Citi's New Act
In the modern history of Wall Street, no one has held tighter to power -- or made more productive use of it -- than Sanford I. Weill, who built Citigroup (C ), into the world's most profitable company. But on July 16, the 70-year-old Weill did something he had never done before in a four-decade career filled with more twists and turns than an Alpine slalom course: He agreed to step down as chief executive by the end of this year. Make no mistake, for Weill this is a major concession. However, Weill's surprise move stops well short of retirement and by no means definitively solves the giant bank's chronic succession problem.
For starters, Weill plans to remain as chairman until Citigroup's annual meeting in the spring of 2006. Weill insists that he will not meddle with Charles O. "Chuck" Prince, Citi's CEO-in-waiting, or Robert B. Willumstad, who will move up to chief operating officer. Both Prince and Willumstad are senior Citi managers and longtime Weill subordinates. "I think I'm grown up enough to not get in the way of the authority that they have to have to really be good in what they are going to do," Weill said in a July 16 conference call. "These will be the guys running the business, and they had better not screw up," he added.
However, it is difficult even for many Weill admirers to envisage the famously strong-willed and Machiavellian executive as a passive sort of chairman, particularly when Citi's acquisition of Sear, Roebuck & Co.'s credit-card portfolio -- a $3 billion deal announced on July 15 -- seems to presage a return to a strategy of growth by acquisition, Weill's forte. "If I was a board member I'd scratch my head and wonder if this really isn't just Sandy saying I'm going to give it up, but really keep it..., " says a top Wall Street lawyer. "It's not typical to stay as chairman for three years after you leave. That suggests that he will exercise very substantial influence."
Weill's choice of Prince as his successor only inflamed suspicions that he intends to maintain control. Prince, 53, is known to be Weill's closest friend in the company. Weill recently hosted an engagement party for Prince and also took him and his fiancée -- Margaret Wolff, a partner at New York law firm Skadden, Arps, Slate, Meagher & Flom LLP -- on a Mediterranean cruise on his yacht. Prince, a lawyer who has worked for Weill since 1983, rose through the ranks starting as corporate counsel and all-round fixer, with unquestioned loyalty to the boss. What he noticeably lacks, however, is operating experience. By contrast, Willumstad, 57, is an accomplished financial-services operator who, despite his low-key demeanor, is a more independent-minded executive than Prince and periodically has found himself in Weill's doghouse because of it.
The question then is not only whether Weill will really let Prince be King, but whether Citi's next CEO has what it takes to follow in Sandy's outsize footsteps?
Prince is smart, articulate, polished, and capable of charming most anyone. "He's a good people person -- a better people person than Sandy," says former Securities & Exchange Commission Chairman Arthur Levitt Jr., a partner of Weill's in his early days. But inside the bank, Prince, not unlike Weill, is known as a severe taskmaster who is both admired and feared by underlings. "Hatchet man" is the characterization most favored by his critics.
By most accounts, Prince has acquitted himself well in all of his trouble-shooting assignments, particularly the last, highest-profile one: extricating Citi -- and Weill -- from state and federal regulator's probes into conflicts of interest in investment banking. In April, Citi agreed to pay $400 million of a $1.4 billion settlement involving 10 investment banks. That was a larger penalty than any other firm paid, but Prince appears to have made an unlikely admirer out of New York State Attorney General Eliot Spitzer. "Chuck Prince is a spectacular choice," Spitzer told BusinessWeek. "I spent more hours with him over the last year than he wanted or I expected. I have enormous respect for Chuck -- his intellect and his integrity."
Even so, Prince was considered a dark horse to succeed Weill because of his relative lack of operating experience. For a brief six months last year, he ran Citigroup's emerging-markets operation, charged with cleaning up after losses from one of the recurrent financial crises in Argentina. Says one well-placed source: "He has not proved that he can deal with operations from bottom up, lead the troops, or be strategic." Asked whether he plans to depart in any way from Weill's approach as CEO, Prince replies: "I hope not. I don't think you should look for dramatic changes from the management team."
Team is the operative word here. Upon closer inspection, Willumstad fares better under Weill's succession plan than his COO title suggests. Citi's investment bank will continue to report to Prince, as it has since last fall. But all of the company's other major business units will report to Willumstad, who has run Citi's hugely profitable consumer-banking business since December, 2000. Chief Financial Officer Todd S. Thomson will jointly report to Prince and Willumstad. "In all aspects except officially, Bob Willumstad appears to be the acting CEO, while Prince continues to keep the wholesale investment bank on a short lease," concludes David A. Hendler, an analyst at the CreditSights research service.
For his part, Weill told analysts that he will do whatever Prince and Willumstad ask him to do, but he would "enjoy calling on government officials and enhancing our relationships with different countries." However, Citi already employs Wall Street's ultimate door-opener -- former Treasury Secretary Robert E. Rubin -- in exactly this capacity. Rubin joined Citi in late 1999 after leaving the Clinton Administration.
The stock market's immediate reaction to Citi's succession plan was skeptical. Citi shares closed at 45.52 on July 16, down 2.8%, compared with a 0.6% decline in the Standard & Poor's 500 financial index. "We view the announcement as a net negative," says Michael Mayo, Prudential Financial (PRU )'s senior banking analyst. "A degree of the 'Sandy Weill premium' goes away." In addition, Mayo notes, "Prince is not well-known externally, and following in the footsteps of Sandy Weill is certainly not easy."
During the conference call, Weill's unscripted interactions with Prince and Willumstad unintentionally revealed just how tough adjusting to their new roles will be. At one point, Prince was musing about life after Sandy. "Not to have him come in and nag us and push us and drive us and demand excellence every morning, it is going to be a different world for us, but..."
Weill interrupted. "Why do you think I won't do that?"
"Every other morning, maybe?" Prince responded.
Weill also interrupted Willumstad as he was waxing on about management continuity. "So it is back to work tomorrow to keep doing what we've been doing," Willumstad said.
"I think it is really back to work today," Weill quipped.
"Oh, excuse me," Willumstad said.
Weill's decision to step down as CEO doesn't seem to have been precipitated by an ultimatum from Citi's board or the special succession committee it set up last year. "The timing here was entirely Sandy," says Director Richard D. Parsons, chairman and CEO of AOL Time Warner Inc. Parsons, one of the committee's four members, says Weill announced three months ago that he was ready to set a schedule to shift authority to Prince and Willumstad. "I don't think it will be easy on Sandy personally," Parsons says. "But such is his regard for Chuck and Bob that I believe he will do what he has to do to make it work."
Yet Weill did not so much as mention his plan to Prince Alwaleed bin Talal, Citi's largest shareholder, when he had a tête-à-tête with him in Paris just five weeks ago. "I was looking at something like this in about a year's time," says Alwaleed, who owns about 200 million shares of the bank and has been an unflagging Weill supporter.
Throughout his career, which began in the 1950s as a Wall Street runner, Weill has displayed an impeccable sense of timing. By the time he approached Parsons and other directors, glimpses of blue sky were breaking through the storm clouds that had obscured Citi's future since early 2002. The hard-earned settlement with Spitzer and the SEC was in hand and, equally important to Weill, the fundamentals of Citi's business were strengthening virtually across the board.
On July 14, Citi announced its best quarterly results ever. Earnings from continuing operations hit $4.3 billion, up 14% from a year ago, on an 8% gain in revenue, to $19.4 billion. Citi's net income of 83 cents per share beat the Street's consensus estimates by 3 cents. Just three hours after it released earnings, Citi gilded the lily by announcing a huge 75% increase in its quarterly dividend, to 35 cents, thereby increasing its payout ratio to 42% from 24%. In a lackluster market, Citi's stock spiked by nearly $1 a share to close at $47.13.
"I don't think it's a coincidence that they raised the dividend 75%," says Samuel L. Hayes III, professor of investment banking at Harvard Business School. "He wants to go out with a bang, and this does it in terms of a very tangible signal that goes out to the shareholders of Citigroup." Adds Prince Alwaleed: "This is Sandy looking after his legacy and very deservedly so. And he's telling the market that he is very confident about the future of Citi, otherwise there's no way he would implement the dividend increase."
As a large Citi shareholder, Weill also reaped a huge financial benefit to cushion his eventual retirement, whenever that comes. The annual income on his 22 million shares now totals $31.4 million, up from $17.9 million.
Sandwiched tightly between the dividend hike and the succession plan came the news of Citi's purchase of Sears (S ) credit-card operation. While some analysts are skeptical of this acquisition -- many of Sears' existing accounts are troubled and delinquent -- most are eagerly anticipating bigger and better deals to come. "They're getting the M&A machine going," says Anton Schutz, portfolio manager of the $190 million Burnham Financial Services Fund, which owns 140,000 Citi shares.
CFO Thomson says that Citi is looking to make acquisitions not only in credit cards, but in private banking, asset management, back-office transaction services, and retail banking, especially sizable regional banks. Speculation is rife that the likes of FleetBoston Financial Corp. and Texas Commerce Bank, a division of J.P. Morgan Chase, are at the top of Citi's buy list. Given Citi's enormous size -- it has $1.1 trillion in assets -- these sorts of deals would only add incrementally to its growth. "The transforming deal is no longer what this company needs," says Thomson.
That may be. But Weill should never be underestimated. No doubt, he would like nothing better to retire -- whenever he really does retire -- in the afterglow of yet another colossal acquisition.
By Anthony Bianco, with Emily Thornton, Mara Der Hovanesian, David Henry, and Mike France in New York; John Rossant in Washington; and bureau reports