Analysis of Effectiveness of Corporate Restructuring - Case Study Example

Corporate Restructuring: A Case Study Overview During the last three decades or so, the global industrial landscape had been completely redrawn by the forces of globalization, deregulation and unprecedented technological development in the field of communication. Companies around the world have responded to the competitive pressures due to these factors through extensive repositioning programs involving mergers, acquisitions, alliances, divestitures and demergers. Downsizing, mergers, takeovers, buy-outs and restructuring have became a reality of today's corporate environment. As Markets are opening and trade barriers are diminishing, organizations are increasingly required to align them as per the global market place environment. Organizations need to be more efficient and effective to ward off the challenges of deregulation and hence increased competition. As a result of increased market pressures, it is unavoidable that organizations analyze and redesign all aspects of their business to remain competitive. Companies around the world are awaking to new realities of an intensively competitive domain and have been undertaking extensive restructuring both at the operational and at the strategic levels. Organizations around the world need to make more decisive choices and take the challenges to leap frog to the next phase of growth. Business portfolios need to be restructured and realigned to assimilate the effects of globalization and deregulation. Companies all over the world are exploring various restructuring methodologies such as Cost cuttings, better customer relationship management, Resource Planning, mergers, takeovers and buy-outs to pursue focused growth. Case: Merger of Citicorp and Travelers Group to form Citigroup in 1999 Citicorp: Citicorp was the descendant of City Bank of New York which was founded On June 16, 1812, with $2 million of capital, later, in 1968 renamed as First National City Bank. Large corporate banking was the core business of Citicorp and was one of the largest banks in the United States at the time of its merger with Travelers Group. Traveler Group: Insurance titan Travelers was founded in 1864 in Hartford, Connecticut. In the 1990s, Travelers went through a sequence of mergers and acquisitions, First with Primerica in 1993 and then Aetna's property and casualty business in 1996. Traveler was the first company in America to insure against accidents and to introduce automobile insurance policy. Making of the Giant - Acquisition In October 1996, Citigroup, Inc. was formed after a $70 billion Merger between Citicorp and the Travelers Group. The Travelers Insurance acquisition added property and casualty, and life and annuities underwriting capabilities to the group. It also brought along the Travelers red umbrella logo, which they applied to all the businesses within the group. One notable exception is Citibank, whose logo is Citibank with a red arc over the't'. The Citicorp-Travelers merger has represented a new era of inorganic growth. Motives behind Merger The merger of Citicorp and Travelers Group took place in 1998 against the prevailing US laws such as Glass-Steagall Act which prohibited the merger of a bank with an insurance underwriter. In year 1999, before the trial period provided by Glass-Steagall Act could end, new law, Gramm-Leach-Bliley Act which invalidated previous law was framed, this validated the merger. The main official motive behind this merger was expanding their product mix, customer base and ", achieve cost savings and synergies" and "to leave a bigger footprint". Restructuring after Merger Weill, then CEO of Traveler Group, proposed a structure of co-CEO's, in order to convince Citicorp to merge, consisting himself and John Reed, CEO of Citicorp. This strategy was believed unworkable by many business research analysts. Former Treasury Secretary Robert Rubin was brought in as a moderator between Reed and Weill . But, conflicts within the company eventually forced Reed to come out of the conglomerate. Later three co-CEO's were inducted into the group. Deryck Maughan and Jamie Dimon from Travelers and Victor Menezes from Citicorp were placed in charge of the corporate and investment bank, while two co-CEO's were placed in charge of the consumer services of the group. Only after 15 months of the merger, the two co-heads agreed, under pressure from shareholders, to separate their roles. In April of the same year, Mr. Reed retired, at the request of the board, leaving Mr. Weill as chief executive. For the moment, Citigroup is an undeniable success: in the first quarter of 2000, it was the world's most profitable company. But the power struggles at the top delayed integration and discouraged "cross-selling" the financial products of one part of the merged firm to customers of another, which was one of the key goals of the merger strategy. It has also prevented the emergence of a strong Internet strategy. Mr. Weill, himself, had admitted that "we have taken longer to get places than we might have." In fact, the costs may have been greater than that implies, not least in missed opportunities. Citigroup's management is now dominated by people from Travelers. The loss of the Citibank talent may yet cause problems, especially outside America. The stellar performance hoped for by the stock market may not happen. The Traveler's management attempted to implement its culture of cost cutting and cross selling into Citigroup which again created cross-corporeal flutter. Citibank retail bankers were instructed to get securities and insurance licensed in order to sell mutual funds and annuities. US retail banking, however, never became a major focus for the company as per plans. Todd Thompson, CFO, explained that "the retail branches are mostly a deposit gathering operation used to fund other, higher return, areas". At the present time, its different consumer divisions are not as integrated as other financial institutions, with each one primarily running as a stand-alone monocline. The corporate and investment bankers were also an issue in integration process. There were differences between corporate bankers and investment bankers, as to who would be the primary relationship point of contact with a customer and authority of new entity. Soon after merger, Citigrouo acquired Associates First Capital, the largest consumer finance company, and Banamex, the largest bank in Mexico. As a part of restructuring process, Citigroup divested almost all its insurance underwriting businesses because, according to business analysts, a poor synergy between the two companies. It sold off its underperforming Travelers Property and Casualty insurance underwriting business which has became a burden on Citigroup stock price due to its earnings being more seasonal and vulnerable to large disasters. It was also difficult to sell this kind of insurance directly to customers since most industrial customers are accustomed to purchasing insurance through a broker. Travelers Property Casualty Corporation, formally of Citigroup merged with The St. Paul Companies in 2004 forming The St. Paul Travelers Companies, Inc. Citigroup retained the life insurance and annuities underwriting business. However, by 2005 Citigroup decided to sell its life insurance underwriting division to MetLife for the same reasons. Citigroup completely exited from underwriting business though it still sells all forms of insurance products. Nevertheless, Citigroup retained Travelers' signature red umbrella logo as its own until February 2007, when it agreed to sell the logo back to St. Paul Travelers, which renamed itself Travelers. Citigroup also decided to adopt the corporate brand "Citi" for itself and virtually all its subsidiaries, except Primerica and Banamex. Value Creation after Restructuring Though changes in corporate strategy are always difficult to implement, Citigroup has managed a major market share. Travelers-Citicorp deal, for $72.6 billion in stock, in all, catapulted the new Citigroup numero-uno with assets of $700 billion and a market cap of about $134 billion. Fig: Operating margin of Citigroup in comparison with competitors (Citigroup 2003) Conclusion Restructuring, indeed, create value for all stakeholders, if carried out a well planned strategy other wise it can back fall also. In case of mergers and takeovers a combined revenue stream is created, which help to shelve off market completion and increase the market share for combined entity. Restructuring process such as cost cutting, downsizing, merger and buyouts help the organization to swiftly adapt to changing market scenarios. References: 1. Richard A. Brealey, Stewart C. Myers, Principles of Corporate Finance, Mcgraw Hill Series in Finance. 2. Andrade, G., M. Mitchell, and E. Stafford (2001): New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, 15(2), 103{120. 3. Baker, G. (1992): Beatrice: A Study in the Creation and Destruction of Value," Journal of Finance, 47, 1081{1119. 4. Bruner, R. (1999): An Analysis of Value Destruction and Recovery in the Alliance and Proposed Merger of Volvo and Renault," Journal of Financial Economics, 51, 125{166. 5. Copeland, T. E., J. F. Weston, and K. Shastri (2005): Financial Theory and Cor-porate Policy. 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