New group joins the Euro giants

THE $85bn (pounds 50m) merger of Citicorp and Travelers will create a commercial and investment bank in Europe that dominates currency trading and is one of the top 10 managers of Eurobond sales.

The new company, Citigroup, will have almost 15,000 employees in 20 countries in Western and Eastern Europe, including 13,000 from Citicorp's 500 European branches and about 1,800 from Travelers' investment banking business, Salomon Smith Barney.

To compete with larger and more established European banking and investment banking companies such as Credit Suisse Group and ING Group, analysts say Citigroup will have to succeed in selling the financial products of its two units to each other's customers - a strategy that hasn't always worked in the past. "The merger obviously adds products to each other's line of business," said Ian Poulter, equity analyst with Williams de Broe. "The question is, can they cross-sell them?"

Citicorp and Travelers said on Monday that they would merge to form the world's largest financial services company. Europe will be one of the new company's most established regions after the US.

Salomon, in London since 1971, is trying to build a European equities and corporate finance operation to complement its Eurobond and fixed- income trading businesses. It employs 350 in equities, and handled transactions last year that included the $266m secondary share sale of German tyre maker Continental and the $1.5bn offering of Banco di Roma.

However, the business is far smaller than the European-based equities units of companies such as Morgan Stanley Dean Witter or the new Warburg Dillon Read, which will have more than 700 people in European equities. In advising on mergers, Salomon did not rank among the top 15 advisers on European cross-border mergers and acquisitions last year, according to Acquisitions Monthly magazine. By contrast, Salomon's advisory business in the US ranked fifth in the first quarter of this year with 14.2 per cent of the market.

In the Eurobond market, Salomon Smith Barney ranks 11th over the last five years, handling sales of $82bn in bonds from 1992 to 1997. Citicorp ranked 25th, handling $29bn in sales. The combined company would rank 10th, behind leaders such as Merrill Lynch, Swiss Bank and Credit Suisse.

Citicorp has been in Europe since 1902 and has corporate banking operations in almost every country, including a big business in Germany. More recently it has expanded into Eastern Europe. It is best known for its foreign exchange business, though, which had gains of 42 per cent in global currency exchange revenue in the fourth quarter to $341m. Citicorp will benefit from the addition of Salomon Smith Barney customers worldwide who want European foreign exchange services.

"Citi is the dominant foreign exchange company on the globe," said David Solin, a partner at Foreign Exchange Analytics, a consultant in Connecticut. Salomon "may increase their in-house business, but they are so much bigger than anyone else, the merger may not have a lot of effect globally".

Citicorp has about $57bn in assets in Europe, helping to generate revenue of $3.3bn and net income of $240m in 1997.

The new company will be the biggest experiment yet in whether a merger between a bank and insurance company allows companies to sell more to each other's customers. In Europe, it will have to compete with Credit Suisse, which last year bought Winterthur Insurance, making it Europe's largest banking and insurance company with $600bn in assets.

ING Group also offers banking and insurance throughout Europe, while Deutsche Bank is trying to boost its insurance business by raising its stakes in several German insurance companies.

All three banks also have investment banking operations, although only Credit Suisse so far has an investment bank with a leading position in the US, the world's largest securities market. Citigroup will immediately take on that role through Salomon Smith Barney and will try to capitalise on its pre-eminence among US institutions in Europe.

Some banks, notably Deutsche Bank and ING Group, have experienced problems in selling and their investment banking and corporate banking products to the same customers and have decided to combine the businesses.

Another business Citigroup could expand in Europe is consumer finance, where it could benefit from its position as a top credit-card company in the US, analysts said.

"The biggest long-term threat they will pose in Europe is in the credit- card business through Citicorp," says David Townshend, equity analyst with Goldman Sachs Group. "US companies are gaining ground in the UK and in the nascent European credit-card market."

Copyright: IOS & Bloomberg