries are going to really change the most and benefit the most from the process of globalization," he says. (That sentiment is later echoed by Citi president Willumstad: "The biggest opportunity for us is in the global market.")

But Weill also sees opportunities domestically, particularly in consumer banking. "Citibank doesn't have a lot of branches," he notes. "We'd like to grow our deposit base." (See "What next?")

During our interview, Weill's voice is surprisingly quiet, but his sense of direction is unmistakable. When asked about the failure of financial firms to make good on the promise of cross-selling to retail customers, Weill smiles wryly, as if acknowledging that successful execution will be a long time coming.

He responds by boasting instead about Citi's cross-selling gains on the institutional side -- an opportunity the pundits have tended to downplay. Using credit lines and traditional bank loans to help secure investment banking business, Citi has rocketed to the top of Wall Street's underwriting universe, pocketing $2.35 billion in fees last year, $282 million more than deposed king Goldman Sachs, according to Thomson Financial Securities Data.

This year, Citi's investment banking lead has gone from surprising to jaw dropping, with $732 million in fees during 2002's first quarter, almost double that of the current No. 2 underwriter, Merrill Lynch.

Weill, at 69, is already past the typical retirement age, but it's clear that he has no plans to slow down -- or to anoint a successor. In 2000 he and then co-CEO John Reed lured Robert Rubin, the former Clinton administration Treasury Secretary and perhaps the most respected financial mind in the world, to become Citi's vice chairman.

Their rapport is easy -- "Hey Bob," Weill yells down the hall at one point, greeting Rubin, who waves amiably back -- but Rubin did not come aboard to take over, as discussions with Rubin and others make plain. Indeed, when Rubin jokes about Weill's eventual retirement, the time horizon is consciously far off.

"What Sandy has done here," Rubin explains, "is attract a lot of good people who've become imbued with the way he does things. This place is very well positioned for when Sandy steps down in 10 or 20 years." In other words, any changing of the guard is less than imminent. Weill is still decidedly the man in charge.