Citigroup as an Investment bank - Research Paper Example

? Finance and Accounting Citigroup as an "Investment bank" Executive Summary Investment banks aid in the underwriting of security deals in the process of raising capital for their corporate clients. In addition, investment bankers provide a myriad of other financial services to make sure the deals meet the entire financial and legal requirements by handling transactional aspects of the deals. Citigroup is a reputable global financial institution with a very highly diverse financial services portfolio providing the services in investment banking in many countries in the world. While Citigroup has both commercial and retail banking sections, the bank also prides itself in having one of the best investment banks in the world, with many of its deals running into billions of dollars each. While retail and commercial banking includes the taking of deposits by the bank, the investment banking sector precludes the taking of deposits, and instead engages in facilitation of transactions and promotion of securities. Citi’s investment bank is among the top ten in world, making over $3.2 billion in fees for the year 2010 (Financial Times, 2010). The group’s investment baking section leads in many regional financial services markets, and has won numerous awards for its investment banking operations. The purpose of this paper is to analyze Citigroup’s investment banking segment. CITIGROUP INC. AS AN INVESTMENT BANK 1. History of Citi’s Investment Banking Operations Citigroup was formed in 1998, after the merger of Citicorp and Travelers in a $70 billion merger (Citigroup, 2012). City Bank’s origin dates back to 1812, which gives the financial institution a 200-year legacy in the banking industry as of this year. Citigroup has since become a world-renowned financial institution with diverse banking specialties. The bank boasts of a vibrant presence in over 100 countries and a workforce of over a quarter of a million employees. The investment banking section of the financial services group accounts for billions of dollars’ worth of transactions, and thrives against a backdrop of brutal investment banking competitors with a global presence in the industry. Initially, the law disallowed the merger of commercial and investment services by a single financial services entity before the year 1998. However, with the timely passing of the Gramm-Leach-Bliley Act at the turn of the twenty first century is what many financial analysts regard as the single most important contributor to the success of many financial institutions such as Citi’s investment banking segments. Primarily, investment banks turn profits by charging fees and commissions for their services (Jobs Digest, 2010). Citigroup offers many investment banking services, which involve underwriting services, issuance of capital in primary and secondary markets, and making debt arrangements on behalf of their clients. The clients include governments, corporations and wealthy individuals and families. The amount of money investment banks make has risen considerably over the last few years. However, many investment banks reported numerous losses that crippled their operations and forced many into merger and acquisition deals and government bailouts during the 2008 global economic crisis. Citigroup reinforced its loyalty with its customers for sustaining the economic blow without a bail out from the government. The crisis in the investment banking sector was mainly attributable to the deals in sub-prime lending deals (Jobs Digest, 2010), which fell into default and made the banks suffer historical and crippling losses. Citigroup lost 35% stake to the state in the heat of the economic meltdown (Jobs Digest, 2010). Citigroup has four major regions: North America, EMEA (Europe Middle East and Africa), Latin America, and Asia. Each of these regions made $544, $1,224, $ 653, $1,253 billion worth of transactions respectively for the year ending 2010, totaling to $3,674 billion. The group is also one of the favorite in an emerging class of investors in the internet segment. In addition, many financial analysts hail the group’s offloading of some of its own stock on the market as a revival of the secondary markets. 2. Deals made IPO Deals Citigroup’s investment banking sector offers underwriting services for its clients who are making initial public offerings (IPOs) of their stocks. Citigroup buys the equity of the company for a particular price, and then sells the equity to investors, cooperate entities, and other investment banks. In the IPO deals, Citigroup also offers advisory services, and charges fees for the services, a field of investment banking that has proven to be hugely lucrative in a market that was hardly popular less than a decade ago. For the accounting year 2010, Citi was instrumental for the handling of the largest Singaporean IPO for the Global Logistic Properties. In Brazil, Citi was able to help Petrobras, a major energy company, to raise $70.1 billion in a rights and follow-on offering deal. The deal helped Citigroup reinforce its reputation as a top IPO services investment banker for the region, a feat that has won the bank many awards, more deals, and much money. Over the course of this year, Citigroup has already offered numerous services to corporate clients in need of IPO deal services, and the year’s prospects look promising for the group. In its strategy to dominate the emerging IPO deals, Citi has made perceptible inroads into the internet IPO industry with the winning of the bid to oversee an $80 million IPO for an online real estate website Zillow Inc. last year alone, internet IPO deals made Citi investment banking sector make a $24.9 million in fees. More recently, Citi has now entered into a deal with Yelp in its plan to raise $100 million in IPO offering. In addition, MCX, an Indian company, plans to raise $135 million in a landmark IPO that had oversubscription of almost 5 times. The world’s top social media site, Facebook, plans to raise $100 billion worth of IPO offering with Citi investment. Secondary Deals Secondary markets deal in formerly issued financial instruments such as bonds and futures. Generally, a secondary market means that a good or an asset was present in the market in the past, but is available for trade once more. Secondary markets are also referred to as aftermarkets. According to a London based firm, which facilitates the meeting of buyers and sellers in the secondary market segments, the secondary market segment of investment banking, has hit a new high in the past few years. Citi has been especially significant in stimulating activity in the industry, with huge secondary market deals over the last few years. Citigroup estimates that over 400 participants currently dealing in the market, an increase from 40 (Institutional Investor, 2011). The market sector grew by a whopping 25% for the year 2010. Citigroup’s secondary market came alive with its sale of private equity amounting to $1.7 billion dollars from its limited partnerships portfolio (Institutional Investor, 2011). The landmark deal, which bore the reputation as a mark to the revival of the secondary market segment, was in collaboration with a French insurance firm, AXA. In another contribution to the secondary market, Citi has now put on offer a $1.9 billion stake in HDFC. Merger & Acquisition Deals Citi investment services extend to the provision of cross-border mergers and acquisition services (Citigroup, 2011). The role of the investment banker in merger and acquisition deals provides the parties involved with enough time to handle other important matters that come with mergers and acquisitions. The merging cooperate entities handle the intricate and all-consuming process of successfully bringing an acquisition and merger to a successful closure. The investment banker on the other hand provides knowledge and business acumen to execute the transactional part of the deal. The transaction services include tender and exchange processing, distribution of offer documentation, preparation of shareholder register, collection of the relevant securities deliveries, tax advisory and reporting, and coordination of cash distribution (Citigroup, 2012). Even today, Citigroup continues to play a key role in landmark merger and acquisition deals around the world. In particular, Citi was the advisor in an M&A deal of Carso Global Telecom by America Movils, a deal valued at $17.8 billion. In the US, Citi was the financial advisor for the Kraft Foods acquisition of Cadbury; a deal that was worth $21.7 billion. Through provision of advisory services, the financial institution has been able to raise billions of dollars in fees, and capital-raising activities required in mergers and acquisitions. Private Placement Deals Private placement deals for the Citigroup fall under the company’s alternative investment segment. Along with private equity, the segment also caters for hedge funds, structured products, managed futures, and real estate deals. The segment in Citigroup’s business portfolio accounts for nearly $60 billion and contributed an appreciable 7% of the group’s earnings for the year 2006 (Answers.com, 2011). Citi boasts of a 45% share of wealthy clients of the Latin and Caribbean region, which explains why the investment banker is the top in the region. For the accounting year ending 2010, Citi’s Asian Pacific market helped its clientele to raise over $160 billion dollars from international financial sources. In addition, through its Citigold Private Client wealth management program, the financial group handles assets worth between $1 and $10 million. During the year 2010, Citi made a $3.5 billion bond issue for BP’s Plc. Additionally, the bank made over $850 billion in deals for its European, Middle East, and African regional bloc in over 600 transactions. In the Latin and Caribbean region, Citi was able to help in the raising of capital exceeding $54 billion dollars from the international capital markets. Citi also aided the Jamaican government manage $7.8 billion worth of debt, a deal that was instrumental in bringing stability to the Jamaican financial base. Also on private placement deals, Citi was an important player in the restoration of Argentina’s government with private credit providers, a move that lowered the government’s external debt obligation. The deal was worth 12.3 billion, and Citigroup took a largely advisory role. Citigroup also helped American Insurance Company to sell MetLife in a $16 billion deal. The group also acted as financial advisor to the deal by Williams in its restructuring operations with Williams Pipeline Partners. On related advisory role, Citigroup was the only advisor for Hewitt Associates in its acquisition of Aon Corporation in a deal that was worth $5 billion. 3. Deals Sizes The investment banking section of Citigroup handles numerous mega-sized deals mainly worth billions of dollars. Although the deals occur in hundreds every year for every specific region, they each involve huge sums of money and few big clients. For instance, the Europe, Middle East, and Africa account for nearly a trillion worth of transaction deals for the investment banking section of Citibank. Citi has begun an investment initiative for its individual clients where the investors can put from $1 to $10 million under the management of the Citigroup. The group was also able to raise huge sums of money from multibillion-dollar deals with its corporate clients in many parts of the world. For example, the investment banking operations by Citigroup was instrumental in a $70 billion deal for the Brazilian company, Petrobras. Facebook is about to engage in one of the biggest deals the company has ever participated in, by helping it to raise $100 billion in an IPO offering. 4. Breakdown of Equity and Fixed Income Citi boasts of a competent team of investment managers to handle equity and fixed income investments. Citigroup’s investment banking portfolio includes equity and fixed income deals, a more traditional banking service. The banking institution offers advisory and management services to many clients through its equity and fixed income managers. Equity contracts accounted for $995 million worth of the investment banking segment. Equity contracts consist of currency swaps, futures, and forwards, written options, and purchased options. In the Asian Pacific region, Citi took part in one of the largest equity offerings for a wealth management corporation AIA. 5. Citigroup’s Industry Specialization Citigroup investment banking serves a wide range of customer groups. Many of the clients are corporate structures seeking advisory and financial services for underwriting and mergers and acquisition deals. Citigroup investment bankers also offer private investment services to wealthy individual clients as part of its bouquet of investment banking services. In addition, the bank also offers financial advisory and capital raising services to corporate clients, financial institutions, and governments in many parts of the world. The banks investment segment is highly specialized, in accordance to product, industry, and regional divisions. Although the investment segment of the Citigroup Incorporation forms a separate section of its consumer and retail banking services, its indistinct with some these areas of financial services in many respects, a trend that is becoming highly common with many banks, which are merging the growing sector of investment banking with traditional banking to reach a larger client base. 6. Syndicate Participation In syndicate deals, investment bankers come together to sell securities. A syndicate or a purchase group is an agreement where one of the members of the group, the originating house, handles the syndicate transactions (AllBusiness, 2012). In Chile, Citi helped raise $1.5 billion in a dual-tranche offering, in a joint landmark deal. In a syndicate deal in the US, Citi helped to raise $28 billion worth of financing for the American automaker, General Motors as a joint bookrunner. In America, Citi was able to participate as an originator for syndicate deals worth $6 billion dollars. Citi was one of the lead banks in a deal to offer to the public $190 million worth of stock due to its familiarity with the internet IPO offerings (Wall Street Journal, 2012). For the accounting year ending 2010, Citigroup made $658 million worth of origination deals. Citigroup is involved in many syndicate deals with other large players in the industry, which has enabled the financial group take part in some of the biggest deals in history. 7. Lead Underwriting Participations Citi is the top investment banker in Latin America and Caribbean, where its presence is formidable in 24 countries in the region. Citi was responsible for 59 underwriting deals in the region in the year 2010, worth $13.2 billion (Global Finance, 2011). At the start of last year, the bank was a major underwriter for a $6 billion deal, the largest deal ever placed in international bond market in an emerging market. Another growing prospect in the sector is in the internet initial public offerings. Citigroup already has a glowing reputation for its understanding of internet IPO offerings business. In a $100 billion dollar deal, Citi is in a prime position to be part of the financial institution that will help Facebook in its latest stock offer. Citi also participated in a joint underwriting deal for Microsoft when it was raising $4.7 billion in senior unsecured notes and $1.3 billion in zero-coupon convertible bond offering. 8. Fee Type Breakdown Fees for Citigroup’s investment banking segment come from advisory services and underwriting services for stocks and bonds. In 2010 alone, Citi made $2,977 billion in fees and commissions from its investment banking, in the year 2009, the bank had made $3,462 billion in fees and commissions for its investment banking segment (Citigroup, 2011). Historically, the amount of fees the company has raised has remained relatively stable for the last number of years. In as early as 2000, the company was already raising over $2 billion in fees for its investment operations. Over the last few years, however, the financial services group has enjoyed more success with earnings from fees following its ability to secure deals for many of its regional markets. 9. Conclusion Citigroup has a vibrant investment banking sector, with a perceptible global presence and a good reputation in the industry. Citigroup engages in all aspects of investment banking, and takes the lead in provision of the services in the Latin America and Caribbean regions. Despite the volatility of some of the deals involved in investment banking, especially the sub-prime loans that forced many investment bankers to seek government bailouts, Citigroup was able to bounce back and attain profitability through other facets of the investment banking business. The market presence, and the capital and expertise the company has at its disposal have won it many lucrative deals that have raked in billions of dollars for the financial services group. Although the investment banking has been in operation for slightly over a decade, it is one of the strongest investment bankers in the world, and ranks alongside the top investment banking institutions in the world. After the 2008 global economic meltdown, Citigroup is keen to shed investment options that expose the 200-year-old financial establishment to unprecedented risks in case the incident occurs in future. The bank’s strategy is slowly transforming, and with financial ‘rationality’ is gravitating towards safer traditional banking operations to help keep it safe from adverse economic turbulences in the future (Citigroup, 2011). Citigroup enjoys favor with many corporate establishments wishing to make deals that require advisory and underwriting services. The prospects for the future hint at a lot of promise, especially with the growth in globalization, which is causing the development of more internet companies. The banking services for the group have helped it secure many big deals involving internet companies, a trend that is likely to persist. In addition, Citi’s plans to participate in the secondary markets as it offloads some of its stake in its lower priority subsidiaries has made a significant contribution to the group as a whole, and boosted its success in the investment banking activities. References AllBusiness. 2012. Business Glossary: Syndicate. AllBusiness. Retrieved on February 27, 2012 from http://www.allbusiness.com/glossaries/syndicate/4946704-1.html Answers.com. 2011. Citigroup Inc. Answers.com. Retrieved on February 27, 2012 from http://www.answers.com/topic/citigroup-inc Citigroup. 2011. Citi’s History. Citigroup Inc. Retrieved on February 27, 2012 from http://www.citigroup.com/citi/corporate/history/citigroup.htm Financial Times. 2010. Investment Banking Review. Financial Times. Retrieved on February 27, 2012 from http://markets.ft.com/investmentBanking/tablesAndTrends.asp Global Finance. 2011. Best investment banks 2011. Global Finance. Retrieved on February 27, 2012 from http://www.gfmag.com/archives/137-april-2011/11188-best-investment-banks-2011-regional-winners.html#axzz1nbKuPWs8 Institutional Investor. 2011. Citi’s AXA deal underscores secondary market revival. Institutional Investor. Retrieved on February 27, 2012 from http://www.institutionalinvestor.com/Article/ 2844965/Citis-AXA-Deal-Underscores-Secondary-Market-Revival.html?ArticleId=2844965 Jobs Digest. 2010. Overview of the investment Banking Industry. Jobs Digest. Retrieved on February 27, 2012 from http://www.jobsearchdigest.com/investment_banking_jobs /career_advice/overview_of_the_investment_banking_industry/ Wall Street Journal. 2012. Citi analyst Lures Hot internet IPOs. Wall Street Journal. Retrieved on 27, 2012 from http://online.wsj.com/article/SB100014240529702038995045771288 22597068412.html Read More