By David Liss
With recession a fading memory and some giant companies flush with cash again, mergers and acquisitions seem to be coming back in vogue. Witness J.P. Morgan's (JPM ) recent takeover of Bank One for $58 billion in stock or the effort by Cingular Wireless to buy AT&T Wireless (AWE ) for $41 billion in cash (the largest all-cash deal in history), or Comcast's (CMCSA ) $54 billion hostile bid for Walt Disney (DIS ). The hunt is on for deals that can squeeze more profits and better efficiencies from industry consolidation. Yet, economic and academic studies have long shown that one out of every two ultimately fail to achieve their expected results, often miserably.
The most common symptom of merger mania is indigestion, in which one or both companies fail to successfully incorporate their business models, goals, or cultures into an integrated whole. The promised payoffs never materialize. Eventually, investors flee, and stock values go down. The most prominent example in recent corporate history was 2001 AOL-Time Warner (TWX ) deal.
One company that has been successful with acquisitions, however, is Citigroup (C ). In 1998, Citibank's $70 billion merger with Travelers Group, which established the world's largest financial-services firm, was the biggest in history until the AOL-Time-Warner deal.
AT SANDY'S RIGHT HAND.
Since then, under the reign of Chairman Sanford "Sandy" Weill, Citigroup has been a lean wolf on the hunt, snapping up dozens of companies. Yet, through it all, Citigroup increased its annual earnings more than 700 times, Weill likes to boast. No one disputes the outfit's success with M&A.
Marge Magner is a Weill protégé who first worked for him back in 1987. She has held many executive positions at Citi, including chief operating officer. For the past eight months, she has headed Citigroup's Global Consumer Group (GCG). As such, she's a key architect and executor of the company's acquisition strategy and has directly negotiated and implemented Citicorp's buys of European American Bank (EAB), Washington Mutual Finance (WMF), Golden State Bancorp, Sears' credit and financial products business, and Banamex-Banacci.
Last year, incomes from Magner's operations totaled $9.6 billion of Citigroup's total $17.85 billion profit, accounting for 55% of the corporation's earnings, with a 17% growth rate. If Magner's group were an independent entity, it would be the seventh-largest corporation in the world. Her latest foray: GCG made a $2.73 billion cash offer to buy Koram Bank, South Korea's sixth-largest, in February.
How does Citigroup do so well with mergers? And why do so many others' fail? I asked Magner for some answers. Here are edited excerpts from our conversation:
Q: When should a company consider a merger or acquisition?
A:It depends on your vision for the business. You have to understand what the dynamics are that are uniquely driving your industry. It also always depends on whether you're in a consolidating industry, which creates opportunities for mergers and acquisitions.
Consolidation takes place because of scale. You're either doing consolidation or receiving it. You will be involved one way or another. Generally, people would rather decide their own fate and determine whether to acquire, not the other way around.
Ideally, you're looking to acquire products, a distribution method, or something that you don't have now that clearly moves you forward in terms of your business strategy or provides greater leverage for your overall business platform. Maybe the acquisition allows you to bring costs down or to distribute your products to an expanding consumer base.
Q: O.K., so when isn't a good time to merge?
A:[You should never do it just] because everyone else is merging and acquiring. Just because it's right for some other company in your industry or in another industry doesn't mean it's right for you. Two companies that are weak players in their respective markets can't merge to cover up their individual problems. One will end up pulling the other down.
Q: How do you determine a specific target for acquisition?
A:You can spend lots of time thinking about what business is a perfect fit. You can look at factors ranging from geography, product line, distribution systems, and information technology. What strategic advantage does that target bring you? Where are you trying to take your business?
At the end of the day, that potential target company must be available. That takes investment-banking help. You can also pick up the phone and call that company's CEO and have a casual chat. A lot in the business world happens because of relationships. By David Liss
Q: How is Citigroup's search different from other companies?
A:We know what we want to do. Our objective is to expand the business by product line and geography. The first thing we do after identifying a company is to look at the numbers. This is, of course, easier if you're talking about a public company.
We then approach these companies -- our investment bankers will come to them. In some cases, the company is looking for a strategic sale and will put itself up for sale. This can help a company to negotiate terms. You have to get a sense of how much you are willing to pay or bid for the company.
Due diligence is the most critical aspect of M&A, and one of the most important aspect of the entire process. For us, we typically have the people responsible for the integration do the due-diligence work. Some companies have analysts go in. Our preference is to rely on the line people who are going to have to deliver the results. [They have] to plan the execution as they perform due-diligence work.
From there, the process is to develop a formal agreement between the two companies, to work through regulatory review on a federal or state level. But you plan integration from the time you start the due-diligence process.
Nothing good happens between the signing of a formal agreement and the closing of the deal. The longer it takes, the more difficult things become. Any organization struggles with uncertainty and ambiguity. Delays detract from effective execution. Identifying all the issues for integration up front is the key. We don't do a deal unless [Citigroup Chief Operating Officer] Bob Willumstad or I understand every aspect of the deal. We don't buy anything unless we have spent a lot of time with the sellers of a company.
Q: How about an example?
A:With the  CalFed deal [Golden State Bancorp was the holding company of California Federal Bank], both Bob and I were in California for due-diligence work from the time we had a basic agreement in place. We were meeting people and talking to the CalFed staff about what they could expect to see in the transition.
We had to make quick decisions and determine who's in charge of various aspects of the operation and who's doing what. If we see ways to consolidate operations and that people won't be needed for certain jobs or that there's duplication of positions, we act as quickly as we can to make any necessary changes in staffing.
The reality is that if you're respectful of people and you work to help them find other jobs, employees are comforted because they know that interest and involvement in employment issues at a senior level will make things happen. Senior management in the corporation know what my priorities are concerning employees. Wherever possible we work to find opportunities for existing staff to work in different locations. We have job fairs and remind people that we do business all over the world.
Q: What about the tough calls?
A:The transaction should either be really easy [once you've done your homework] or for a very good price to justify taking more risk. At the end of the day, you have to determine what the new entity will look like, how it will perform, and how investors and consumers will judge it. You may have to walk away. There may be limits from a pricing standpoint. Just because you can do a deal doesn't mean you should.
You always have to remember that you're investing the shareholders' money and that you have to give them a good return. There are limits. [Sometimes,] when you look at the business 3, 5, 10, or 20 years out, if it looks like it's important for the strategic long-term value of the company, you may decide that this deal is important and that you have to do it. There may be more of a strategic impact than a financial impact.
For Citigroup, we look for our deals to be more accretive than dilutive. The worst potential deals are those that dilute earnings per share. We will look at all deals in terms of the opportunity to increase EPS for our stockholders.
Q: How do you properly integrate a company into your own? What are the primary considerations?
A:The No. 1 consideration is the customer. What's the customer seeing and experiencing? How are they able to get to the quality of service they're expecting during this transition period? It all starts from maintaining a consistent experience for the customer with no fire drills.
The No. 2 consideration is the [acquired company's] employees. Determining how to match commission plans, salaries, benefits, and other human-resource issues. Employees need to have their roles clarified as quickly as possible.
Q: What are the primary considerations for successful technology and systems integration? How do you monitor progress? What are the biggest obstacles to overcome?
A:Band-Aids only work for a short period of time. For example, WorldCom did an awful lot of acquisitions, but they didn't really integrate their information-technology systems effectively. Technology integration must be a priority and must be done properly. This has to be the first order of business. Technology must be used to ensure that the customer has a positive experience with no disruption.
Q: What is the proper mix of growth -- acquisition vs. organic?
A:The answer will vary from organization to organization. From our experience, the proper mix of growth over time is two-thirds organic and one-third through acquisition.
Q: What's the most important lesson you have learned?
A:The importance of execution. Doing this well and doing it thoroughly. You need people who understand how your organization must be focused. Having people who are experienced with the process is critical. For the CalFed merger, we merged 350 branches into our system of 3,100 branches and 9,800 branches worldwide. You have to have people on the ground to make things work, to make sure that the customer is well served, and that your employees are calm.
Liss is a contributing correspondent for BusinessWeek Online. His background includes six years as a management consultant and as a legislative aide on Capitol Hill. He has a master's degree in public administration from Columbia University
Edited by Patricia O'Connell