'One Helluva Candy Store!' That's what Sandy Weill calls the megameld of his Travelers Group and John Reed's Citicorp. Can Citigroup's odd couple make it pay?
By Carol J. Loomis and James Aley Reporter Associate Lixandra Urresta

(FORTUNE Magazine) – At the end of the most electric week in his life, Sanford I. Weill, the 65-year-old chairman of Travelers Group, was in Augusta, Ga., for the Masters golf tournament, switching frequently between green and navy blue jackets. During the day, walking the glorious, storybook grounds of the Augusta National course and lunching on its clubhouse veranda, he wore the famous green jacket available to only two slices of society: those golfers who have won the Masters and the club's 300-odd members, whose ranks Weill joined in 1995. Wherever he walked, Weill was stopped by people (including another chap in green, 1976 Masters winner Raymond Floyd) who wanted to congratulate him on the deal that had made the week so remarkable: this stunning, crazy, could-you-ever-have-imagined merger between Travelers and Citicorp.

On Thursday, Saturday, and Sunday evenings of that early April week (but not on Friday, when he flew back to his Connecticut home to celebrate Passover), Weill changed to navy blue and served as host at dinners Travelers gave for customers. A different set of 130 guests turned up each night, and they dined in a billowy white tent put up alongside the Augusta house--Tara-like in style--that Travelers, a television sponsor of the Masters for 40 years, rents each year. Then, toward the end of each dinner, Weill stepped near the buffet table and launched into the story of how he and John S. Reed, 59, chairman of Citicorp, had brought their companies to this juncture.

Some of the people listening surely had the inevitable thought about a monster merger: "Here we go again--one more ego-driven push for size and power." Size there will certainly be: The company to be called Citigroup is set to rank in the top ten of the FORTUNE 500 and is already sporting a pro forma market value around $145 billion.

But also in the air at those dinners, exerting a kind of counterforce, was a sense of business history. This is not two large coastal banks merging and spread-eagling the United States. It is two very different financial-services companies joining together in a way that promises--and threatens--to transform the notion, long written into law, of what business activities are permissible for companies that own banks. It is also a merger that rides on, and preaches, the idea of revenue gains. These are to be gleaned, so the story goes, from Travelers' and Citi's "cross-selling" each other's products, from their reaching into geographies that are not now their strength, and from the general, if often discredited, proposition that one plus one might actually be made to equal more than two.

It is simultaneously a merger that raises enormous questions. The granddaddy of these is the matter of co-CEOs, which is the management architecture that Reed and Weill--shall we alternate which name comes first?--have adopted. The merger could not have happened had either insisted on being boss. Nor can the new company possibly thrive, so many a principal in the deal believes, unless the arrangement endures for some time (years, not months) and securely welds the two parts together.

And yet it is well known that co-CEOs are a management abomination, miserable to deal with on a church committee, much less at the top of a huge, deeply complex company. Weill and Reed have, of course, said it can work and have vowed that it will. But can something so immensely and intrinsically difficult really be pulled off? Answers evade at this early stage of the drama. But one conclusion asks to be recognized: We are at ground zero of one of the most fascinating business and management stories ever to come along.

In the job of making Citigroup fat and felicitous, it should help that its two monarchs have long known each other, though under initial conditions that were hardly ideal: In the 1970s both were on the board of a company, Arlen Realty, that fell into deep trouble and demanded a good deal of face time from its directors. But Reed and Weill have since been only casual business friends, not buddies.

In fact, though both are highly intelligent, they are otherwise the Odd Couple (and "too old to change," says Weill). Reed, fit and Ivy League in looks--though his principal school was MIT and his degree in metallurgy--is an analytical loner who dislikes talking to the press (although he's excellent at it) and sometimes seems to shun socialization entirely. In contrast, Weill has so many friends that his wife, Joan, was tortured in trying to cull the list to a number (173) that would fit into New York's Four Seasons restaurant when she threw him a surprise 65th birthday party in March.

At the party, each table was asked to come up with five adjectives that would describe Weill. "Portly" made the list easily, and "rich" got there, too, in acknowledgement of the huge stock-option rewards that have accompanied Weill's success in transforming his company from a peanut to a powerhouse. But one of Weill's really distinguishing characteristics could not easily be distilled into a word: After 45 years of large accomplishment, he's still the kid from Brooklyn, forever awed by how far he's come. He can't believe he's a member of Augusta and is above all blown away by this merger: "I wake up every morning and pinch my ear to make sure I'm not dreaming," he said at one of those Augusta dinners, displaying the quality of wonder that Joan says makes him "lovable."

Those shows that Sandy Weill put on in Augusta would not have worked for Reed, who speaks expertly when he wants to but is too reclusive to seek the stage. Weill, on the other hand, draws energy from standing up in front of crowds, fielding their questions, batting back answers that range from informative to funny. He also owns all the knowledge in this particular encyclopedia, given that it was he who had the idea for this merger and made it happen. Travelers is the acquirer in this deal as well: Citicorp shareholders are to get 2 1/2 shares of Travelers for each Citi share they hold, a ratio that leaves Travelers paying about $70 billion (a modest premium over Citi's going-in market price).

When Weill tells the story of how it all happened, he tends to leave out some details that FORTUNE learned from others: Fact is, Travelers held serious merger negotiations with J.P. Morgan last summer, and had these borne fruit, they would surely have preempted a deal with Citi. But the Morgan talks foundered on disagreements about terms and management structure. Weill, throughout his history a nonstop dealmaker, then moved unfazed to the next project: his $9 billion acquisition of Salomon Inc. last fall.

You might think that would have sufficed for a while. But at a Travelers planning meeting that began in January and leaped to a day in early February, Weill asked for some musings about financial-services companies that might make attractive merger partners. The name Citicorp surfaced promptly and drew snickering yeas of approval. Weill himself didn't snicker and knew, he says, that "this was a call I should make." But he says he always thought the effort would add up to nothing better than spinning his wheels.

Weill called Reed next morning and made a date to talk with him the night of Wednesday, Feb. 25, when both were to be in Washington for a Business Council meeting. Weill gave no hint of his mission, and Reed came up with his own guess as to why he'd been called to this meeting: Weill, he thought, wanted to put the arm on him to make a charitable contribution--maybe buy a table at some benefit dinner. When Reed learned that the contribution Weill had in mind was the totality of Citicorp, he was floored. The idea, he says, had never entered his thinking.

But the more Reed listened to Weill, the more sense it made. The two companies are amazingly complementary, displaying little overlap in what they do. Weill has spent his business life collecting distribution systems, which today go by the names of Salomon Smith Barney, Travelers, Commercial Credit, and Primerica Financial Services (PFS). But Weill has just a minor presence overseas (most of it gained only recently, when he bought Salomon). With this merger, Weill will pick up one of the great international distribution systems in existence--it's called Citibank--and instantly become an overseas power.

Reed, meanwhile, is so committedly an internationalist that he is sometimes criticized--even by his directors, it is said--for slighting domestic expansion. Reed may be sensitive to that point himself, a frame of mind perhaps subtly revealed by his assessment of the planned merger of NationsBank and BankAmerica as a "very good" combination. But here he is, via Weill, set to grab one of the strongest distribution operations in the U.S. Moreover, Travelers is an asset manager of size--running more than $200 billion in mutual funds and the like--and this is a business area in which Citi has been weak and floundering around in search of a fix. Citi has also given short shrift to investment banking, choosing to spend elsewhere. But now Citi will have the ready-made help of Salomon Smith Barney, which along the way yearns to get a road into Citi's huge roster of corporate banking clients.

Though the term is Travelers' and not often used by Citi, both companies are "manufacturers" of products that may be sold in the other's distribution system. Besides mutual funds, Travelers makes such things as annuities and insurance policies, both life and property-and-casualty. Citi is the biggest U.S. "manufacturer" of credit cards, and it offers bank loans and electronic checking accounts that could possibly be sold, say, to the middle-income clients of PFS. We are talking here about the "cross-selling" aspects of the deal, and one Travelers director said recently that he thought the possibilities "endless"--extending way beyond the string of ideas he'd heard when Travelers executives turned up before the board to explain the cross-selling proposition.

You don't have to be as smart as John Reed is to grasp that these two companies fit better than most, and on that night of the 25th, Reed listened to Weill with growing interest. But Reed knew relatively little about Travelers and could not immediately bone up because he was set to leave on a long trip around the world. So he put vice chairman Paul Collins, a veteran at Citi and one of Reed's closest confidants, to studying Travelers and filling him in long distance. Reacting, Reed fell back on his habit (not Weill's in the least) of writing down the logic of a case, to see whether it develops holes on paper, and from Singapore sent Weill a long fax detailing his thinking. By Thursday, March 19--with not even a month having passed since Weill and Reed had met in Washington--Reed was back and the men were deep in serious conversation. At the end of two days of talks, Reed put his arm around Weill's shoulder and said, "Let's do it, partner." You don't flummox Weill often, but even he was stunned by how fast things were moving.

In the two weeks of behind-the-scenes tumult that followed before the deal was announced on April 6, Weill made three heads-up calls to Washington. One, in which Reed joined, was a largely ceremonial call on the eve of the announcement to Weill's friend President Clinton. Another was to Secretary of the Treasury Robert Rubin. When Weill said he had a deal to tell him about, Rubin said, "You're buying the government!"

The third call, portentous, was to Federal Reserve Chairman Alan Greenspan. Weill asked, "You remember that thing I talked to you about last summer? Well, I've made a deal to merge with a bank, and I'd like to bring the other guy down to talk to you." Greenspan asked who the banker was. "It's John Reed," said Weill. Greenspan decided then he might just call the Fed's lawyer--and told Weill he'd get back to him with a date.

The heavy freight in this exchange is the Bank Holding Company Act, which bars banking companies from engaging in most forms of insurance underwriting, a big business for Travelers. Consequently, it was never in the cards in this deal that Citi could buy Travelers. On the other hand, the absurdities of bank regulation make it possible for a nonbank--that's Travelers--to agree to buy a bank, apply to become a bank holding company, and commit to get itself into compliance with the law within a prescribed period. The law specifically allows two years for this to happen and holds out the possibility of three one-year extensions to be granted at the pleasure of the Fed.

One scenario for Citigroup is that it will eventually have to dispose of Travelers' insurance-underwriting activities. Another scenario is that new banking legislation, forever on the calendar, will relax the restrictions on what banking companies can do. It is well known that Greenspan would like to see a relaxation, and that's why Weill brought him so quickly into the discussion.

Given the difficulties of making this merger work, maybe we should cook up a third scenario: Citigroup gets down the road and splits back into two parts. That's a joke, but it is relevant that this imponderable matter of co-CEOs got a powerful amount of discussion at the 7 1/2-hour board meeting on April 3, at which Citi's directors debated the proposed merger. Reed says that director Richard Parsons, president of Time Warner (parent of FORTUNE's publisher) told horror stories about the days in which Steve Ross (a kid from Brooklyn, by the way) and Nicholas J. Nicholas (Ivy League in type) tried unsuccessfully to coexist as CEOs. In that scrape, Ross triumphed; Nicholas left. On the other hand, painting a more pastoral scene, an inside Citi director, vice chairman Onno Ruding, testified that co-CEOs are an accepted and effective way of doing business at Unilever, on whose board he also sits.

In the end, both Citi's board and Travelers' simply decided that the fit between the two companies made the management risks worth taking. "I love this deal because we start off with such a big pile of chips," said a Travelers director recently. "But I know that there is no stack of chips high enough if these two guys can't work together."

Just starting out, Reed and Weill must get accustomed to a board that neither can call his own: The script calls for Citigroup to have 24 board members, half from Citicorp, half from Travelers. This bit of balance is a far cry from what either man is used to. Reed has dominated his board, somehow managing to keep it under control even in the dark days of the early 1990s, when his then approach to managing--we are Citi; we can do anything--nearly brought the company to its knees. Weill, meanwhile, has a board that is largely composed of close friends (naturally all invited to the birthday party), many of whom signed on in 1986 when he took control of Travelers' predecessor, Commercial Credit. This is another instance of there being too many friends: To get down to his Citigroup quota of 12 directors, Weill is having to ask three of his outside board members (whose scalps are not yet hanging) to resign.

Already scalped, at both Travelers and Citi, are all the inside board members (save, of course, Weill and Reed), who just couldn't stay on if the directors were to be held to a reasonable number. That puts Citi's Ruding and Paul Collins on the sidelines, for example, and also benches Travelers' highly influential president, James Dimon, 42, and Salomon Bros. former boss, Deryck Maughan, 50. In a warm-up act for what is to happen at Citigroup, Dimon and Maughan are co-CEOs of Salomon Smith Barney. In the eight months these two highly competitive people (regarded at Travelers as possible Weill successors) have been sharing responsibility, they've had their problems getting used to each other's style and sorting out who does what. How's it working? Weill is asked. "Better," he says, in a word that speaks volumes about how it was before it was better.

And those are two men who've grown up in the same environment, Wall Street. Just think what happens when you make CEOs out of another consummate Wall Streeter, Weill, and a consumer banker, Reed, and try to bridge the culture gap between their very different institutions.

Where the culture clash may first have to be addressed is in the compensation policy for executives, which is starkly different at the two companies. Citi has a relatively conventional compensation structure that leans on grants of restricted stock for people it wants to keep (including several outsiders that Reed has brought in from the nonbanking world) and that incorporates stock-price targets at which option grants become vested. Reed himself has been a believer in his stock and still is: He has more than once borrowed millions to exercise options and now holds about a million shares, worth around $160 million. But Citi has no general requirements that its executives hang on to their stock or that board members be significant owners. Consequently, the entire cadre of officers and directors at Citi owns less than 0.5% of the company's stock.

In contrast, Weill all by his lonesome owns 1.3% of Travelers stock, worth about $950 million, and its officers and directors combined own 2.4%. These stakes have been built by bountiful option grants and by something called the "blood oath"--the sworn promise of Travelers' management team and its directors that they will not sell shares (except to finance the costs of exercising options and the resulting tax bills).

The blood oath is taken dead seriously, as may be seen by the case of Edward Budd, a director just now stepping down. Budd had been chairman of the old Travelers Corp. before Weill bought it in 1993, and the stock of the new Travelers Group that he received became pretty close to his entire net worth. In time he grew itchy about being so undiversified and asked to be relieved of his oath so that he could sell some stock. Permission was denied on the grounds that if you make one exception, you have to make more. Budd therefore took the big step of retiring from the board, just so he could do some selling.

About blood and stock, Reed says, "All or nothing is hard." He points out that Citi has many foreigners in its senior management to whom stock ownership is "a strange thing." As an example, he mentions Ruding, who is Dutch: "If you said to him, 'You can never sell a share of stock,' he wouldn't know what you were talking about." So Reed thinks there are big questions about compensation to be ironed out. Here's a smoke signal to watch: The head of Citi's compensation committee is Frank Shrontz, former CEO of Boeing, and the corresponding director at Travelers is Arthur Zankel, a partner of First Manhattan, an investment management firm, and one of Weill's closest advisers. Check who gets the job at the merged company, because that may be a clue to where compensation policy is heading.

A byproduct of the compensation philosophy at Travelers is an impressive amount of teamwork. For example, though cross-selling is not about to take over the world anywhere, including Travelers, the company has made real strides in getting its divisions to focus on selling the products of their siblings. PFS salespeople--those folk who sell term insurance across kitchen tables--are, for instance, generating a good number of new loans for Commercial Credit. Reed looks at this Travelers talent and admires it, going so far as to suggest that it is important in his thinking about the merger. "I've been struggling for years to try to improve the management and energy levels within Citi," he says. "I think there's an intensity and a sales capability in Travelers that we don't have as well developed. This is going to improve our management DNA."

The problem is going to be getting the cells transferred into a Citi biochemical makeup that has traditionally been resistant to teamwork. Citi is known for a go-it-alone attitude bordering on outright arrogance--which is no sign of promise for cross-selling. Citi has not Played Well With Others.

A reason is the kind of individualists that Citi tends to attract and that co-CEO Weill is now going to have to get used to. Citi is filled with extremely smart people, which is good, of course. But these extremely smart people come equipped with powerful ambitions and frequently tend to protect their baronies (or "silos" in Citispeak) at all costs. The result is an odd cultural mix of supreme talent, bloody political warfare, ponderous bureaucracy, and major collateral damage on the human resources front. "It's a dynamite organization," says an executive recruiter who specializes in financial services. "They've got the best and the brightest. But Citi tends to eat 'em up and spit 'em out. Man, they got turnover."

That's partly because Reed's management style is perpetual tinkering. He's constantly reshuffling management, moving people around the world, and generally trying to keep the whole corporation in a never-ending state of revolution. People have been known to leave organizations like that.

Reed has also pursued a controversial strategy of bringing outsiders into the company and putting them into boat-rocking jobs. In January he created a seven-member second tier of lieutenants and gave them all the title of "corporate executive vice president." Of these seven people one rung down from Reed, four weren't even in the company before 1993. And of these four, not one sprang from the banking industry: Lawrence Phillips, who runs Citi's human resources operation, came from GE Aerospace; Mary Alice Taylor, Citi's global operations and technology chief, from FedEx; Edward Horowitz, in charge of Citi's advanced development group, from Viacom; and Bill Campbell, who runs all of Citi's consumer businesses, from Philip Morris.

Of these, Campbell seems the most controversial. The opposition that has formed against him boils down to the charge that he's just some marketing guy who only knows how to sell a tangible product and hasn't a clue about the complexities of banking. The critics say it's bad enough that Reed brought in an outsider and installed him right up there at the top of one of the world's greatest financial institutions--but why did it have to be someone who used to sell tobacco? The criticism also revolves around Reed's driving ambition to build a global brand, a vision now being pursued by Campbell. A former Citibanker says there's too much talk at Citi about branding being the end product. "It's not," this person says. "It's the end result of coming up with the right product, delivered over a period of time."

It's difficult to say whether the animus toward Campbell is well-founded or merely a manifestation of Citi's insular corporate culture. He's a new guy in an extremely unforgiving crowd. Assessing the complaints, Tom Hanley, an analyst at UBS Securities who's been following Citi for almost 30 years, says they're typical of what new blood coming into the company can expect: "The chances of making it as an outsider are very slim." Should this be extrapolated, one has to wonder, to an outsider given the title of co-CEO?

For his part, Campbell sounds serene and comfortable with what he's doing. In a recent conversation with FORTUNE--a rarity, since he seldom talks to the press--he even got to talking about matters that raised thoughts of blood oaths. In packaged goods, he says, manufacturers have a quality check at the factory door. But in financial services, alas, a product isn't complete until it's in a consumer's hands. "Great brands," said Campbell, "are about making a promise and keeping a promise." That's the key thing, he said, in financial services--and it's "difficult" to pull off.

Array that among the incredible challenges to be faced by--where are we now in the order of these names?--Reed and Weill as they begin their ramble into co-CEO-land. Remember also that sometime in the future they'll have to face the last grand challenge, a succession plan. Here we have a few facts to deal with: The official retirement age at Citi is 65, and at Travelers there is no such thing. That could be because Weill has absolutely no intention, so many of his friends think, of retiring. Asked by FORTUNE whether he had plans to retire, he said simply, "No." That was Reed's answer also, but of course he's six years away from retirement age.

One person who has talked to a Citi director says his board believes the two men have a commitment to leave their CEO jobs together, handing the reins to their designated successor (or, in the Unilever style, successors). Here's another fact: Weill says that isn't so. "It could be we do retire together, or it could be we don't retire together." Hmm. Put succession down as one of the great imponderables in this remarkable business story about to unfold.

Weill and Reed, and just about everybody else, know the imponderables will include many a rocky moment. But they sat together on the Monday of their blockbuster announcement and displayed, if we may borrow a book title, undaunted courage. You could make a long list, said Reed, of reasons for not doing this merger. But the world, he went on, was not created by people who focus on the "nots." And to Reed's left, his co-CEO nodded in perfect agreement.