Anyone wanting to experience at first hand the different styles of Sandy Weill, chairman of Travelers, and John Reed, chairman of Citicorp, could have done worse than attend the annual stockholders’ meetings of the two companies, held on consecutive days in late April in New York: their last before the two companies merge later this year to become Citigroup.
Citicorp held its meeting in an auditorium in its own headquarters at 399 Park Avenue. It was a low-key, almost dull, affair for a company that had just surprised the financial world by announcing the largest merger in history. Reed himself conducted the formalities with confidence and polish enough, introducing the board directors up for re-election who were seated in the front rows of the auditorium and who stood and turned briefly to the audience.
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For most of the meeting, he deflected with politeness, restraint and the odd flash of humour the cranks and pontificating self-publicists who attend these affairs in the US. One stockholder congratulated him for saving money on the merger by not employing investment bankers, a good idea she said “because all you CEOs know each other anyway”. Reed drew some laughs by replying: “Well, we have in Salomon Smith Barney a very good investment-banking business, so we don’t want to say that kind of thing too much.”
Well-read Reed
Reed showed his typical command of detail and numbers. How much did the bank spend on lobbying? He had the numbers off-pat – a few hundred thousand dollars for lobbying at both federal and state level. And he offered some bland answers to fairly bland questions. About possible acquisitions in Asia: “We’ve seen in Thailand and Korea a great interest to change the banking system and open it up. That represents an opportunity to expand our business.” On the riskiness of extending credit cards to people on low incomes: “Loss rates are running at 6% right now, which is high by historic standards. But, by and large, the consumer is a good credit.”
The meeting was almost entirely without spark, until one woman needled Reed for the umpteenth time over the controversial decision to become co-CEO of Citigroup with Weill, suggesting that Reed should quit now. At last, one of the quiet mass of stockholders rose to defend the man who had overseen a recovery in Citicorp since the start of the decade during which time its share price rose from $9 to $160. “Mr Reed has seen us through some tough times.” (applause) “So far his judgement has been good for consumers, employees and especially for stockholders. Instead of making a pre-judgement, why not give them a chance to work it out.” Thanks for the ringing endorsement.
If Reed was contemptuous and seething within at much of this nonsense, he never once showed it, looking, over the glasses perched low down on his nose, professorial, every inch the chairman. But as soon as the formalities were concluded, he disappeared.
Contrast that with the Travelers meeting. No characterless in-house auditorium for Sandy Weill. He chose Carnegie Hall for Travelers’ last meeting, setting the informal, showy tone with his very first remark, gazing above the mainly full stalls to the unused upper tiers of the magnificent venue: “Wonder what kind of deal we’d have to do to fill this place.” (laughter).
Later, as the sound of a siren from the street echoed through the hall interrupting the grating tones of one irritating questioner, Weill grinned: “Aren’t the acoustics in here great?” Indeed they are. And the sound that day was predominantly one of thanksgiving, as the assembled took turns personally to praise good old Sandy for making them rich.
Investors who had bought shares in Commercial Credit, the first building block in what became Travelers when it floated in October 1986, have seen the market value of their company grow from $1 billion to over $75 billion in eleven-and-a-half years. “And many of us feel that the best is yet to come,” declared Weill. To much applause, one shareholder told him: “We hope you never quit.”
In contrast to the Citicorp meeting, the directors were up on the stage with the chairman. But there was no doubt who was in the spotlight. The executive and non-executive directors, including former US president Gerald Ford, sat half-turned to the audience – who had a great view of their left shoulders – gazing almost reverentially towards Weill at the podium. Weill was in his element, a bulky man, supremely confident, at ease with himself, and basking in the warmth flowing up from the audience. Weill took the same comment about not using investment bankers on the Citicorp merger and had real fun with it. “Now I want to correct that. We had the benefit of Jamie Dimon and Deryck Maughan (co-CEOs of Salomon Smith Barney) advising on this deal. So we got the investment-banking advice of Salomon Smith Barney.” (pause). “We just didn’t pay them for it.” (laughter).
At times the meeting verged on the hokey, as investors queued up to gush at Weill. One young man, his farm-boy voice cracking with emotion, told the meeting how he himself worked in a far-flung corner of the Travelers group and his family were all investors in the company. “I want to tell you mah family has never been as well off as it is today.” That one drew a real storm of approval from the hall.
Back to the future
Weill lapped it up, a clear master at making people like him. “What are you doing about year 2000?” asked one questioner. “We’re trying to go back to 1900,” said Weill, quick as a flash. (He later acknowledged the cost of year 2000 compliance at about $300 million.) Weill did better than politely acknowledge the more ordinary questions, he revelled in them. One woman wanted to know how the share exchange for the Citigroup merger would work. As well as getting shares in the new Citigroup would she also be able to keep her old Travelers stock? Weill patiently explained it would be a one-for-one swap, clearly approving the strength of her attachment to Travelers paper.
Another lady, resplendent in a red hat, wanted reassurance that the Travelers umbrella logo would survive. She wondered whether Weill could arrange for shareholders to get hold of real Travelers umbrellas. “You said sell you, not give you, right?” said Weill. He then suggested that if she telephoned he’d make sure to get her an umbrella to match the hat.
There were also technical questions from Travelers employees. One asked about accounting and reporting for potential earnings dilution following exercise of employee options, another about keeping the company’s popular capital-accumulation plan, whereby managers take part of their pay in the form of restricted stock. Several asked about the companies’ continued commitment to their divisions following the merger. One employee of Primerica Financial Services, the part of Travelers that retails life insurance and mutual funds, wanted to know how that part of the business might be affected by the arrival within the Travelers “family” (a key word through the meeting) of Citicorp Investment Services, which also deals in stocks, bonds and mutual funds. “Right now,” Weill told him, seizing the chance to expound on the cross-selling concept underpinning the merger, “you are doing 500,000 financial needs analyses a year [personalized analysis for customers, introduced by Primerica as an alternative to individual investments or investment plans]. We hope that, together, you can reach out to many more people, with everything they need for their financial future.”
The contrasting meetings bring home two truths about the groundbreaking merger now unfolding. One is the particular culture – driving hard, working together – that pervades Travelers, as a result of so many employees owning stock in it. Its senior managers together own more than 25 million shares and are pledged to hold them for as long as they remain in the company. More than 75% of all employees own shares directly. Last year, the company expanded to 100% the number of employees with exposure to the stock by introducing the Travelers Wealthbuilder plan. It grants options each year to all employees to buy shares in an amount equal to 10% of their compensation up to $40,000.
It’s been a deliberate policy of Weill’s to encourage this degree of ownership as a way to shape Travelers’ culture. The outside board directors own 2.3 million shares, an unusually large number. Even the company’s lawyers own Travelers shares, making them, according to Weill, less likely to procrastinate over closing the deal with Citicorp.
Likewise, Reed, and many of his senior managers, own Citicorp stock. Reed has borrowed heavily to buy stock and options during past troubles, an important symbol of his own commitment to the bank and to getting it out of the troubles it fell into on his watch. But the sense of ownership is not so widespread, and neither, one suspects, is the same dynamism, nor the cost-consciousness. Despite Reed’s efforts in recent years to break it, Citicorp’s culture has been one of separate divisions where managers have each pursued their own investment spending plans.
The second truth is that Travelers without Weill is almost unimaginable. He built the business from virtually nothing, since acquiring Commercial Credit in 1986 and adding on one big acquisition after another. Weill has won many fans on Wall Street, such as Joan Solatar, insurance industry analyst at Donaldson Lufkin & Jenrette. “Travelers’ growth has not come simply from piling on accretive acquisitions,” she says. “Travelers adds to each company it purchases through revenue growth as well as cost-cutting.” Another analyst says simply: “Travelers is Sandy Weill.” Perhaps that overstates the case. Certainly, the company has a family feel. James Dimon, co-head of Salomon Smith Barney is often described as being like a son to Weill. Their relationship even seems to have survived the departure from Salomon Smith Barney of Weill’s daughter who had a disagreement with Dimon. Sandy’s real son, Mark Weill, has an important job behind the scenes at the company, serving as a centralized chief investment officer for the assets gathered by the various Travelers insurance companies.
The lone and remote figure of Reed has dominated Citibank for some 20 years. But his role is that of a steward of a publicly quoted institution that was already big before he rose to head it. It’s difficult to imagine Citicorp without him, but not as difficult as it is to imagine Travelers without Weill.
Succession struggle
Reed appears to have struggled for several years with the issue of succession. Several times this decade, executives who appeared to be emerging as potential heirs, or who seemed to have been brought into the bank as such, have suddenly been forced out. Former president Richard Braddock left in 1992; Christopher Steffen came in from Kodak in 1992 and left in 1995; and Pei-yuan Chia, who in 22 years since joining the bank from General Foods rose to head its consumer businesses retired surprisingly in 1996. Other senior executives have no sooner begun to make names for themselves than they have been caught up in regular rotations of managers across continents and across businesses, such as, to pick one of countless examples, James Bailey, whisked from running the consumer-oriented and successful credit-card business to running the wholesale business of transaction services in 1996.
Such sudden changes of position have been a constant under Reed. Another regular feature is the import of executives from the branded consumer goods companies – such as William Campbell who arrived from Philip Morris to run the consumer branch network in 1996 – which Reed so admires and holds up as exemplars for Citibank. This constant activity has never quite managed to fill an apparent void at the very top of Citicorp. “I thought I would be meeting all these brilliant top-line bankers,” says the investment banking head of financial institutions group (FIG) for one firm that worked with Citicorp recently. “But not so. Some of the people Reed has surrounded himself with are not particularly impressive.”
It may be that Reed was attracted to Travelers by the prospect of invigorating his senior management with new blood: bringing in some can-do types to complement Citicorp’s thinkers and planners and bringing in more of an entrepreneurial, sales culture. “This may not be just about cross-selling. Citicorp needs some help in just plain selling its products,” says Goldman Sachs analyst Robert Albertson.
There may have been other considerations in Reed’s mind: such as an effort to re-establish his company in the forefront of US financial services. Certainly its credit-card business, which put the bank on the map in the 1970s and 1980s as a leader in consumer financial services, has suffered in the 1990s from rising bad debts, loss of market share and a degree of stagnation as the card business revenues were diverted to prop up other parts of the bank. “Reed may have felt his franchise had been diminished compared with the competition, that Citicorp was not as big a factor as it used to be,” says one banker. “This deal makes it a very big factor in the US once more. Just about everybody else in the business is affected by this deal. It has touched off more introspection and more talks among other institutions than any other merger.”
Since the announcement of the merger on April 6, and in the absence of any detail about the business group structure or senior management positions, much speculation has centred on the unusual decision of Reed and Weill to become co-CEOs of the company. Can it last? Will they work together for long without one becoming dominant? And who would that be? Most analysts would bet on Weill. But it is almost as hard to imagine Reed playing second fiddle. “Reed is one of the toughest men in the business,” says an investment banker who has worked with him over many years and suspects he will thrive during the turbulent times ahead. “He has always been bold: in the way he embraced technology in the 1970s and pushed Citicorp into consumer banking in the 1980s. At the time he was heavily criticized for both of those moves. And he was at his best during the crisis of the early 1990s [when Citicorp almost collapsed under bad real-estate loans]. He thrives on chaos and danger.”
In the short term there’s probably more than enough work for both Reed and Weill to do. Each has run a large and unique company. Neither could have manufactured nor managed what the other has. Weill admits: “This [Citigroup] is a very big company. John knows so much more than I do about a lot of it. Half the countries Citicorp is in, I haven’t even been to. I look forward to him being a terrific partner.” Some analysts speculate that Reed might take on an executive chairman role – planning, travelling, meeting premiers – while Weill might become more of the classic CEO. That in turn raises the intriguing prospect of how a renowned cost-cutter like Weill might deal with a bank that has shown a tendency to invest in long-term opportunities sometimes to the detriment of near-term financial performance.
A need to hang together
Perhaps the whole notion of inevitable conflict between two big egos is overplayed. “Each of these two men has, at times in the past, nearly lost their companies and their entire careers,” says Goldman’s Albertson. “It will be more important to them to make this work than to score one up on each other.”
Anyway, what ultimately determines the deal’s success may be the capacity of managers lower down to work together. When the deal was announced, just under six weeks after Weill first popped the question to Reed on February 25, few executives on either side were in the know. Reed principally relied on his vice-chairman, Paul Collins, and admitted at the press conference to announce the merger that “to keep these things quiet, you cannot tell everyone. Over the next few weeks, Sandy and I will get more people fully involved”.
Weill seems to have the better record of keeping senior executives happy. In part, this may be because high-profile managers such as Dimon, Maughan, Robert Lipp, head of Travelers Property Casualty, Joseph Plumeri at Primerica and Michael Carpenter at Travelers Life & Annuity are each designated CEOs of their separate companies. “My concern would be if somehow that began to change under Reed,” says Solatar, “and if there was more turnover among senior executives.”
Weill, pushed on whether the two organizations will deal with overlap through spin-offs of certain businesses or with redundancies, conceded in late April: “We’ve not really worked out those kinds of details yet. It’s very early on in our putting this together.”
Some observers reckon the lack of detailed pre-merger planning and delay in putting names on the new organization chart raises the prospect of management confusion and enormous execution challenges from the outset. “It’s an oddity in a deal of this size not to announce all this stuff early on,” says an investment banker expert in bank mergers, adding: “I don’t think there has ever been a deal of this size done without outside advice.”
Guessing whether the deal will work or not comes down to taking a view on each managements’ track record. The clues from the Travelers’ strategy suggest that the new group will seek a few areas for cross-selling and within those drive the effort to the very hilt.
Cashing in on relationships
One obvious area of opportunity is matching Salomon Smith Barney’s investment-banking skills with Citicorp’s enviable banking relationships: Citicorp has corporate clients worldwide, especially in emerging markets, who could use Salomon to lead bond and equity deals. Earlier this year, Citicorp vice-chairman William Rhodes played a leading role in negotiating a roll-over of commercial bank credit to Korea at the worst point in that country’s financial crisis. At the same time, Salomon was working as joint bookrunner with Goldman Sachs on Korea’s return to the international bond markets. Put the two sets of skills into one organization working together and the potential is striking. Time and again, Citicorp must have walked away from capital markets underwriting – especially equity underwriting opportunities from emerging markets – that, given the capacity, it could have had almost for the asking.
But how will Salomon Smith Barney come together with Citicorp’s global relationship bank (GRB)? This organization looks after customers among the 1,000 or more biggest and most international corporations. And how will it fit with Citicorp’s cross-border financing group, which is aimed at emerging-market issuers? What will be the roles of Dimon and Maughan from Salomon Smith Barney and top-rank Citicorp executives such as Robert McCormack, who runs the GRB and Dennis Martin, head of emerging markets? These questions of senior management roles will soon be answered. But there are others. How will cooperation be encouraged down through each organization? What will be the conflicts between Citicorp lifers earning $700,000 a year and Salomon investment bankers earning $3 million?
One of the most striking oddities of the deal is how it seems to contradict what Reed has been saying for years about the investment-banking business: that he doesn’t particularly like it and has no plans to acquire his way into it. He is now closely tied to it. Investment services, the Salomon Smith Barney part of Travelers, contributed 46% of Travelers’ operating earnings in 1997, which works out at 21% for the pro-forma Citigroup. Admittedly a large part of that is made up by retail brokerage and Travelers has already, according to departing Salomon executives, moved to tone down the more volatile proprietary risk-taking part of the business. One rumour is that this principal position-taking activity will be moved into a central investment-management function at Travelers under Mark Weill, where Mark’s father might keep a closer eye on it.
Making such combinations work at various key points across both companies is the key to the deal’s success and the biggest management challenge. Much of the scepticism about the transaction springs from the argument that financial supermarkets don’t work. They have been tried before and failed.
Past attempts included Weill’s own efforts with American Express and Shearson Lehman Hutton, while Citicorp’s 10-year effort in selling basic investment products to retail customers has hardly taken Wall Street by storm. Customers do not want bundles of mediocre products from a single provider, they want to shop around the internet for the best products and prices.
This seems to ignore several key points. First, not every part of Citicorp and every part of Travelers has to gel into a comprehensive cross-selling effort. The two companies’ only financial promise has been to deliver incremental revenues through cross-selling of $1 billion in the first year. That’s a mere 2% of the combined group’s existing revenues and looks like a modest target that has been set with a view to being surpassed. Cross-selling only has to work some of the time for that to happen.
And critics were once just as sceptical about retail representatives spending time on financial-needs analysis (FNA). Might customers not simply ignore them or take the analysis and buy elsewhere, they asked. But analysts say the hit rate on completed FNAs is 60%. That’s how often a customer buys at least one product from Travelers and it’s a good return.
Second, no-one knows more about cross-selling financial products than Weill. The first signs of this have recently become evident at Travelers in two areas. Salomon Smith Barney financial consultants have recently begun successfully selling life insurance, annuity saving schemes and long-term care insurance, manufactured in other companies in the Travelers group. Even more notably, representatives of Primerica Financial Services have scored some successes selling Travelers auto and home insurance, annuities, Commercial Credit loans and Salomon Smith Barney mutual funds. At the present rate, this might contribute just $200 million to annual profits, but that’s a promising start.
“It’s not that cross-selling can’t be done. It just needs the right leadership,” says Thomas Hanley, analyst at UBS Securities. At Travelers, Weill encourages cross-selling through a planning committee, including all the CEOs of the separate group companies, which meets monthly. Not cooperating is a bad career move. One questioner at the recent stockholders meeting asked about Smith Barney financial consultants driven to leave the group because of poor cooperation from Salomon analysts. “If someone’s not cooperating, just call me or Jamie or Deryck,” replied Weill.
Third, when Weill boasts, as he does, that “we have all the different distribution channels and all the different products”, that does not mean the company has to be all things to all men at all times. There may be a more subtle message. For years, executives in US banking and financial services have been worrying over one question: where to derive revenue growth. This has prompted the rush into investment banking, the drive to build asset management and transaction services and the aping of the Merrill Lynch model of the combined retail brokerage and institutional investment bank. Today’s accepted wisdom is that the US is adequately served financially and that this is a market-share game where various strategies – branding, alternative distribution technology, bundling of services – must be explored to win customers from other competitors.
Something of everything
It is not clear which services, or methods of distribution, if any, will be predominantly successful. But if certain products or combinations of them and certain distribution methods do suddenly appear to be the winners, it’s a sure bet Citigroup will have them. It covers a range of customers from the younger, more spending-oriented – who might want Citicorp chequing accounts, credit cards, auto loans and mortgages and who might also take some insurance – to the wealthier and older, the type who might plough money into savings with Smith Barney financial consultants. “It seems to me that whoever makes this kind of merger work first will have a tremendous competitive advantage,” says Hanley. “If Reed and Weill have read the tea leaves right, they could come out of this huge winners.”
Furthermore this is a group that would have posted combined pre-tax income of $11.7 billion for 1997 and which, some analysts suggest, might double in five years. “They could invest heavily in select areas and grab whatever trend finally takes off in financial services,” suggests Christopher Flowers, head of the financial institutions group at Goldman Sachs.
If that requires some pruning of businesses, so be it. This may already be planned. The merger appears hubristic to the degree that it anticipates regulatory change. For the moment it is exploiting legal loopholes in the law preventing banks and insurance companies from coming together.
But should congress not deliver the expected reforms, Citigroup would have two choices: ditch Citicorp’s banking charter (unlikely) or sell off the property and casualty underwriting business. “That might be a good idea anyway,” says Diane Glossman, analyst at Lehman Brothers. “Property and casualty underwriting is not a particularly profitable business.” The company might still be able to market those types of insurance, attracting outside insurers into licensing agreements by promising to share the benefits of cheaper distribution. In the more important life insurance business, Citicorp is already allowed, under grandfathering rules, to operate in 44 states.
So what is the risk of failure? If they simply failed to make the cross-selling work and were just left with the businesses they already had, they might look a little foolish. In that case they might have to prune the business portfolio or break it up again. They might kick themselves for letting an opportunity slip, but they would still – presumably – have what they started with, which was two sets of good businesses.
“I have to ask myself what would be the disaster that might make these companies together worth less than they were on their own,” says Glossman. “It would be heedlessly rushing to consolidate all the underlying operations without due thought.”
The little evidence so far suggests that the opposite is happening. Reed said at the initial press conference that Citigroup would maintain certain strong brands: Travelers in insurance, Citibanking in retail and Salomon Smith Barney. Having unveiled the cross-selling concept, Weill, Reed and their closest executives are now giving considerable thought to what they can do and where. That’s why no wide-ranging estimates for future earnings growth have been published.
“Both companies were appropriately cautious about such promises,” says Glossman. Her one rider to this benign view is that Citicorp is going through a protracted and costly effort to rationalize its many computer systems into one. “It’s very important that that programme not be derailed by this merger,” she says. “Once the first phase is completed, future growth of expense on infrastructure will be much less.”
Weill’s still turning
The Citigroup merger is so large that investors might think it signals an end to Sandy Weill the deal-maker. What could he do next to match this? In fact, any number of things. Much the most likely are acquisitions outside the US. As much as anything else, this deal is about the internationalization of Travelers.
At times Weill sounds almost like the naive middle-aged American tourist who has just got his first passport. He likes to tell such tales as how he and Deryck Maughan dined in Korea in early January at the home of then president-elect Kim Dae Jung, when Salomon was working on Korea’s bond deal. It sounds like a new kind of experience – meeting foreign premiers, dropping their names – he dearly loves.
According to insurance and brokerage analysts, the key demographic trend for financial services companies in the US – baby-boomers investing heavily for retirement – has another eight years or so to run. Thereafter, growth might well have to be found outside the US. Travelers can now take its expertise and apply it in countries such as Japan, Germany and Australia, where Citibank already has a strong brand name and, after that, perhaps go into emerging markets.
“Our first opportunity to grow globally was the merger with Salomon,” says Weill. “That showed us the opportunities for growth as we look around the world. Many of these economies are growing at much faster rates than the US.”
Warming to his theme he adds: “Since the collapse of communism, with everybody copying the American way of doing business and following the capitalist system, if you look at the privatization of companies and of pension systems and the development of a middle-class in emerging markets, the opportunities and outlook for a financial services company headquartered in America and looking globally have never been better.” Naive? Maybe. But wrong? Who would say so?
