April 7, 1998
In the largest proposed corporate merger in history, the banking giant Citicorp and insurance titan Travelers will join forces. The new company, to be called Citigroup, would be the largest financial services company in the world. Two financial analysts discuss the proposed deal with Phil Ponce.
PHIL PONCE: Now, two corporate giants and the merger that promises to change the financial landscape.
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The largest merger in history.
PHIL PONCE: Citicorps' John Reed and Travelers' Sanford Weill shook hands yesterday before announcing the largest corporate merger in history, an $83 billion deal, which will join the two companies' banking, brokerage and insurance services. The new company would be the worldís largest financial-services company.
JOHN REED: We are thrilled by the prospects. The business opportunities seem to be quite fantastic for our shareholders, and frankly we probably are talking about a restructuring of the financial service industry that directionally is the way that most people have thought that it would be going for quite some time.
PHIL PONCE: Citicorps is the second largest commercial bank in the United States and the world's leading distributor of credit cards, issuing some 60 million bank cards. Travelers Group is a financial conglomerate that offers insurance and investment banking services. It became the nationís third-largest brokerage firm when it bought out the New York investment firm Salomon Brothers last year. The merger comes as Congress once again considers changes to banking law. The 1993 Glass-Steagall Act prevented banks, insurance companies, and brokerage firms from joining forces. Travelers head Weill said yesterday he hopes the proposed merger will push Congress to remove those barriers.
SANFORD WEILL: Maybe what weíre doing will cause that legislation to change, because I think that if you look to Europe, or you look to Asia, organizations like ours already exist, where banks and insurance companies and investment companies are all part of what they call universal banks. And what we are doing here is creating a company headquartered in the U.S. that will be able to compete very effectively all over the world.
PHIL PONCE: The new company will be known as Citigroup. The deal requires shareholder and regulatory approval.
PHIL PONCE: Joining us now are Marcus Alexis, who teaches economics and management at Northwestern University. Heís a former chairman of the board of the Federal Reserve Bank of Chicago. And Rodgin Cohen, a partner with Sullivan and Cromwell, a New York law firm. Heís advised several major mergers of financial institutions. Gentlemen, welcome both.
The rationale for the merger.
Mr. Cohen, simply put, why do these institutions want to merge?
RODGIN COHEN, Banking Attorney: I think there are a number of drivers which lead to mergers such as this. One is the demands of technology, which are ever increasing. A second is competitive pressures domestically. A third is globalization of the financial markets. A fourth is what you might call the homogenization of financial products, with products being similar at various segments of the markets. And then finally you have the demands of customers, both retail customers and commercial customers, who want to obtain a full range of financial services from a single institution.
PHIL PONCE: Mr. Cohen, would you say all of those factors are at play in this proposed merger?
RODGIN COHEN: Yes, I would. I think each of those is a relevant factor in this merger.
PHIL PONCE: Mr. Alexis, what do you think is in it for the respective parties? Why are they "getting married" like this?
MARCUS ALEXIS, Northwestern University: Well, as Mr. Cohen said, they have competitive issues. There are certain synergies. Not only do customers like to get a full range of services from a single vendor but also there are certain economies in cross selling by them. American banks have not been able to maintain a dominant role in financial markets because of the restrictions imposed upon them by Glass-Steagall, and our holding bank legislation. This gives our banks a chance to play on a level field with banks in Europe and in Asia.
PHIL PONCE: Are you saying that banks in Europe and in Asia already had the ability to offer this range of financial services that banks in the United States do not?
MARCUS ALEXIS: Thatís exactly right. They have a much wider range. They can become much more intimate with their commercial customers. There are not the limitations, artificial limitations, in fact, in the financial services industry, which we imposed, actually for good reasons, back in the 1930's, trying to protect the banking industry from certain--from undue risk. But there is no need for such limitations or regulations at this point. And I think all it does is it hampers our banking sector.
Will the merger run into legal problems?
PHIL PONCE: Mr. Cohen, Mr. Alexis just talked about what happened back in the 1930's and the laws that were put into place back then. Is this--how big of a hurdle will this proposed merger be? That is to say, will the laws that are in place right now stop this merger from going through?
RODGIN COHEN: In my view they will. Youíve got to divide the Travelers operations into its component parts. Large consumer finance business, thatís clearly part of commercial banking and will not be a problem. It has a large asset management business. That will also not be a problem. That is something which banks and bank holding companies can do. Starting about a year ago the Federal Reserve significantly liberalized the existing restraints on combinations between banks and securities firms, so there should be no real difficulty with the securities underwriting and dealing business, which Travelers does. Now the one remaining barrier is between banking and insurance. And Citicorp has positioned itself perhaps uniquely to be able to engage in at least some of the insurance activities which Travelers presently conducts. So the areas of Travelersí business which are outside of the realm of what Citicorp could do today are relatively limited.
How will the merger impact consumers?
PHIL PONCE: Mr. Alexis, getting back to the issue of consumers, what is it the consumers will--how will consumers benefit, or how will consumers be affected by this?
MARCUS ALEXIS: Just a point before that. While itís true that most of the activities that Travelers engages in are really what the Citicorp could do without much difficulty legally, almost half of the Travelersí profits, though, did come from insurance, so that insurance is a very significant part of the business that the Travelers Group brings to this transaction.
PHIL PONCE: And getting to the question of how this might impact consumers.
MARCUS ALEXIS: Well, the consumers--there are services that Travelers Group now provides, for example, various kinds of insurance, getting back to the insurance industry again, but you could couple together those kinds of insurance services with the financial services offered by the Citicorp organization, deposit services, mortgage lending, et cetera, and those activities do give you a full consumer basket that enhances the marketplace presence of Citibank and also provides an entrance into some markets where Travelers Group may not be strong right now.
PHIL PONCE: Mr. Cohen, how big of a deal is this so-called one stop shopping for financial services?
RODGIN COHEN: I think it is increasingly important. I think the outline Mr. Alexis just went through is illustrative. An individual who walks into a financial service representative, whether he be a broker, an insurance agent, or a teller at a bank, he wants to be able to attain a deposit service, a mutual fund, an insurance product, and he really doesnít want to have to go to three places. Now, thereís been a lot of controversy in the past about whether one-stop shopping makes a lot of sense in financial services. But, to me, the analogy is in other areas of the retail market. Twenty-five years ago if you wanted a prescription, you went into a drugstore. If you wanted groceries, you went into a grocery store. And if you wanted clothing, you went into a department store. Today you go into a Wal-mart or another leading discounter and I donít think anybody believes that the impact on prices has been anything other than favorable.
PHIL PONCE: Mr. Alexis, if thatís the case, why is it that some consumers groups are upset about this and think that consumers could get hurt? What is their argument?
MARCUS ALEXIS: Well, consumers are always concerned that the--in the banking area anyway--that increasing the concentration in banking will limit competition and that the larger bank will be more interested in large customers and, therefore, that there will be less available for them and that their deposits will not come back into their communities but will be going overseas or will be used to fund large corporate activities. But as long as the consumer market is attractive--and I think that it will continue to be attractive--and particularly as consumers come to financial institutions, to banks that is, for more services, such as coming for credit cards and coming for--buying securities, that customers will be seen and the local markets will be seen as more attractive and certainly will compete with the larger corporate market for the attention of the executives at these merged institutions.
Will this merger change the face of banking?
PHIL PONCE: Mr. Cohen, this proposed merger has been described as having the potential to "change the face of banking." Is that an overstatement, or do you agree with that?
RODGIN COHEN: I think that may be a bit of an overstatement because while it is an exponential increase in the size of transactions and in the size of a single institution, thereís not really a directional change. There has been a very strong process of moving towards consolidation both within industry segments of the financial services industry and across those segment lines. The one barrier, again, has been between banking and insurance. This is the first attempt to really break down that barrier in a long time, and itís important in that respect but the direction is really a constant.
PHIL PONCE: And, Mr. Alexis, how much pressure do you think this proposed merger might bring to bear on the barriers that continue to exist between banking and insurance?
MARCUS ALEXIS: I think that the regulators will now have a choice they have to face, and the legislature as well, and that is that they can either stop this merger, which I do not think would be in the public interest, or they can let it go through, as it is, as it is proposed, and if they do so, then some of the restrictions, such as Glass-Steagall on the insurance side, there are also still some remaining restrictions on the securities side, but if they let this go through, in effect, one achieves through this kind of merger the sort of unification that the financial services sector needs.
PHIL PONCE: And speaking of unification, Mr. Cohen, do you think when this merger goes through, that other financial behemoths out there are going to be looking to team up like this?
RODGIN COHEN: I think there will certainly be a very deep interest in being able to offer the same full range of services which the combined Citigroup would be able to offer. If I could only add just one other thing quickly, Senator Glass of Glass-Steagall got up on the floor of the Senate in 1933 and said the biggest mistake he made while he was in Congress to vote in favor of restricting branching. I think if he were alive today, Sen. Glass would say, the biggest mistake he made was proposing legislation which imposed these barriers.
PHIL PONCE: How about that, Mr. Alexis, has the banking industry sort of outgrown, out-evolved the legislation that controls it?
MARCUS ALEXIS: Well, I think youíve asked the right question. Has it outgrown or out-evolved? It wasnít necessarily a mistake to set up the kind of regime that was done in the 1930's. We didnít know a lot. The country was in crisis. There was a need to do something quickly and to do something dramatically. And so a series of banking laws were passed with the attempt of trying to give the public confidence in banking. Now, this regime worked fairly well until the late 1960's, and then it ran into difficulty as interest rates got into the double digits, then the system that had been planned didnít work. And, after that, the banks saw that their best markets were beginning to be eroded by bank--by institutions which were not banks in the regulatory sense but performed many of the functions of banks and did so in ways that made them more attractive to bank customers. And you had money market mutual funds that came along and took some of their best depositors and little by little the banks found that they were being nibbled at, and humbled.
PHIL PONCE: Well, with that, Iím afraid weíre out of time. Gentlemen, I thank you both very much.