Skip to main content

Too late for Citi breakup?

Each time Citigroup (C) disappoints investors, the calls go out for breaking up the company. The window for doing that is shrinking.

When Citi announced with great fanfare their expense reduction initiative, led by Bob Druskin, many analysts focused on the staff reductions. Citi was very clear, however, in describing that they are looking at a completely different way of doing business.

The following quote is from the NY Times:

"Many departments will be consolidated or fashioned into utility groups... Instead of serving an individual business, like investment banking or consumer banking, they will provide services for an entire country or region."

This next quote is also from the NY Times:

"Streamlining the company's technology systems is expected to generate an additional 35 percent of the expense reductions. Citigroup said it was planning to cut its 42 data centers in half by 2009, consolidate its mortgage origination systems, and also reap savings from an ambitious five-year project to integrate its consumer-banking systems."

What this means is that Citi is becoming more unified. As each line of business begins to rely on the "utility groups" as described in the first quote, that line of business will now be dependent on Citi for certain kinds operational support. Looking closer at the second quote you can see that lines of business are expected to share and integrate their mission-critical software systems and move their hardware into a smaller number of data centers.

This fabric of inter-relationships will make it harder and harder to extract a line of business from the Citi corporate structure in the event a breakup strategy is pursued. Essentially, a buyer would have to recreate many support services, from HR to call centers to tech support. A buyer would also have to move much of the system hardware out of Citi data centers and make arrangements to acquire the core system software and possibly staff up to support it. The Times article also mentioned how more and more back-office functions are being staffed in India. This implies that a buyer might have to replace staff for entire functions or accept outsourcing companies (and associated contracts) put in place by Citi.

How far will Citi go in creating "utility groups"? This is a strategy that seeks expense control via economy of scale benefits. Citi could logically pursue this strategy to the point where back-end functions like general ledger, loan servicing, billing, etc. are shared across many lines of business. As all customer facing organizations cross-sell Citi products, line of business sales teams
may even be reduced.

As Citi's strategy is implemented it will change the value proposition for the lines of business effected. The pool of buyers will shrink -- only certain companies would be willing or able to take the business to be bought and fill in the pieces that were subsumed into Citigroup. This will tend to reduce the price placed on any line of business to be sold.

Citi is well launched on this strategy but the implementation will not be complete overnight. As the strategy progresses, the window for breaking up Citi gets smaller and smaller.

Disclosure: author owns Citi shares


Popular posts from this blog

Brazil - in a bubble or on a roll?

A couple of years ago, no one recognized the real estate bubble even though it was under everyone's nose. Now, analysts and bloggers are seeing bubbles everywhere they look. One of them, they say is in Brazil whose Bovespa stock market index has doubled in the last 12 months. Does the bubble accusation hold water? I don't think so and here are 7 reasons why Brazil is by no means a bubble economy: Exports have held up over the past year thanks to demand from China for Brazil's soya exports and iron ore. This was helped by the the Brazilian government's drive to improve trade links with Asia and Africa. Export diversification, spurred by a more active trade policy and increased focus on "south-south" trade under current president Lula, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries A "sensible" economic framework has been in place since the 1990's. This has included inflation

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position. This first post in the series starts at the beginning: getting good investment ideas. Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets. As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professional

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas. Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what