Marriage Pressures Rivals to Quicken Pace of Courtships
Suddenly, big no longer looks big enough.
The giants of financial services--the nation’s biggest banks, investment firms and insurance companies--abruptly found themselves overshadowed Monday by the behemoth that would emerge from the proposed merger of Citicorp and Travelers Group Inc.
The stunning deal, which would create a company named Citigroup, raises the bar for what’s required to be a major player in financial services. Hence, it puts pressure on other financial-services companies to find their own merger partners if they want to compete on an equal footing with Citigroup, analysts said.
“Each of their competitors will be at a distinct disadvantage, no matter how big they are,” said Michael Flanagan, president of Financial Service Analytics Inc. in Fort Washington, Pa.
When lined up against Citigroup and the breadth of services it would offer--from bank accounts to credit cards to brokerage services to life insurance--banks such as Chase Manhattan Corp. and BankAmerica Corp., investment firms such as Merrill Lynch & Co. and insurers such as Equitable Cos. all would have gaping holes in services despite being gigantic companies.
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Indeed, the desire to build a complete financial supermarket for clients is why the companies already had been feeling the urge to merge, even before Monday’s blockbuster announcement.
Citicorp had previously held exploratory merger talks with American Express Co. Chase Manhattan reportedly has talked to Merrill Lynch about a possible combination.
Those three clearly are on analysts’ lists of merger candidates, along with investment firms Lehman Bros. Holdings Inc., PaineWebber Group Inc. and even Goldman, Sachs & Co., which is owned by its partners.
J.P. Morgan & Co., a commercial bank that has spent heavily to build a securities and investment banking group on its own, also is thought to be a marriage candidate. So is brokerage giant Charles Schwab Corp. So, too, are foreign banks looking to offer a wider array of U.S.-based services.
“Each and every one of Citigroup’s competitors is on their way back to the drawing board, to rethink or confirm their strategies,” Flanagan said.
Which is why investors bid those and other financial-services stocks sharply higher Monday in response to the Citicorp-Travelers deal. Chase rose $6.88 to $147 a share, Merrill Lynch soared $10.50 to $97, American Express gained $5.75 to $104.75, Lehman jumped $6.19 to $80.81, and Schwab rose $2.56 to $39.63 a share, to name just a few.
However, BankAmerica fell 81 cents to $86.75, after rising to $90.25 early in the session. The stock’s decline suggested that investors are worried that the San Francisco-based banking giant might lose a competitive edge to the new Citigroup entity.
The Citicorp-Travelers deal “brings a new sense of urgency to the industry, and what might have been a marathon race [in terms of financial mergers] is now more like a one-mile sprint,” said Howard Ward, manager of the Gabelli Growth Fund, a mutual fund that has 22% of its $1.4 billion in assets in financial-services stocks, including Citicorp.
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But Ward said he also wonders whether such mega-mergers can be prosperous over the long term. For instance, buyers are paying top dollar for investment-banking and brokerage operations because the stock market is at record highs. But when the stock market turns south and those operations earn less money, will the mergers still make sense?
“I’m concerned it’s a top-of-the-market phenomenon,” he said.
And if you think you’ve heard all about “financial supermarkets” before, you’re right. Companies have been using mergers for nearly two decades to build empires that try to offer “one-stop shopping” and so dissuade their customers from doing business with their competitors. Some of the mergers have worked; others flopped.
Travelers itself is an amalgam of merged companies, including Primerica, Smith Barney, Salomon Bros. and Travelers insurance. Commercial banks and brokerage firms have been merging among themselves at a quicker pace lately--witness the deal last year that created Morgan Stanley, Dean Witter & Co.--and banks have been aggressively buying brokerage firms.
Although these mergers are building on an old theory, they have a better chance of working today, analysts said, and the willingness of two companies as big as Citicorp and Travelers to wed illustrates that.
The biggest difference is that U.S. laws that had blocked individual companies from dabbling in all aspects of finance are continually being loosened.
“The regulatory barriers are coming down fast, and a large part of the reason is that technology and advances in computerization are permitting much faster integration” of commercial banking, investment banking and insurance, said Bert Ely, a banking consultant in Alexandria, Va.
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But analysts say there’s no question that what’s also fueling mergers is the fear of being left behind, or missing the opportunity to buy the best properties, by standing on the sidelines.
The merger wave among U.S. commercial banks has slashed the number of banks by one-third since 1987, and the volume of deals continues to run between 500 and 600 transactions annually.
The number of broker-dealers has dropped 17% since 1987, and most of the remaining firms are small, boutique operations. The largest firms in the brokerage business are either joining with others or selling out to banks--as Montgomery Securities did to NationsBank last year and Robertson, Stephens & Co. to BankAmerica.
“There are only so many trophy properties left, and I think this will speed up things in terms of consolidation,” Ward said. “There’s the fear that someone will take the partner you feel is best suited for you, or of being taken over yourself.”
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Financial Industry Watchword: Consolidation
A wave of mergers has swept the financial-services business over the last decade, but the deal mania hasn’t run its course, as demonstrated by Monday’s Citicorp-Travelers Group marriage announcement. The number of commercial banks has fallen by one-third since 1987, and the number of broker-dealers is down 17%. Although the broker count has risen since 1992, most new firms are boutiques; major firms have continued their consolidation trend.
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Commercial Banks
As of Sept. 30, 1997: 9,215 (In thousands)
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Broker-Dealers
1997: 5,572 (in thousands)
Sosurces: American Bankers Assn., National Assn. of Securities Dealers
