Citi Ungrouped

Tom Brown has a “modest proposal” to increase Citigroup’s value. Break it up.

I should say up front I was never a big fan of the supermarket strategy that was behind the 1998 creation of the Citi monolith in the first place. Huge scale doesn’t count for much in financial services, for one thing. And in financial services, smaller, focused players tend to outcompete large, diversified ones. That’s why, for instance, community banks reliably take deposit market share from the large national banks. And it’s why the monoline card industry was able to drive all but a handful of players out of the card business. The idea behind Citi was flawed from the beginning—which is one reason the stock’s P/E has eroded steadily for the past seven years.
By contrast, a breakup of the company would be a great strategic move and profound gesture to shareholders and competitors. In our view, a leaner, more focused group of legacy Citi businesses would emerge and be vastly preferable to the current bureaucratic Byzantium. The units would be much more effective competitors as smaller, focused players than they are now. So management can and should admit the obvious: the company is so big that, strictly by the law of large numbers, it can no longer generate meaningful company-wide organic growth. To put matters in perspective, if the company were to grow by 9% annually, net income would have to rise by $1.6 billion in 2006, which is roughly the equivalent of creating a brand-new BB&T. Incremental acquisitions, meanwhile, would have to be huge to make a meaningful difference, and would be tough to execute well (as management has publicly conceded).

Posted by on September 26th, 2005 at 11:50 am


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