How Citi Fixed Its M&A Business
Global behemoth Citigroup (C) has taken heat from investors upset over its stagnant share price and colossal span. Its size, many argue, has made for an unwieldy mess, curbing profitability. In terms of shareholder returns, they contend, bigger has not meant better.
Yet there's at least one area where the company's conglomerate structure is working to good effect. In the fiercely competitive mergers-and-acquisitions field, the world's largest bank has emerged from the ongoing M&A boom stronger than ever. Once in the middle of the bulge bracket, it's now neck and neck with leaders Goldman Sachs Group (GS) and Morgan Stanley (MS) in the race for market share. The M&A unit's share of the global market has grown from 18.9% in 2004 to 27.1% as of mid-June, putting it within one point of its rivals, according to researcher Dealogic. Its compound growth rate of 12.8% over the last three years is the fastest of any major investment bank.
Citi's sprawl has helped its M&A business benefit from globalization. "One reason we have taken as much share as we have is our ability to commit resources and infrastructure to cross-border deals," says Frank Yeary, global head of Citi's M&A business. Yeary says Citi, which has a market cap of $254 billion, also has benefited from its focus on two other important growth markets: larger M&A transactions, and private equity buyouts.
The 43-year-old Yeary has been an investment banker for more than 20 years. He began his career at Lehman Brothers (LEH) but has spent most of his time at Citi, save for a three-year stint as a senior managing director at The Carlyle Group, where he developed connections that have helped him build Citi's business as an adviser to buyout firms.
Yeary says the upturn in Citi's M&A business began in 2004, after a sweeping internal review of its problems. The M&A business was still shaking off the hangover of the 1990s. Many of its star tech and telecom clients, such as WorldCom, were bankrupt. Former telecom banker and analyst Jack Grubman was enmeshed in scandal. And the M&A business had crashed along with the stock market in 2000, leaving Citi and other banks with a sudden need to cut costs and rethink their strategy.
"A few years ago, coming out of the trough of 2002 and the first half of 2003, we took a strong look at our business, at our core strengths," says Yeary, who oversees 150 M&A bankers. His unit is part of the larger investment bank, which includes M&A and debt and equity fund-raising units.
Toe-to-toe with white shoes
Despite the business climate, Yeary and other senior managers saw growth opportunity. Research showed that private equity megamergers and cross-border transactions were entering an extended boom, and Citi's global infrastructure could help exploit each of those trends. As deal sizes soared, banking clients needed access to many markets around the world, since no single market—even one as large as the U.S.—can absorb all the debt generated by a $30 billion or $40 billion deal. Moreover, multinationals doing cross-border deals required local expertise on issues such as currency, taxation, and regulation. "We saw an opportunity to be positioned as an adviser to the world's largest and most important companies on their largest and most important deals," Yeary said. "If you go back five years, that wasn't our traditional market position."
The effort pitted Citi against the white-shoe banking business long dominated by Goldman Sachs, Morgan Stanley, and JPMorgan Chase (JPM). Goldman and Morgan Stanley, however, deployed their resources in a somewhat different fashion. They invested heavily in building their own private equity, hedge fund, and proprietary-trading operations, while Citi did not. Citi's chief operating officer, Robert Druskin, acknowledged the point on June 20 in a conference call with a Deutsche Bank (DB) analyst: "We have never really had a very effective alternatives business," Druskin said.
But Druskin says Citi's scale and scope can help each business grow. "Having the corporate bank, with a beachhead in 102 countries…it's very helpful. Because you have space, you have infrastructure, you have knowledge of the local markets," he said. "I think there are lots of ways they can work together."
That global capacity helped Citi win several major accounts, Yeary says, citing Citi's work on Phelps Dodge's 2006 bid to buy mining companies Inco and Falconbridge. (Phelps was acquired this year by mining giant Freeport McMoRan Copper & Gold (FCX).) The bank also has represented Endesa (ELE), the Spanish utility that has fielded takeover bids from Spanish, German, and Italian suitors, and is still up for grabs. Citi worked on nine of the 10 largest global deals of 2006, and is on track to pull off the same feat this year. Those transactions include AT&T's (T) $102 billion acquisition of BellSouth, the largest deal of 2006, and Barclays' (BCS) $90 billion acquisition of ABN Amro Holding (ABN), the largest deal to date of 2007.
Big deals keep on rolling
The bets were well placed. Overall M&A activity came roaring back, growing at a compound rate of 41% over the last three years, according to Dealogic. The market is on track to reach $5.2 trillion this year, up from $1.8 trillion in 2004. But the market for large deals worth $5 billion or more is growing more than twice as fast, at a compound rate of 87%. There is some evidence that riskier deals with lots of low-level junk-bond debt are having a tougher time getting funded, but there's still plenty of investor demand for big deals with investment-grade or higher-level speculative-grade debt.
Analysts expect the M&A business to keep growing, even if the market cools. "We believe the robust equity market and strong M&A activity will help drive growth," Standard & Poor's Equity Research said in a June report on Citi. (Like BusinessWeek, S&P is owned by The McGraw-Hill Companies (MHP).)
Citi's lack of proprietary trading may have hurt in recent times, along with a flat share price and a 300,000-plus-member workforce that many analysts consider bloated. CEO Chuck Prince has sought to trim costs, only to minimal effect. In May, Edward S. Lampert, the billionaire hedge fund manager known for investing in distressed companies, took a small stake in Citi, fueling speculation that Lampert's ESL Investments could herald a major Citi restructuring or even breakup (see BusinessWeek.com, 5/16/07, "What Does Lampert Want With Citi?"). Lampert declined comment to BusinessWeek.
But when it comes to the M&A trade, Citi’s financial supermarket approach is confronting the white-shoe rivals squarely—and winning.
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