The Chatter About Citi and Barclays

Both banks are widely believed to be in the mood for a merger. Will it be with each other, or could they have other targets in mind?

By Mara Der Hovanesian and Stanley Reed

Ever since Bank of America (BAC ) and JP Morgan Chase (JPM ) announced their megamerger deals, the markets have been abuzz with talk of what Citigroup's (C ) next move might be. The latest speculation: Barclays PLC (BARC ), Britain's third-largest bank, will be Citi's next acquisition target. Shares of the London bank rose 3.9% after The Guardian newspaper reported Aug. 6 on its Web site that Citi, the world's largest financial institution, is on the verge of making a bid.

It's not surprising that such an idea would surface. Despite the fact that it's summer and the U.S. stock market is in the doldrums, everyone is anticipating that Citigroup will make a move, and when it does, that it will be big. Indeed, Deryck Maughan, chairman and chief executive of Citigroup International, told investors at "International Day," a July 30 Citi-sponsored conference, that acquisitions were definitely part of the bank's strategy to grow globally.


  Under former CEO Sandy Weill, Citi made its name as an unprecedented acquirer of financial companies. While CEO Chuck Prince recently told analysts at a conference hosted by investment research and management firm Sanford C. Bernstein that "we're not interested in doing big, transformative, high-execution-risk, complicated deals," there's little doubt that he is keenly focused on building the consumer-banking business abroad and that Britain is a key market. Fueling the speculation that Citi would make a bid for Barclays is the fact that Chief Executive Matthew Barrett has gone on the record as saying he is open to mergers. Such comments touched off a spate of discussions earlier this year. However, some analysts speculate that the recent scuttlebutt is all wrong, that the London bank might just as well be interested in leading its own deal.

Britain's third-largest bank is cash-rich and has been buying up its own shares of late. "Barclays' management is increasingly confident in their ability to deliver both growth and profitability," says Marc Thomas, European bank analyst with Keefe, Bruyette & Woods in London. "They clearly feel the shares are undervalued and one would have to ask why they would want to sell now. Besides, they would not be buying back shares if a deal was imminent," Thomas continued. Neither Citi nor Barclay's would comment on the rumors.

Barrett recently told BusinessWeek that European banks may be too small to compete internationally and may have to consolidate or face being swallowed by the U.S. counterparts. The most recent round of consolidation in the U.S. could be the catalyst for long-awaited merging of European banks, says Barrett -- especially if U.S. banks find the pickings slim at home. On the other hand, Barclay's leadership team is pleased with the recent growth of the its investment bank and asset-management business and might not want to sell out so quickly.


  Such speculation is also playing out against a worldwide background of increased momentum in banking mergers and acquisitions. Britain's HSBC Holdings (HBC ) will pay $1.75 billion for 19.9% of China's Bank of Communications this month. Two of Japan's biggest banks -- Mitsubishi Tokyo Financial Group (MTF ) and Sumitomo Mitsui Financial Group -- are also in discussions. And Abbey National (ANL ), a British mortgage lender, recently agreed to merge with Banco Santander of Madrid. In all, international bank deals announced international mergers involving non U.S. banks have amounted to 208 deals valued at $38.9 billion so far this year, according to Thomson Financial.

Meanwhile, international banks are moving in on U.S. bank's home turf. In May, Royal Bank of Scotland (RBS ) recently purchased Ohio's Charter One Financial (CF ) in a $10.5 billion all-cash deal, reportedly the largest-ever acquisition of a U.S. retail bank by a foreign buyer.

Citigroup has long had a significant international presence, but it clearly wants to strengthen its position in foreign markets. It has been aggressively exploiting its existing stakes in foreign banks, including Banamex, Mexico's largest bank, and Korea's KorAm Bank. Citi's international business generated $6 billion in earnings last year. Global consumer banking, which accounts for nearly half of Citi's profits, grew 20% in the second quarter, vs. the year-ago period. With results like that, it's easy to see why Citi would be looking around overseas.

Der Hovanesian is finance editor for BusinessWeek in New York and Reed is London bureau chief

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