History
Citicorp was established in the 1800’s as a banking institution that was inclined to providing financial services to the merchants in New York and its environs. For a long time, this was the biggest banking entity in America and owing to this fact, it owned a large amount of assets, and in mid-1900’s, it was accorded the name of being the largest banking institution in the world. It was the first financial institution to initiate negotiable instruments, credit and master card schemes.
On the other hand, Travelers group is made up of financial institutions dealing in all financial concerns. This includes the provision of insurance facilities. Besides, it also deals with real estate developments and offers asset management services as well. Citicorp and travelers group were merged in 1998 to create one large institution referred to as the Citigroup. Citigroup was expected to establish its operations globally. As a result, it obtained more than one hundred million clients from these locations.
Reasons for the merge
One reasons, 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” (Walter 34). 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.
Merger motives
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.
How they work together and make money
One of the elements that will be established in the merging of these two companies is the expansion of their operations to over one hundred regions globally. Owing to the merging of their operations, these companies are more likely to attract more clients.
This is as a result of the fact that customers will avoid the situation whereby they obtain their services from different companies, which increases their costs of obtaining these services. As a result of the merging again, citigroup will be in a position to offer its clients discounts based on the number of services outsourced from the company.
The company was able to establish and implement successful strategies within the first six months, and this was as a result of combined efforts of experts from both companies. When the operations under the new company name commenced, these companies were able to attract the largest part of the market share because of their ability to provide financial and non -financial services all under one roof.
Type of merger
The merging process of these two companies can be classified under different categories depending on the element of the merger being considered. The first category is the type A merger whereby the companies would be expected to change to completely incorporated financial organization operating under an exclusive business structure and supported by a sole resource base as well. As a result of this type of merger, the company was in a position to provide banking services insurance services, asset management services and securities.
The other category of mergers is the type B merger which would require “the merged company to provide commercial and investment banking within the same entity while undertaking insurance underwriting and circulation, mortgage banking and other dedicated services through distinct capitalized affiliates” (Citigroup).
The next category of merging in this case is the type C merger which involves the process whereby a commercial bank takes the place of a parent in the merging process.
The commercial bank which in this case is the Citicorp takes the role of the foundational company and the services of the other company which include insurance and investment banking are integrated there in. finally, is the type D merger “which involves, the creation of the holding company controlling the associates involved in; asset banking, insurance, commercial banking and other categories of financial and non-financial businesses” (Citigroup).
This is the most appropriate model in the case of Citicorp and travelers group as the tow companies were brought together to form Citigroup which acted as the parent company controlling the other related operations which in this case included the banking activities, security and investment services and insurance services.
Results
After the merger had taken place, “the standing shares in the companies’ recent quarterly reports indicated the value of the company to be $70.6 billion” (Federal Reserve Bank). Financial analysts discovered that this value was $5.1 billion in excess of market capitalization of the Citicorp Company before the merger, and this therefore, was a sign of improvement in performance.
Citigroup portrayed an increase in the level of earnings as a result of the “cross selling of the opportunities between the two companies as well as the cost savings that resulted this merge” (Walter 35).
The quantity of assets in Citigroup also increased to around $700 billion, while the new company was able to earn net revenues amounting to $50 billion. It expected that within the first financial year of its operations to be among the top ranking company in fortune’s 500 companies list. This is illustrated by Citibank (1999), “the preferred stocks of both companies were all converted into preferred stocks for the new company”. The performance of the stocks in the stock market has been improving over the years after the merger.
The volume of trade for example, as at May 2007 was approximately $2.3 million which is quite high compared to the February estimates of around $1.4 million. These values however fluctuate a great deal over the years but on average, the operations of the company in the financial market are considerably high.
Works Cited
Citigroup. Citigroup corporate website, (n.p), April 2007. Web.
Citigroup. “Citigroup: Is this marriage working” Business weekly online 264 (12) n. pag.
Federal Reserve Bank. “Banks Merge To Stay Competitive” Richmond Publications in Summer 12 (5), n. pag. Walter, Ingo. Mergers and Acquisitions and Banking & Finance. New York: Penguins, 1999.