Success of a Combined Company Is Not Certain

Success of the proposed merger between Travelers Group Inc. and Citicorp ultimately rests on answers to two questions: Do consumers really want a one-stop financial supermarket for all their money needs? And would consumers get these services at more reasonable costs and quality than if they shopped around?

Architects of the proposed merger said it capitalizes on recent advancements in technology and a growing middle class worldwide that is looking for hassle-free and reasonably priced financial services.

“It’s a business proposition whose time has come,” said Citicorp Chairman John Reed. “The customer does not want to go from place to place” for banking and securities transactions.

Still, the financial supermarket concept is an old one that has often failed in the past. Such mega-mergers only lead to higher fees and less competition for bank customers, consumer advocates and other critics argue.

“In theory, I think consumers would welcome a one-stop financial services company, but in practice they don’t,” said Samuel L. Hayes, professor of investment banking at Harvard University. “People don’t want to depend on a single vendor with their money, they want to spread it around a bit and have some leverage,” he said.

Popular during the 1980s, the financial supermarket idea prompted such major acquisitions as General Electric Co.’s purchase of Kidder Peabody & Co., Sears, Roebuck & Co.’s purchase of Dean Witter and American Express Co.’s purchase of Shearson Loeb Rhoades.

These combinations failed in part because they didn’t produce the expected synergies and profits and because of a clash of cultures at the different companies, especially when the acquirers had no Wall Street experience.

This time, the proposed combination is between two heavyweight financial giants that would benefit from economies of scale, company officials said.

The new company, to be called Citigroup, would combine Citicorp’s checking, credit cards, foreign exchange opportunities and trusts with Travelers’ mutual funds, insurance and brokerage services.

So a customer could get a checking account, a mortgage, a brokerage account and homeowners insurance--all through one company. That means if a consumer applies to Citicorp’s Citibank banking unit for a home loan, Travelers could offer them a brokerage account.

“This is a thumbs-up for consumers,” said Joe Belew, president of the Consumer Bankers Assn., a trade group in Washington. “There will be more convenience, more choice and presumably price breaks.”

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Consumers might like having a consolidated monthly balance sheet that could show balances on savings and checking accounts, retirement accounts, brokerage accounts and a mortgage, analysts said.

“More and more people will want one piece of paper to look at every month and one vendor to deal with,” Belew said.

The proposed merger could also mean cost savings for customers and help smaller community banks attract customers, especially small businesses that want a more personal approach, said Larry Kurmel, executive director of the California Bankers Assn., a trade group.

“Consumer banks are laughing up their sleeve right now,” Kurmel said. “They will lure those customers who still want to talk to the same person every time they come in.”

Consumer advocates, on the other hand, argued that big is never better for consumers, who could end up paying higher fees for such services as brokerage transactions, mutual fund custodial fees and insurance policies.

On that basis, consumer advocate Ralph Nader on Monday asked the Federal Reserve to reject the proposed mega-merger.

“Bigger banks selling more and different kinds of products means what it’s always meant: less competition, with consumers paying more than if they shopped around,” said Jon Golinger, consumer program director for the California Public Interest Research Group, known as CalPIRG.

Consumers will find themselves being aggressively cross-marketed for more and more products they might not even want, said Golinger. He identified three areas of concern for consumers.

First, Golinger said, consumers could be solicited to buy products that look like something else, such as an investment that seems to be a bank certificate of deposit but may not be federally insured.

Secondly, he said, consumers could be solicited to buy what they really don’t need, such as insurance on credit cards in case of death, he said.

And third, Golinger said, such mega-mergers raise privacy issues for consumers who may give personal information to a credit card company only to see it used by a related company to sell them investment products.

“Your personal financial information is going to pass through a lot more hands,” he said. “There will be more uninvited use of that information.

In fact, much cross-marketing of the two companies’ diverse financial products is expected.

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Travelers’ consumer loan unit, Commercial Credit Corp., represents a huge potential market for Citicorp, which has 36 million credit cards in circulation. Commercial Credit serves about 1 million customers from about 1,000 U.S. offices.

Analysts said the two companies would probably combine their asset-management operations. Travelers manages assets of about $168 billion, an area where it is stronger than Citicorp, which manages $129 billion, much of it for wealthy individuals in its “private banking” group.

Still, despite the advantages, combining such different financial businesses as commercial banking, investment banking and insurance has been difficult in past decades.

Financial services industry mergers put together in the 1980s fell apart in the 1990s due to conflicts over compensation and corporate control issues.

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Giant Among Giants

The $83-billion proposed merger of Travelers Group Inc. and Citicorp would form the nation’s largest financial services company, with twice the assets of No. 2 Fannie Mae. The merger, which would be the largest in history, is the latest attempt to form a financial services supermarket. Each company’s holdings, the nation’s largest financial institutions and what other financial services stocks did today:

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Revenue Breakdown by Business

Citicorp

The 186-year-old banking giant is the world’s leading foreign-exchange dealer, the world’s largest credit card issuer and servicer and the nation’s No. 2 bank.

Emerging markets: 36%

Global banking: 22%

Credit cards: 18%

Citibank: 17%

Private Banking: 7%

*Numbers may not add up to 100% because of rounding

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Travelers Group

The nation’s second-largest securities firm, the 134-year-old Travelers Group ranks 21st in total assets on the Fortune 500 list.

Salomon Smith Barney: 57.2%

Property/casualty insurance: 26.4%

Life insurance: 11.8%

Consumer finance services: 4.5%

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10 LARGEST U.S. FINANCIAL INSTITUTIONS (RANKED BY ASSETS)

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Total assets as of 12/31/97 Rank Institution Type (billions) 1 Citigroup Bank/broker/insurance $697.4 2 Fannie Mae Specialty lender 391.7 3 Chase Manhattan Corp. Bank 365.5 4 NationsBank Corp. Bank 307.8 5 Merrill Lynch & Co. Broker/dealer 292.8 6 J.P. Morgan & Co. Bank 262.2 7 BankAmerica Corp. Bank 260.2 8 General Electric Capital Services Specialty lender 255.4 9 First Union Corp. Bank 205.7 10 Freddie Mac Specialty lender 194.6

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Financial-Stock Mania

Major financial stocks rocketed on Monday and most have outpaced the broad market over the last year.

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Monday close Pct. Gain from Stock and change change 52-week low Citicorp $180.50 +$37.63 +26% +77% Travelers 73.00 +11.31 +18 +137 Merrill Lynch 97.00 +10.50 +12 +125 J.P. Morgan 144.75 +10.81 +8 +55 Charles Schwab 39.63 +2.56 +7 +96 American Express 104.75 +5.75 +6 +82 Chase Manhattan 147.00 +6.88 +5 +74 Mellon Bank 67.25 +2.38 +4 +88 Wells Fargo 340.94 +6.81 +2 +39 S&P; 500 index 1,121.38 -1.32 -0.1 +52

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Sources: Company reports, SNL Securities, wire reports

Researched by JENNIFER OLDHAM / Los Angeles Times