This article was originally published in Maclean's Magazine on April 20, 1998
Everything about last week's proposed merger between Citicorp and Travelers Group Inc. was grandiose - not least the rhetoric surrounding it. Uniting the two American titans into the world's largest financial services company, gushed Citicorp chairman John Reed, is a "transforming merger ... a deal you simply had to do." His counterpart at Travelers, Sanford Weill, called it "a marriage made in heaven." James Dimon, Weill's right-hand man, sought to outdo even his boss. He unblushingly labelled it "one of God's great opportunities."
To be sure, size matters. The new company, to be called Citigroup Inc., will be the Titanic of banks, with a market value of some $192 billion and $994 billion in assets. That will make it No. 1 in the world - ahead of other international financial behemoths such as Tokyo Mitsubishi of Japan, UBS of Switzerland and Germany's Deutsche Bank. By comparison, the proposed merger of the Royal Bank of Canada and the Bank of Montreal is small potatoes. If Ottawa approves that deal, the new Canadian bank will have a market value of just $39 billion and assets of $453 billion, making it 22nd in the world. In fact, the marriage of Citicorp and Travelers puts more pressure on Ottawa to let the Royal and the Bank of Montreal consummate their union. It dramatically underscores the global trend towards consolidating financial services. And it lends weight to the argument of Canadian bankers that they must unite - or be crushed by the new worldwide giants.
But is the deal all that its architects, Reed and Weill, made it out to be? They boldly predicted a new era of worldwide banking, with tens of millions of new consumers hungrily scooping up their financial offerings. If U.S. regulators give the go-ahead for the merger, the new Citigroup will start with more than 100 million customers in 100 countries, and use Travelers' famous red-umbrella symbol. It will sell everything from credit cards to insurance, mutual funds, brokerage services, mortgages and car loans. The gamble is that a new middle class is emerging around the world with a demand for all that, and more. "That middle class increasingly demands a superior product," said Reed, "and they demand that it's easy to get, reasonably priced, and no hassle." Investors initially gave the move a big thumbs-up. Shares of both companies jumped sharply, adding $43 billion in combined value in a single day and pushing the Dow Jones index to its first-ever close over 9,000. (It finished the week at 8,995).
Then the hard questions started. The Citigroup merger, rhetoric aside, is based on an old concept - the so-called financial supermarket. The idea is that consumers want one-stop shopping for a range of financial products under a single corporate umbrella. It is an alluring notion, but one that has been tried before without success. Most famously, American Express spent most of the 1980s cobbling together a network of subsidiaries offering investment banking, insurance, charge cards and financial planning. (Among the acquisitions was Shearson, an investment bank then headed by Weill.) Customers stayed away in droves, and Amex was forced to dismantle the unwieldy structure. During the same decade, Sears, Roebuck & Co. teamed up with broker Dean Witter Reynolds to offer a much-derided "socks and stocks" concept - consumer goods and financial services under one roof. It, too, failed.
Another problem: merging two massive companies with almost 162,000 employees worldwide will be a mammoth task. Under a sketchy arrangement outlined by Reed and Weill, the new company will be overseen by a 24-member board and run by both men acting as co-chairmen and co-chief executives - a formula for potential conflict and confusion. In unity, warned skeptics, there may not be strength after all. "It looks," editorialized the Financial Times of London, "about as manageable (and potentially remunerative) as the British empire in its twilight years. The difficulties of supervision will be awesome."
Leaving aside the managerial challenges, there is the problem of having two powerful egos at the top. Reed and Weill took pains during a joint announcement in New York City to stress how long they have known each other - almost 30 years - and how much they respect each other. But those who have followed their careers quickly pointed out that they could hardly be less alike, and did not reach the pinnacle of their profession by tolerating rivals. Weill, 65, is a street-smart native of Brooklyn, the son of Polish immigrants who has built a personal fortune of more than $2 billion through decades of deal-making on Wall Street. Reed, 59, is a career Citicorp man with a reputation as a reserved insider who has survived as chairman since 1984 by firing anyone who threatened to emerge as an obvious successor. "I'm quieter and more inward-looking," he said when asked to compare himself with Weill. Reed is also a comparative pauper beside his new best friend: his personal stake in Citicorp is worth just $455 million.
While Canadian bankers seized upon the Citigroup deal to lean more heavily on Ottawa to approve the Royal-Bank of Montreal merger, the two deals are quite different. The Canadian proposal is mainly about uniting forces in a relatively small market, and using that base to compete internationally. Citicorp and Travelers are vastly bigger, and want to become one of a handful of truly global operators. But the deals are part of a single trend, and both pose challenges to government regulators struggling to contain new-millennium companies within the confines of laws born during the insecurities of the Great Depression. The old wisdom was that it was dangerous to allow financial power to become too concentrated. In Canada, the Bank Act and federal policies prevent banks from merging or expanding into related fields. In the United States, the Glass-Steagall Act of 1933 forbids banks from offering insurance services. Reed and Weill made it plain that they believe their deal will force American legislators to change the law - just to keep up with the new reality.
On both sides of the border, more financial mergers may follow. In the United States, Chase Manhattan Corp. has long been rumored to be courting Merrill Lynch or Credit Suisse. In Canada, the Toronto Dominion Bank tops the speculation. With the Royal-Bank of Montreal merger now more probable, TD Bank chairman Charles Baillie said he was more open to a deal. (Analysts say the Canadian Imperial Bank of Commerce is the TD Bank's most likely partner.) Whatever deals emerge, the simple prospect bid up the price of financial stocks on Wall Street and Bay Street.
The merger craze is not limited to financial services. Other sectors have been transformed by similar deals: as recently as October, the $37-billion takeover of MCI Communications by WorldCom set a record as the biggest corporate merger ever. That is now dwarfed by the Citigroup deal - worth some $111 billion, based on the number of shares that Travelers plans to issue to Citicorp stockholders. In Canada, too, mergers and acquisitions are running at a record pace - up 75 per cent by value in the first quarter of 1998 over the previous year. Topping the list in Canada is the $11-billion proposed merger of Nova Corp. and TransCanada PipeLines Ltd.
It is, warn some analysts, eerily reminiscent of the end of the '80s, when RJR Nabisco was taken over by leveraged-buyout artists Kohlberg Kravis Roberts in a mega-deal that came to symbolize the decade of greed-is-good. What followed soon after was recession and retrenchment. Anxious investors - watching the Dow flirt with 9,000 - can only hope that history is not about to repeat itself.
New York City, with offices in 98 countries
Commercial and consumer banking, mortgage and investment banking, trust services, consumer finance, credit-card services
New York City, with offices in 26 countries
Brokerage operations, asset management, commercial lending, life insurance, property and casualty insurance
Maclean's April 20, 1998