MERGERS & ACQUISITIONS

Case Analysis: Citicorp And Travellers Group

By:
Arshit Srivastava
19FLICHH020182
BA LLB Semester 8 (Section E)
Faculty Guide: Shruti Kandoi mam
 BUSINESS UNDERSTANDING: BASIC BUSINESS STRUCTURE OF THE COMPANIES

Citicorp.
City Bank of New York was chartered by New York State on June 16, 1812, with $2 million of capital.
Serving a group of New York merchants, the bank opened for business on September 14 of that year, and
Samuel Osgood was elected as the first President of the company. The company's name was changed to The
National City Bank of New York in 1865 after it joined the new U.S. national banking system, and it became
the largest American bank by 1895. The bank merged with First National Bank of New York in 1955,
becoming the First National City Bank of New York in 1955. In 1974, under the leadership of CEO Walter B.
Wriston, First National City Corporation changed its formal name to "Citicorp", with First National City
Bank being formally renamed Citibank in 1976. Citibank became the largest bank in the United States and
the largest issuer of credit cards and charge cards in the world, and expand its global reach to over 90
countries.

Travellers Group
Travelers Group, at the time of the merger, was a diverse group of financial concerns that had been brought
together under CEO Sandy Weill. Its roots came from Commercial Credit, a subsidiary of Control Data
Corporation that was taken private by Weill in November 1986. Weill mastered the buyout of Primerica
Financial Services—a conglomerate that had already bought life insurance company A L Williams as well as
brokerage firm Smith Barney. The new company took the Primerica name, and employed a "cross-selling"
strategy such that each of the entities within the parent company aimed to sell each other's services. Its
non-financial businesses were spun off. In September 1992, Travelers Insurance, which had suffered from
poor real estate investments and sustained significant losses in the aftermath of Hurricane Andrew, formed a
strategic alliance with Primerica that would lead to its amalgamation into a single company in December
1993. With the acquisition, the group became Travelers Inc.

̌Citigroup corporate website- https://www.citigroup.com/citi/about/timeline/

The New York Times https://www.nytimes.com/1998/04/07/news/citicorp-and-travelers-plan-to-merge-in-record-70-billion-deal-a-new-no.html
 WHY THE DEAL TOOK PLACE?

Citicorp and Travelers Group publicly announced their merger on the morning of 6 April 1998. The
combined company is named Citigroup. One of the motives behind the merging of Citicorp and travelers was
to create a larger proportion of assets which would be beneficial to both institutions. After the merging, the
total assets for what was now Citigroup amounted to about $700 billion while the total value of the firm
exclusive on the assets was $140 billion. The second reason inclined to travelers group was that the company
would be in a position to “market common funds and insurance to Citicorp’s retail customers whereas
granting the banking units access to an elaborate customer base of investors and insurance buyers” (Federal
reserve bank). The next reason for merging these institutions was to reduce the cost of adjusting to new
technology, which is changing gradually. The other motive is to allow faster globalization of the institutions
as was being experienced in the financial markets.

Another reason as to why the Citicorp and travelers merger was considered important in the financial
industry of the United States was because this merger would create “a financial supermarket hence increasing
the economies of scale in both companies”. The other reason was the vulnerability of the travelers group to
economic disasters. This merger would ensure that the company has the capacity to retain more financial
shocks than before.

Most people were also not acquainted with the idea of purchasing insurance premium directly from the
company. This merger would therefore, propose this concept to the public. It was believed that, they would
appreciate it more keenly owing to the credibility of Citicorp. Citicorp on the other hand, needed to venture
into the insurance business, and this was a perfect option as it would allow them get into this business
without the trouble of investing.

Business Weekly “Is this marriage working” Business weekly online- https://www.bloomberg.com/news/articles/1999-06-06/citigroup-is-this-marriage-working
 WHAT IS THE PARTICULAR TYPEOF MERGER?

Citigroup made 315 acquisitions and took stakes in 242 companies during the period 1981–2002. On April 7,
1998, Citicorp and Travelers Group announced merger plans to create the world’s largest financial services
company with banking, insurance, and investment operations in 100 countries. The stock swap deal valued
each company at $70 billion. The combined firm with $698 billion of assets became the largest financial
services company globally which was slightly larger than Bank of Tokyo-Mitsubishi. The new company was
called Citigroup. The combined company had 100 million customers in 100 countries. The thrust of the deal
was to create one-stop financial shopping for consumers offering Citicorp’s strengths of traditional banking,
consumer finance, and credit cards along with insurance and brokerage services from Travelers and its units.
The merger resulted in the first truly global financial services supermarket which offers products from
traditional banking to investment broking and insurance policies. In the stock swap deal, Citicorp
shareholders received 2.5 shares in Citigroup for each of their Citicorp shares. Citicorp and Travelers
shareholders owned 50% each of the company. The merger deal gave Travelers the ability to market mutual
funds and insurance to Citicorp’s retail customers, whereas Citicorp got access to the expanded client base of
investors and insurance buyers for Travelers. The merger witnessed problems of cultural integration. Bloated
costs, outmoded technology, and retention of employees were the major problems faced by Citi following the
merger deal. The cumulative return for 279-day period for Citicorp during the merger period was 35.4%. The
cumulative return for Travelers Group during the 279-day period surrounding the merger period −10 days to
+268 days was −41.49%. When the expected synergies didn’t materialize, Citigroup spun off Travelers
Property and Casualty into a subsidiary company in 2002. In 2005, Citigroup sold Travelers Life and Annuity
to MetLife.

Nova Law Review, Vol. 23, Iss. 3 [1999], Art. 6

 STATUS OF THE DEAL

Citicorp and Travelers Group publicly announced their merger in 1998. The meger between Citi Corp. and
Travellers Group is a Congeneric Merger deal. A Congeneric/Product extension merger is a merger
happening between companies operating in the same market. The merger results in the addition of a new
product to the existing product line of one company. As a result of the union, companies can access a larger
customer base and increase their market share.

Citigroup spun off Travelers Property and Casualty into a subsidiary company in 2002. In 2005, Citigroup
sold Travelers Life and Annuity to MetLife.
 ANALYSIS: EFFECT OF THE MERGER

The new company will be a giant by almost any measure. It will have $698 billion in assets and a market
value of $135 billion, both the biggest in the financial services industry, it said. It will be second in earnings
at $7.5 billion vs. $8.3 billion for ING, the financial services giant in the Netherlands that bought Barings
after the British bank failed.

The formation of the new company will occur through a merger of Citicorp into Travelers, which will apply
to the Federal Reserve to become a bank holding company. The deal is meant to be tax-free to shareholders.

On the day Citicorp and Travelers Group announced their merger, Citicorp’s stock price jumped 26% and
Travelers Group’s stock price jumped 18%. Clearly investors anticipated significant new opportunities for
Citigroup.

Despite the increased competitive threat from Citigroup, the merger had a positive impact on the stock prices
of peer life insurers and large banks. The average abnormal return for life insurance companies is 1.02%. The
average abnormal return for banks with assets of greater than $10 billion is 1.26%. The average abnormal
returns of health insurers, property/casualty insurers, and smaller banks are not significantly different from 0.
The lack of significant negative returns for any segment of the industry provides marginal evidence that this
was not a wealth transfer from one segment of the industry to another.19 Rather, the findings lead to the
conclusion that the benefits for peer institutions outweigh the negative effects from increased competition.

One interpretation of these findings is that deregulation may allow greater abuse of implied government
guarantees. If banks and insurance companies are allowed to combine into organizations that are “too big to
fail”, then the firms that are most likely to benefit from these combinations (large banks and insurance
companies) gained as the probability of passing the Financial Services Modernization Act increased. Large
banks that combine with insurance companies may be able to take advantage of implicit government
guarantees through lower funding costs or an improved reputation. Implicit guarantees are consistent with the
significant positive returns for large banks and life insurance companies and the negative returns of small
banks.

https://www.business-standard.com/article/specials/citicorp-travelers-in-largest-ever-merger-198040701130_1.html