NEW YORK (
efforts at retooling its sprawling business through asset sales may get a boost from the recent resurgence of the M&A market.
A handful of
have been struck in the last few weeks, including
$5.5 billion takeover of
and Japanese drug maker Dainippon Sumitomo Pharma's purchase of
. Also this week,
rejected a $16.7 billion bid by
The recent deal agreements follow bailed-out insurer
American International Group's
successful efforts to sell pieces of its business, part of its own effort to get out from under massive government loans made to prevent its collapse last year. The company last week said that it reached an agreement to sell a portion of its investment advisory and asset management business to a Hong Kong-based private investment firm. Last month, AIG completed the sale of its energy and infrastructure investment assets and said it would sell its Hong Kong-based consumer finance unit.
is also reportedly shopping its Van Kampen mutual fund unit.
As the economy begins to recover, the markets will begin to open up for buyers first looking for more profitable assets, but eventually for distressed assets too, some say.
"A frozen credit market will defrost for the highest-quality borrowers first, which plays well into the hands of Citi -- because anybody who is going to be buying the type of assets that they own is a premier company," says Harlan Platt, a finance professor at Northeastern University. "The evidence we have in the last two weeks suggests that premier companies can in fact gain access to capital and make acquisitions. ... Two to three quarters from now, then even buyers for the bad stuff will surface. But right now there is so much risk and so much regulation."
On the other hand, observers say there may be less motivation for Citi management to sell its more profitable businesses as the economy improves. Plus, the company on Thursday was set to complete an exchange converting preferred shares to common shares, making the U.S. government a 34% stakeholder, and addressing lingering capital concerns about the company.
"The marginal benefit to even selling something at a much better price today than it was three months ago may not amount of a whole lot of beans for them," says John Jay, an analyst at consulting firm Aite Group. "Citi management may be incentivized to hang on in the hopes that something quintuples."
CEO Vikram Pandit has been criticized for not bringing change quick enough to the troubled institution, as well as for his lack of commercial banking experience. The company has been attempting to reshape itself during the worst financial crisis since the Great Depression through massive deleveraging of risk, expense cuts, restructuring of core businesses and management changes -- all taking a toll on its revenue.
The company has been chipping away at divesting businesses in Citi Holdings, its so-called bad bank. Last week, the firm said that it reached an agreement to sell three private label
, which represented approximately $1.3 billion in managed assets.
The group has also inked deals for profitable noncore assets like Nikko Cordial, Nikko Asset Management as well as a joint venture with Morgan Stanley for Smith Barney and some overseas divisions relatively quickly.
But troubled assets still hang over Citi's future. Citi Holdings consists of brokerage and asset management, local consumer lending, and a special asset pool.
The company hasn't had much luck selling off less palatable items, like Primerica, CitiMortgage, CitiFinancial and a "special pool" of toxic assets that has a loss-sharing agreement with the government. At the end of the first quarter, Citi had $235.8 billion of on-balance sheet assets covered by the loss-sharing agreement with the U.S. Government, primarily within consumer lending operations, it said.
John Chrin, the former co-head of
financial institutions investment banking, says while some corporate M&A may be picking up, the deal landscape within the financial sector is "still in a relatively deep freeze" from a lack of buyers.
Citi may be able to sell small assets, or perhaps find buyers for other profitable businesses, such as its Mexican Banamex business or in operations in Brazil. But for the most part "the big institutions are still very focused on their own capital positions and the last thing they want to do is book a lot of goodwill and intangibles" and reduce their own equity, says Chrin, who left JPMorgan Chase this year to become Lehigh University's new Global Financial Services Executive-in-Residence.
Citi said that it "continues to make progress on its strategy and will continue to pursue opportunities within Citi Holdings that create the most value for shareholders," according to the Aug. 31 credit card deal release. As of June 30, Citi Holdings assets have declined 22% to $649 billion reflecting asset run-off and management actions, the company said.
--Written by Laurie Kulikowski in New York.