April 24 (Bloomberg) -- Citigroup Inc. may fail to win full control of Japanese brokerage Nikko Cordial Corp. with its $13.4 billion bid as more shareholders hold out for a higher offer.

Investors controlling at least 28 percent of Nikko are seeking a better price, up from 21 percent two weeks ago. Citigroup raised its bid 26 percent to 1,700 yen ($14) a share in March and has ruled out another increase.

Failure to win more than two-thirds of Nikko's equity would leave the New York-based bank unable to exercise full power over actions such as mergers or the sale of a unit. That could force the U.S. bank to seek compromises over major decisions with investors who resisted its offer. The bid expires April 26.

``The freedom of management will be constrained,'' said Kenji Mizutani, professor of economics and business at Chukyo University in Nagoya and a former executive director at Mitsubishi UFJ Financial Group Inc. ``Lack of absolute control may make it difficult for Citigroup to sell units to recoup some of its investment.''

Orbis Investment Management Ltd., Nikko's second-largest investor, and holders including Harris Associates LP have offered their shares for sale at 1,900 yen, indicating they won't accept Citigroup's bid. As of 9:30 a.m. today, such sell orders had been entered for 277 million Nikko shares on the Tokyo exchange, or 28.3 percent of the total.

Shares in Nikko fell 0.2 percent at 1,690 yen at 11 a.m. in Tokyo, trading below the offer price for a second straight day.

Index Funds

Adding to Citigroup's difficulties, index-linked funds at Japanese firms such as Nomura Asset Management Co. and Daiwa Asset Management Co. typically don't tender their shares in a takeover bid. Such funds together hold about 8 percent of Nikko.

Managers of domestic index-linked funds tend to keep their holdings in companies that get bought without being delisted to maintain a correlation between index and portfolio performance. In Japan, a single shareholder or group must control more than 75 percent of a company to have it removed from trading.

Buying Nikko would help Citigroup tap more of the $13 trillion of financial assets held by individuals in the world's second-biggest economy, where it trails local banks led by Mitsubishi UFJ. Chief Executive Charles Prince has announced takeovers in China and Taiwan to close a gap with HSBC Holdings Plc in Asia while reducing annual spending by almost $5 billion.

Signaling Tactic

Bermuda-based Orbis and Southeastern Asset Management Inc., a Memphis-based fund manager, on April 20 reiterated their opposition to Citigroup's bid. Southeastern is Nikko's biggest investor with a 6.6 percent stake. Orbis owns 5.8 percent.

``We have owned Nikko Cordial shares since 2002 and believe the interests of our clients will be better served by maintaining the investment rather than selling at 1,700 yen per share,'' Orbis said in an e-mailed statement on April 20.

Atsuko Yoshitsugu, a Citigroup spokeswoman, declined to comment.

Orbis on April 3 put all of its 56.5 million Nikko shares up for sale at 1,900 yen and suggested other shareholders who consider the bid too low follow suit. The strategy offered a way to signal the strength of opposition. A day later, investors had placed sell orders for 137 million shares, and the campaign has continued to gain momentum.

Overseas shareholders control 65.2 percent of Nikko, up from 49.5 percent a year ago, the company said this week. Nikko's four biggest investors -- all of which are foreign funds -- control about 23 percent of the stock together and have rejected Citigroup's offer as too low.

Wait-And-See

Citigroup has gotten a better response from Japanese companies, which together control 5.3 percent of Nikko.

Mizuho Financial Group Inc., Japan's second-largest bank, has said it will tender its 4.8 percent stake to Citigroup. Eisai Co., Japan's fourth-largest drugmaker with 0.49 percent, has also accepted the offer. Fujifilm Holdings Corp., which has 0.11 percent, said it is still considering whether to sell.

Citigroup may complete the purchase even if it fails to win full control, and later try to add to its holding, investor Patrick Lemmens said.

``Citigroup put a reasonably priced offer on the table,'' said Lemmens, who helps manage $3.5 billion at ABN Amro Asset Management in Amsterdam. ``They will take what they can now and buy the remaining stakes later.''

Nikko last month forecast profit for the year ended March 31 would fall to 80 billion yen from 88 billion yen. The company reports earnings today.

To contact the reporter on this story: Takahiko Hyuga in Tokyo at thyuga@bloomberg.net

Last Updated: April 23, 2007 23:06 EDT