Mergers in 1998, Citicorp Acquired Traveler\'s Group

Mergers

In 1998, Citicorp acquired Traveler's Group in a merger of financial services giants. The combination created the world's largest financial services company at the time, combining banking, investments and insurance (Martin, 1998). Under terms of the deal, it was a stock swap, with Traveler's paying $70 billion for Citicorp's shares, though the deal was sold as a $140 billion deal (Ibid). The deal paved the way for expectations that future similar deals would be allowed (Carow, 2001). This paper will analyze the deal in retrospect, to see if the deal delivered value for the shareholders of the two firms. Since it was described as a merger, the shareholders of both firms were expected to benefit.

Background

In the late 1990s, there was tremendous excitement in the markets about the possibility that major mergers in the financial services industry would be allowed by Congress. Carow (2001) noted that market expectations for the allowance of such mergers were primarily reserved for major financial institutions. This could be because smaller institutions did not face barriers to merging, or because it was expected that such merger activity would primarily be conducted among larger institutions, as they might stand more to gain from this type of activity. The Citicorp-Traveler's merger was essentially the first real test of the idea that Congress would allow such mergers, and indeed it was followed in 2009 by legislation that explicitly permitted such integration among major financial services companies.

Major financial services companies wanted to merger -- and shareholders were excited about such mergers -- because the perception existed that there were particular synergies that could be achieved from such activity. Typically, merger and acquisition activity is conducted with the expectation that the combined entity will be able to gain synergies that will cover the cost of the acquisition. An example of such synergy would be the ability of a retail bank, like Citibank, to market insurance products to its customers, for example from its Traveler's unit. By creating formal links between the products of the two companies, the combined entity could generate sufficient synergy to capture enough revenue to justify the acquisition premium that had been paid at the time of the merger. There would also be benefits at the institutional level, for example cutting costs by combining some functions under one roof, and by having greater economies of scale in things like investing of surplus funds.

The Merger

At the time of the deal, the size of such a merger between financial institutions was unprecedented not only in the United States but in the world. The combined entity was the largest financial institution in the world at the time, ahead of that Bank of Tokyo-Mitsubishi. The deal generated considerable excitement. Such was the excitement that, unusually for such a deal, the stocks of both companies rose after the deal was announced. Citicorp's stock rose $35 5/8 to $178 1/2, which stock in Traveler's increased 11 3/8 to $73. It was assumed that synergies were going to happen, but there was the issue, as there is with any merger, of how to bring about those synergies.

When two large companies merge, there are always issues at play with respect to mission, culture and leadership. When two companies merge that are in different businesses, finding synergies in the combined entity is probably a very complex entity that requires superior management. John Reed was the CEO of Citicorp at the time of the deal, and recommended that new leadership be brought in, but the Board instead chose Traveler's CEO Sandy Weill to lead the combined entity to the promised land. This proved to be a mistake, as Weill was unable to run the company effectively. The combined entity saw little of the promised synergies, and Weill was entirely unable to integrate the two constituent companies in any meaningful way (Elkind, 2010).

There were several issues with the combined entity. First, its complexity was great and there was no coherent strategy to merge the company or to develop the synergies. This is an unforgiveable sin in mergers -- to do the merger because you can, without thinking ahead whether or not it truly is a good idea. At the time, however, the entire market was caught up in the idea that merging banks and insurance companies was the path to gold. The second issue with the combined entity is that it took a strange turn in terms of its strategy. When the combination of two companies is so unique and exciting as this one was at the time, the temptation exists to take the combined entity into entirely new places as a business. In a sense, this is what happened with the Citi-Travelers company. The company's strategy focused too much on risk, something that would not have happened in the two companies during the 1990s when they were on their own. The results were disastrous for the entity and it slipped into a financial funk. Shareholders, who won early in the deal, saw those gains evaporate completely. The deal ultimately did not deliver shareholder value at all, to the holders of either of the merged companies.

The deals that occurred later significantly changed the judgment of the initial deal. Citigroup spun off Travelers Property Casual Corp for $5 billion in 2002, this entity merged with St. Paul's in 2004 for $16 billion. These deals should not affect judgment of the initial deal because they were subsequent, and did not involve the entire property that was part of the original $70 billion deal. Citigroup sold its life insurance underwriting business to The Met in 2005, but retains its insurance sales businesses.