Citicorp, Travelers Agree to Record $83-Billion Merger
Citicorp and Travelers Group Inc. on Monday said they agreed to merge in a record-shattering $83-billion deal that would create America’s first true financial supermarket, a global vendor of such products as mortgages, mutual funds, credit cards, life insurance and auto loans.
The deal--by far the largest corporate merger in U.S. history if approved--would combine Citicorp’s global banking reach with Travelers’ broad U.S. network of insurance and stock-brokerage offices under the Travelers and Salomon Smith Barney names. The proposed marriage is expected to pressure other financial companies to consider merging, while testing again whether consumers really want a financial supermarket. Previous efforts to offer such one-stop shopping have often failed.
But the most remarkable aspect of the agreement--negotiated in deep secrecy over the last four weeks--is that it is a direct challenge to Congress to revamp the nation’s banking laws, which currently forbid banking companies from owning insurance underwriters like one owned by Travelers. Efforts to reform such laws, however, have recently run into snags on Capitol Hill.
“Maybe what we’re doing will cause that legislation to change,” Travelers Chairman Sanford I. “Sandy” Weill said bluntly during a press conference Monday announcing the merger.
The deal will also require federal regulatory approval, which company officials and some other experts expect will not be a major problem. The deal could get approval, conditioned on reform of banking laws, they said.
The deal is significant enough that its two architects--Weill and Citicorp Chairman John S. Reed--notified President Clinton by telephone Sunday night and consulted in Washington last week with Federal Reserve Chairman Alan Greenspan. They also made a courtesy phone call to Treasury Secretary Robert E. Rubin on Friday.
The transaction, expected to close in this year’s July-September quarter, would be more than double the size of the second-biggest merger, WorldCom Inc.’s pending $37-billion acquisition of MCI Communications Corp.
The new company is to be named Citigroup and its corporate logo will include Travelers’ familiar red umbrella. It would have 100 million customers in 100 countries, with 160,000 employees selling a full range of financial products and services.
The firm would have combined assets of $700 billion, yearly revenues of nearly $50 billion and operating profit of $7.5 billion--easily tops in the financial-services industry. Based on the market value of the combined companies’ stock, it would be the nation’s fifth most valuable company, behind General Electric, Microsoft, Coca-Cola and Exxon.
Citicorp is the parent of Citibank, America’s second-largest bank after Chase Manhattan. It also is the world’s largest credit-card issuer, with 60 million bank cards in circulation.
Besides its brokerage and insurance units, Travelers owns Primerica Financial Services and Commercial Credit.
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The merged giant could offer a consumer a checking account, a mortgage, a brokerage account with access to the latest new stock offerings, and homeowners insurance. So if a consumer applies to Citibank for a home loan, Travelers could offer him or her a trading account.
But consumer advocate Ralph Nader asked the Federal Reserve on Monday to reject the proposal, saying it would be too big to regulate and would result in higher prices for consumers. Other critics said it would stifle competition.
Others have tried before to create a financial-services supermarket, although never on a scale like this and with mixed success.
Sears Roebuck & Co., for example, failed with its “socks and stocks” innovation of the 1970s. Sears added the Dean Witter stock brokerage and Coldwell Banker real estate company to its Allstate Insurance Co. unit, hoping that America would buy investments, real estate and insurance in the same place it bought washing machines. It didn’t work, and Sears later got rid of the financial-services units.
Anticipating merger fever, Wall Street set financial-services shares on fire Monday. In fact, without the boost from just three stocks--Travelers, American Express and J.P. Morgan & Co.--the Dow Jones industrial average would have dropped more than 60 points Monday.
Instead, America’s favorite stock index climbed 49.82 to a new record of 9033.23, the first time that it has closed above 9,000. On another day, that story would dominate the nation’s business news.
Wall Street’s biggest winner Monday was Citicorp, which closed at $180.50, up an astounding $37.63, or 26%, on the New York Stock Exchange.
Under the agreement, Citicorp shareholders would receive 2.5 shares of Travelers stock for each of their shares. Travelers and Citicorp shareholders each would own 50% of the merged company.
Travelers shares closed at $73, up $11.31, or 18%. At that price, the deal would be worth $182.50 a share to Citicorp stockholders.
Citigroup headquarters would be in Citicorp’s distinctive Midtown Manhattan skyscraper, where Weill, age 65, and Reed, 59, would become co-chairmen and co-chief executives in a power-sharing arrangement unusual in corporate America.
That, too, has been tried before, without spectacular results.
But in a mobbed press conference Monday at Manhattan’s Waldorf Astoria Hotel, Weill and Reed were optimistic about their chances for success.
The staid Reed has long held Citicorp aloof from merger activity, whereas Travelers is the product of a dizzying string of deals dating to 1988, when Weill’s Commercial Credit bought Primerica, which bought Travelers, which bought Aetna’s property-casualty insurance business and then Smith Barney and finally Salomon Bros.
But the deal won’t work without cooperation throughout the ranks, Reed said, and both men are determined to make their personal cooperation a model for their subordinates.
The deal originated Feb. 25 in a Washington hotel, where Weill and Reed were attending a business conference.
Weill said the model for the new company will be the “universal banks” of Europe, which are far larger and fewer in number than U.S. banks and offer under one roof all the products and services of investment banks, insurance companies and commercial banks.
Travelers, though a domestic powerhouse, has longed for an overseas presence, which Citicorp supplies. For Citicorp, it provides instant access to insurance and stock-brokerage products that it can sell through its branch network.
The deal also will produce savings in the “hundreds of millions” of dollars by eliminating overlapping operations, Reed said, although he said that was not a big factor in the deal.
Weill said that although an unspecified number of jobs would be eliminated, over time he expected the company’s work force to grow larger.
Under the agreement, Citicorp will merge into Travelers and the combined company will then apply to the Federal Reserve Board of Governors to become a bank holding company.
Current law would allow such a deal to go forward only with the condition that the combined company divest its insurance operations within two years.
“I don’t see how the Fed can do anything but give conditional approval to it,” said Charles A. Gabriel, senior financial analyst with Prudential Securities, who added that he does not expect the Justice Department to object to the merger on antitrust grounds.
Instead, Gabriel called the merger a “very welcome hand grenade” that will jump-start reforms in Congress.
Legislation that would repeal laws barring banks from underwriting or selling insurance and limiting revenues from the securities business appeared to be gathering speed this year with Clinton Administration support, but the bill stalled out last week after House leadership made some last-minute changes opposed by the White House.
In Washington on Monday, House Banking Committee Chairman James A. Leach (R-Iowa) called on Congress to try again, saying reforms are needed “to ensure that America’s competitive position abroad is enhanced.”
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Special correspondent Diane Seo in New York contributed to this story. Mulligan reported from New York and Vrana from Los Angeles.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Marrying for Money
Proposing the largest merger ever, Citicorp and Travelers Group Inc. plan to join forces. The deal faces a number of regulatory hurdles.
THE IMPACT:
CONSUMERS: Various services-- banking, insurance, mutual funds-- all available from one “financial supermarket.”
FINANCIAL SERVICES INDUSTRY: Pressure builds for banks, brokers and insurance companies to look more closely at combining to stay competitive.
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POTENTIAL POWERHOUSE:
$700 billion in assets
160,000 employees
100 million customers
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Researched by JENNIFER OLDHAM / Los Angeles Times
(Marrying for Money photo illustration by CHRIS ERSKINE / Los Angeles Times
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* BROAD IMPACT: From consumers to the chief executives involved, deal has major impact. D1, D5, D6, D12
* Another Milestone
The Dow closed above 9,000 for the first time. But the rest of the stock market was weak as profit-taking set in. D1
Dow Breaking Points:
Feb. ’97 (above 7,000)
July ’97 (above 8,000)
April ’98 (above 9,000)
