Citigroup: Is This Marriage Working?

The Citigroup merger is going reasonably well. But there are signs of tension between Weill and Reed

Ask John S. Reed about being co-CEO of Citigroup with Sanford I. Weill, and he volunteers a revealing story. It concerns a Spanish bank created by a merger that, like Citigroup, was headed by co-CEOs. At first, the Spanish bankers were "good buddies," but they soon got into a power struggle. One CEO died, but another man replaced him and the fighting continued. Finally, the board settled on one boss and the bank thrived.

The lesson for Citigroup, the Spanish CEO told Reed, was simple. Have the board flip a coin in public and let the winner be CEO. That way there's no winner and no loser, just blind luck. Reed made a point of telling Weill this story. Says Reed, with his characteristic candor: "Sandy didn't like it."

Reed is not suggesting a coin flip. But just in case anyone missed the message of the story, Reed leaves no doubt that sharing the top job is tough. "I don't think Sandy and I have yet created much of a problem," Reed says. "But co-CEO's are hard."

One year after the integration of Citicorp and Travelers began in earnest, there's evidence that the relationship is fraying. Saudi Prince Alwaleed bin Talal, whose 4.8% of Citigroup stock makes him the largest single shareholder, says he learned three weeks ago that coordination between Weill and Reed has not been as close as it was when the merger was announced. Says the Prince: "I will try to see them both in July during my trip to the U.S., but I hope it will be resolved by then one way or the other." Citigroup's next board meeting is the third week in July.

A rift at the top between Weill and Reed could hamper what is already a vast and audacious project. The two men are attempting several revolutions at once. First, they are trying to offer consumers around the world everything from CDs and credit cards to mutual funds and insurance. At the same time, they are attempting to combine the Salomon Smith Barney investment bank with the Citibank corporate bank. And they are doing all this at a time when the Internet is rewriting the rules of financial services.

The unwieldy co-head structure complicates the issue of whether management can pull off this staggeringly complex task. Reed and Weill are making the best of the situation. But they both are surely aware of the limits of this marriage of convenience. In an ideal world, each would be far happier running the company alone.

Just how sustainable is this marriage? Talk to Reed and Weill, and they say they get along. "I have no problem being a partner with John," says Weill. Says Reed: "We do have differences of temperament, but they work out pretty easily."

Indeed, on one level, Reed and Weill complement each other. But can two such strong but very different people really share the top job for any length of time? Weill is a cost cutter who lives for his next acquisition. Short-term profits and the stock price are paramount. He manages through personal relationships: Weill expects and receives blood loyalty from his managers. Reed's forte is long-term vision and he will spend the money to realize it, such as the first ATM network. Reed, an intellectual who relies on memos and bureaucracy or "processes" to manage, has few long-time lieutenants.

REPORT CARD. Both men, though, are anxious to show progress. And in many ways, the deal is going reasonably well. After two lackluster quarters, Citigroup racked up a $2.4 billion profit in this year's first quarter, the largest of any U.S. corporation. Reed, though, says his internal measures show the deal has yet to prove itself. So far, Citigroup hasn't gotten much of a boost in the stock market, based on a comparison with Reed's "synthetic" Citigroup model. That model compares Citi's stock with an index of the bank's top competitors. Citi's stock has performed only slightly better than the index (chart, page 129).

Reed is also carrying around a progress checklist of priorities for key areas such as the consumer bank, the corporate bank, and asset management. So far, as Reed sees it, only asset management has made the grade.

Reed says if there isn't sufficient progress by December, the board should start asking questions about whether the company can be properly managed by its co-heads. "I said to the board: `Look, if 18 months in we are not effectively running the company, well then, if I were an outside director I would say, hey guys, what's going on?"' says Reed, who dates the start of the integration from June, 1998. "I will be very disappointed if at the end of 1999 we can't look back and say the fundamental structural steps have been taken and the processes are in place." Weill is not as specific but does say that he wants Citigroup to be "Y2K management compliant," meaning that he expects the groundwork for the deal to be complete by yearend.

HEIR WAR. Even if Reed's specific goals are met, there's the unspoken issue of succession. When the deal was inked, Reed thought he was getting a likely heir apparent in Jamie Dimon, then president of Travelers Group Inc. But when Dimon was ousted last November, the company was left without anyone to succeed Weill, 66, and Reed, 60.

Reed and Weill may view the succession differently and may have different timetables. Reed says the two haven't discussed this sensitive topic since the early days of the deal. But Reed has talked about retiring and is open to the idea of bringing in an outsider as a successor. Weill, though, seems to relish the lengthy process of grooming a successor and is in no hurry to leave. "We will have done a good job if four or five years from now it becomes obvious that people have grown up in this company that can take over from what we do, and take it to the next level," says Weill. A more political analysis of the two would be that Weill and Reed could be headed for a showdown. Prince Alwaleed's comments aren't the only sign of strain. There are rumors among insiders and ex-Citigroupers of discord between the two men. Scuttlebutt is that Weill is winning the battle by putting his lieutenants on the ground. They say Reed, something of a loner, has few internal allies. But Reed could find support from the board, which is half Travelers directors and half Citicorp directors. "John and Sandy say the rumors simply are not true. Come back in two years and see what they built," says Michael Schlein, Citigroup's director of corporate affairs.

Getting beyond the two personalities, there is no denying the promise of the deal. Citigroup could very well be on the way to success. And the friction and frustrations now being felt may just be the growing pains of any big merger. Indeed, it should be said that Weill and Reed have put themselves on the line, taking the plunge at a time when competitors, such as J.P. Morgan, Chase Manhattan, and Merrill Lynch, have yet to move toward more consolidation.

Reed and Weill have assembled a dazzling collection of businesses, and Citigroup has been making fInancial progress. Return on equity was 24% in the first quaRter, well above its goal of 20%. Like other financial companies, Citi's stock also has rebounded from the lows of last fall, rising from 32 1/2 on Oct. 8, the day the deal was closed, to 64 currently.

Citi's bureaucratic culture has been energized by Weill's fast-moving managers. Costs have been cut, stock options have been distributed more broadly, and a culture of salesmanship has been promoted. Travelers' domestically oriented managers now have entree to a wealth of opportunities overseas, thanks to Citibank's on-the-ground presence in 100 countries. "I think the concept of what we did is fantastic," says Weill. "The opportunity for us to accelerate growth, rather than to be a casualty, is enormous."

But although these are early days, Citi has yet to prove that combining all these businesses under one management will prove more profitable over time. "I would lie to you if I said we have booked tremendous incremental customer revenue by exploiting the various channels," says Reed. "It's premature. I would guess that would take two to three years."

Reed's "synthetic" Citigroup model shows the market is viewing the deal warily. Reed and Citigroup Vice Chairman Paul J. Collins created a weighted composite of the stocks of Citi's top competitors to see how Citi stock would stack up. Together, they form a company comparable to Citigroup. "The proposition in my mind is, do we do better?" says Reed. "Otherwise putting us together doesn't make sense." So far, the market's verdict isn't quite in. "We're a tad better than the synthetic right now, but not meaningfully," says Reed. "On the other hand, we're not worse."

Reed's checklist is another benchmark. "You won't be surprised," Reed says, poking fun at his reputation as a scientific manager. The list consists of a half-dozen or so goals that he feels must be met as part of the basic integration of Citicorp and Travelers. Reed is concerned that Citi define its vision for its consumer and corporate business. And he wants it to establish processes for measuring risk, nurturing talent, allocating capital, and developing the technology to compete in the Internet era.

"Putting two companies together, particularly as big as these, you have to start with a business purpose," Reed says. "You have to know what the hell you are trying to do. It can't be just making money."

Weill's goals are more tangible. Not surprisingly, the two men have run into disagreements. For example, they had to decide on a common pension plan for nearly 170,000 Citigroup employees. The gap between the two CEOs was considerable. Travelers is known for its chintzy benefits, while Citicorp's benefits were more generous. In fact, the first move in a typical Weill acquisition is to cut costs by paring benefits and pension plans and replacing them with stock options. As a bank, Citi traditionally paid fairly low salaries but rewarded longtime workers with good benefits.

Weill wanted to implement new benefits by Jan. 1, 1999, says one Citigroup manager. However, the two couldn't reach an agreement until April, and the new benefit plan won't go into effect until Jan. 1, 2000. The resulting plan scaled back Citicorp's benefits and relies more on stock options, while cutting costs in the short term. Reed says that putting the system together took a lot of work on his part. Reed says he felt a moral obligation to examine even the most minute details of the plan. "I spent four months, putting zillions of hours into this," Reed says.

In addition to disagreements, having co-heads has been time consuming. For example, Reed recently initiated a strategy session on Japan. "I said, `Hey, Sandy, we have a lot of money invested in Japan, but we don't have an integrated business plan,"' Reed says. "It may have been the best meeting Sandy and I have done together. We really Mutt-and-Jeffed it very well." But the meetings stretched over three days.

CACHET CLOUT. Citigroup began as a glimmer in Weill's eye back in February, 1998. Weill courted Reed and pitched him on a merger of equals. For Weill, it was a no-brainer. Travelers, which was almost entirely a domestic company, lacked Citi's cachet, clout, and depth of experience everywhere from Brazil to Bombay. Citicorp, with $23 billion in 1997 adjusted revenues, had the biggest credit-card business in the world and retail and corporate banking operations.

The megamerger appealed to Reed as well. First, Travelers, with $37 billion in revenues, offered Citicorp new distribution channels through Travelers' 10,600 Salomon Smith Barney brokers, 28,000 Primerica Financial Services reps, and 11,800 Travelers Life & Annuity agents. Further, Reed, Citi's CEO since 1984, had failed to build a management team that could cut through Citi's entrenched bureaucracy. Travelers had better managers--or as Reed put it, good DNA. "I had been frustrated in trying to get greater operational disciplines into the old Citibank," says Reed. "I felt the merger would help me in that quest, and it has."

ROCKY START. The huge deal would be both men's central legacy, but Weill was especially euphoric. The dynamic between one of banking's most respected names and the more mundane Travelers was best summed up at the Apr. 20, 1998, Travelers annual meeting at Carnegie Hall. A shareholder took the microphone and said that Weill must feel as if he had just asked supermodel Elle MacPherson out on a date. And instead of turning Weill down, MacPherson asked him if he wanted to spend the weekend with her. Weill responded with a grin.

The major catch to the deal: Weill and Reed had to share the top job, since neither wanted to step down. And unlike every one of the dozens of acquisitions that Weill had done, this was a merger of equals--a very different animal.

The deal got off to a rocky start. From April until Oct. 8, when the Federal Reserve officially approved it, Travelers and Citicorp were forced to proceed slowly. Another blow came on Nov. 1, when Weill and Reed abruptly asked for Dimon's resignation. The two co-CEOs were forced to choose new leaders for the corporate bank: Victor J. Menezes, who was Citibank president, and Michael A. Carpenter, who had headed a Travelers insurance business.

Dimon's departure changed the whole ball game. Going into the deal, Reed assumed that Dimon was a viable successor. Once it became clear that Weill and Dimon's relationship was troubled, Reed and Weill were left with no successor in sight.

Weill and Reed have little in common. Weill is a Wall Street legend. From a middle-class background in the Bensonhurst section of Brooklyn, he has become the third highest-paid CEO in America, making $167 million in 1998. He is a street-smart, personable, outgoing man who loves nothing more than talking about his latest victory. Wall Street loves Weill for his relentless focus on the bottom line and the stock price. Weill has relied on a group of managers who are personally very loyal to him.

Reed is probably the most visionary banker of his generation. He was born in Chicago but grew up mainly in Juan Peron's Argentina, the son of an American corporate executive. Much of his time is spent alone, reading and thinking. Call his office early in the morning, and chances are Reed will pick up the phone because he's the first to work, says one former associate. It's typical of Reed that he just about revolutionized retail banking while on vacation, dashing off what is still referred to as "The Memo from the Beach."

So just what happens when a die-hard moneymaker is lashed to a more theoretical executive? And which one is running the show? It certainly looks as if Weill has the upper hand. His lieutenants control most of the operating businesses. Look at who's heading Citigroup's vast consumer business, credit-card, mortgage, and retail banking empire: Robert I. Lipp, the former Chemical banker whom Weill hired. Lipp edged out his co-head, Citibanker William I. Campbell, who retired in April. Reed had brought Campbell in from Philip Morris Cos. Or consider that while Travelers manager Thomas W. Jones and Citicorp manager Peter Carman are co-heads of SSB Citigroup Asset Management, it is Jones, a Weill hire, who is on the management committee. And finally, Weill's son, Marc, who heads Citigroup Investments, is on the management committee.

Weill is also transforming the culture of Citigroup. For example, Joseph J. Plumeri II, who headed Primerica Financial Services, a consumer finance company with part-time salespeople selling term insurance to lower-income families, is now in charge of Citibank's more than 1,100 branches. And Plumeri is getting results: Citibank's earnings were $75 million in the first quarter of 1999, up from $25 million a year ago. "When you put companies together, it is a disruptive kind of thing," says Weill. "It becomes something that begins to work if and when people understand what you're doing and if, in their eyes, it makes sense."

Weill has also brought in the religion of stock options. This year, 33,000 Citigroup employees were awarded founders' stock options, increasing the number of Citi employees who own stock. Further, the top 70 managers at Citigroup have agreed that they won't sell 75% of their Citigroup stock until they retire.

But at the board level, Reed may have the edge. First of all, he is the younger man by six years. Second, Weill is no longer playing with his Travelers board, with its insiders and loyalists. The board is now dominated by blue-chip CEOs from AT&T's C. Michael Armstrong to Monsanto's Robert B. Shapiro to Chevron's Kenneth T. Derr. "The board now is not a Sandy Weill board. Citi directors are much tougher," says a former Citigroup manager.

A senior Federal Reserve official said that the Fed is aware of talk that Reed might leave the bank but is not uncomfortable with Weill. However, the official said the Fed sees Citigroup as a regulatory challenge because it's "an entity unlike any other we've ever supervised." For example, the Fed official said there was concern about the impact of the culture of the insurance business on banking practices. And, according to the official, "There has been a lot more upheaval and fractiousness than we expected."

The bottom line is that Weill does not want to go anywhere, while Reed is giving mixed signals. "I think John's view is to find a successor and move on. Sandy's view is `carry me out in a box, toes up,"' says one former Citigrouper. Reed says any discussion of the topic has to be put off until Citi delivers on his checklist, hopefully by December. At that time, Reed says, he would be able to rethink his role. "You are at a checkpoint-restart," meaning it is time to decide whether to start a new checklist, says Reed. "Then you say, what's good for the company?"

There's no question Reed has interests outside business. On the day he sat for an interview with BUSINESS WEEK, Reed had just given a speech to a group in New Jersey on the subject of what will happen in the next 100 years. And in conversation, Reed ranges far and wide, mixing insights from the sciences with snippets of metaphysical poet John Donne and references to sports. "I have lots of other interests," Reed says. "I have lots of things I would like to do--none of which I am currently doing."

But Reed also leaves the impression it will be hard for him to leave. "At some level, I'm a Calvinist," he says. "The worst adjective that could be applied to me, in my own value judgment, would be irresponsible. Not meeting your responsibilities is a big sin in the Reed household." And Reed sees much unfinished business. Expanding on the Internet is key to his goal of getting 1 billion customers.

Which leads us back to the Spanish bank and the coin toss. In which case, the appropriate question to ask may be: Anyone care to flip a quarter?

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