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April 6, 2008

Citi merger architect calls contract ‘mistake’

by Dave Nixon

Story link: Citi merger architect calls contract ‘mistake’

The milestone merger that produced Citigroup was a “mistake” that failed to benefit the financial services conglomerate’s investors, customers and employees, says John Reed, who masterminded the $166bn deal with Sandy Weill in 1998.

Mr Reed’s remarks arrive days before Sunday’s 10th anniversary of the merger announcement and emphasize the challenges faced by Vikram Pandit, who took over as Citigroup chief executive in December, as he tries to revitalize the company.

At the time of its creation, Citigroup, which united Citicorp, Mr Reed’s bank, with Mr Weill’s Travelers insurance and brokerage business, was hailed as ushering in a new age in finance by creating a single store for consumer and corporate customers.
In an extraordinary interview, Mr Reed said it was uncertain whether the company’s model or its management deserved the greater allocation of responsibility for its problems. But he said Citigroup turned out to be a “sad story”.

“The specific merger transaction clearly has to be seen to have been a mistake. The stockholders have not benefited, the employees certainly have not benefited and I don’t think the customers have benefited because our franchises are weaker than they have been.” Mr Reed said.

Citi’s shares have dropped over half their value in the past year and it has been required to raise $30bn to support its balance sheet in the wake of the subprime disaster. Once minor rivals such as Bank of America and JPMorgan Chase are now worth more.

Mr Reed, who left Citigroup in 2000 after losing a boardroom conflict with Mr Weill, has been speaking frequently to Mr Pandit, who replaced Mr Weill’s former protégé, Chuck Prince, as chief executive, people close to the company say.

Citi insiders say Mr Reed has advised Mr Pandit as a minimum to mull over spin-offs, such as Citi’s international consumer arm.

Mr Reed declined to comment on such issues, but said Mr Pandit would have to rebuild Citi’s managerial culture.

In a thinly veiled condemnation of Mr Weill, Mr Reed said Citi’s problems began a few years after the merger. Mr Weill rejected Mr Reed’s views and said Citigroup’s model had been a victory.

Mr Weill noted that Citigroup’s share price had risen in excess of 160 per cent, outperforming large companies such as General Electric and Berkshire Hathaway, between 1998 and 2003, when he stepped down as chief executive .

Don Callahan, Citi’s chief administrative officer, defended the merger, saying it had “revolutionised” the financial sector.


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