Making a Money Machine

One way or another, the unprecedented merger wave sweeping across our economy has touched your life. The local bank is long gone. You’ve been reunited with the same dreadful HMO you thought you ditched a few years back. Your mutual-fund statement has a new logo. Offputting. Irritating. Confusing. Or, if you’ve been merged out of a job, debilitating.

But before we hang all the dealmakers, consider the flip side. Last week financial-services giants Travelers Group and Citicorp agreed to the largest merger in history, a stock swap worth some $76 billion. It’s a titanic marriage that will dwarf everything else in banking, brokerages, insurance, ATMs, cold calls, lollipops, hamburgers and chutzpah. It makes the size of the next biggest merger, the pending $42 billion deal between MCI and WorldCom announced last October, look cheesy.

The deal would create the world’s biggest company, to be called Citigroup, with $700 billion in assets and a market value of nearly $160 billion. It would join under one name some 100 million customers in 100 countries, 162,600 employees and 3,200 offices, and offer every conceivable financial service for individuals and corporations. Under one umbrella you could get money to buy a house or a FORTUNE 500 company, trade stocks, bonds or foreign exchange, insure your life or find export financing. Heck, you could even open a checking account. Says Roy Smith, a professor of finance at New York University: “This new company will look more like Procter & Gamble than it will look like a bank. That’s because what is being created here is a retail-products-distribution company for people interested in financial services.”

Big. Yeah. But not just for big’s sake. Neither is this deal about building another empire or another fortune for its chief architect, Sanford I. Weill, the ever hustling CEO of Travelers. It will, of course, do those things. Since last Monday’s announcement, Travelers shares have jumped nearly 10%, giving Weill incremental wealth of $123 million. That gets him to $1 billion–before stock options, where CEOs make the big dough.

This deal is really about arming for global warfare in a viciously competitive industry that is filled with giants from Europe to Japan. Citi, for instance, is not ranked among the top 20 banks in the world. And foreign companies, unlike those in the U.S., face relatively few restrictions. In Europe banks and insurance companies have been free to buy each other for a decade. There’s even a term for the combination–bancassurance. “It may be a new model for the U.S., but it’s not a new model for Europe,” Peter Toemin, bank analyst at London’s ABN AMRO Hoare Govett, says of Citigroup. As the globe shrinks, Weill pointedly notes, “it’s very, very important that some of the big ones be in the U.S.”

His deal with Citicorp, whose CEO, John S. Reed, will share the CEO title with Weill, puts tremendous pressure on lawmakers to rewrite largely obsolete U.S. banking laws. Weill insists that he isn’t trying to force anything. But members of Congress, who only a week earlier had yet again postponed efforts to dismantle officially the Depression-era Glass-Steagall rules governing banks, are reopening the debate.

In any business–be it manufacturing or services–size can bring many good things: clout, easier access to capital, lower costs. Those are what allow a company to keep prices down, provide better service, win business and keep profits up–the favored recipe for large-scale corporate survival in the global, capitalist ’90s and a prime driver of the record $919 billion in mergers last year. By comparison, the 1980s (when the press screamed about “merger mania”) were strictly peewee league. The biggest single year of deals in the greed decade was 1988, with $353 billion.

Already this year, deals worth $236 billion have been announced, putting us on track for a seventh consecutive yearly record. Only a day after the Citigroup blockbuster, two more pairs of financial-services companies agreed to marry. Credit-card and home-equity lender Household International will pay $7.7 billion for Beneficial Corp., which is in the same businesses; and insurer Conseco Inc. agreed to pay $6.4 billion for subprime, mobile-home lender Green Tree Financial. Meanwhile, the stock price soared for just about every mutual-fund company, bank or brokerage considered likely to find a partner.

The deals will, of course, result in more lost jobs as well as other dislocations and inconveniences for employees. But one clear benefit of the merger trend is that it goes hand-in-hand with companies’ unrelenting focus on keeping costs and prices down. From computers to cars to commissions on stock trades to the rate on your mortgage, the 1990s have been a buyer’s market. In no small part that disinflationary environment derives from the robust activity of dealmakers like Weill in mixing and matching to get the most out of every asset.

Weill plans to cross-sell everything from mutual funds and annuities to term life insurance. In fact, he’s already doing it within the Travelers family. With Citigroup, he’ll have a huge bank, with all its products and locations, to add to the mix. Citi, for instance, has a strong position in Asia. Weill says he’d be disappointed if at Citigroup he and Reed merely doubled earnings in five years, the stated goal.

To beat that bogey, he concedes, he can’t simply offer a wide array of financial products. Customers won’t buy them purely on convenience. The failure of financial “supermarkets” at American Express and Sears proved that in the ’80s and today the number of small community-oriented banks is growing in towns where mergers have wiped out local institutions, leaving corporate branches and higher fees in their wake. “You have to be a low-cost provider,” Weill emphasizes.

Affable and street-wise, Weill, 65, grew up middle class in Brooklyn and started his career on Wall Street in the 1950s as a messenger for Bear Stearns Co. By the early 1960s he had raised $200,000, and 15 acquisitions later he built Shearson Loeb Rhoades into the nation’s second largest brokerage. In 1981 American Express bought Shearson, and Weill tagged along, hoping one day to succeed CEO James Robinson. He preceded him instead, leaving in 1985; Robinson was bounced in 1993.

Weill wasn’t MIA for long, though. In 1986 he acquired a little-known finance company called Commercial Credit, which helped people consolidate debt, and turned it into a buyout machine. He purchased a conglomerate called Primerica (once named American Can), which owned Smith Barney. Weill was back on the Street. He bought Travelers for its life-, casualty- and property-insurance business, then he reclaimed the retail operations of his old Shearson brokerage from Amex. Next were the life and casualty operations of Aetna. And just last September he rocked the Street again, buying the bond-market powerhouse Salomon Inc. With each acquisition, Weill made tons of money for shareholders by crushing costs in the acquired company while adding product offerings and increasing Travelers’ scale.

Citicorp CEO Reed, 59, has had something of a management thrill ride too. More buttoned down and less accessible than Weill, Reed (out of the country and unavailable since last Monday’s announcement) twice brought his institution back from the brink of ruin–some of which was of his own making. In the early ’80s, Citi nearly drowned under a wave of Latin American loan defaults; in the more threatening late ’80s, a lending crisis triggered by a collapse in real estate values had shareholders shouting for Reed’s scalp. He hung on and so did Citi, its stock riding a spectacular recovery from under $10 in 1991 to last week’s $165, a 1600% increase that blows away the returns of just about every other company of size in that period.

Still, the betting is that Weill, the survivor of dozens of previous deals, will eventually run Citigroup solo. For now, though, the relationship is cozy. “No way am I going to ever be responsible for his being gone,” Weill says.

For a deal of such size, this one came about quickly, smoothly and quietly. Weill began to hatch it about a year ago at a planning meeting in which his top lieutenants endorsed the concept of buying a commercial bank with global reach. Some names were kicked about in ensuing months, and Citibank’s cropped up just this past February. “It was a real wheel spin,” Weill recalls. “No one thought it would go anywhere, but everyone liked the idea. So I decided to call John Reed.”

Nice call. The deal raises myriad questions. Should it be permitted? Under current U.S. law, it can’t fly. At a minimum, some businesses (insurance underwriting, for one) would have to go. The bet by Weill and Reed is that laws will change in the two-to-five-year grace period they’d be allowed if the Fed approves their application.

On a larger scale, of course, the deal raises concerns about companies generally getting too big and powerful. The endgame of relentless merger activity, after all, is a few companies in each industry owning their markets and having unfettered opportunity to do and charge whatever they like. That’s not good for anyone.

Dealmakers like Weill insist that won’t be a problem. And he may be right for a different reason: the history of megamergers is that they tend not to work as planned. “When you create these oversize companies, they become vulnerable by definition,” says Porter Bibb, a senior investment banker at Ladenburg Thalmann. Big firms can’t react to small opportunities, so new businesses pop up to fill the void. Some inevitably grow enough to challenge the giants. Indeed, every merger phase in the U.S. in the past 30 years has been followed by a period of divestitures as companies retreated to their “core competencies.”

Concentration is perhaps most worrisome in banking because that is the industry that provides so many others with capital. Too much concentration could stifle creative lending, and if one of only five major banks in the country fell on hard times, the economy could be crippled. “This is an enormous public-policy issue that needs to be addressed today,” warns William Benedetto of the boutique investment- banking firm Benedetto Gartland & Co. He argues that the Citigroup deal is so big that it’s dangerous.

No one really knows. But because of Sandy Weill, we just might find out.

–With reporting by Bernard Baumohl/New York, Kate Noble/London and Bruce van Voorst/Washington