NEW YORK (
's plan to shrink its CitiFinancial consumer lending unit is another indication that large deals involving financial companies are struggling to get done.
The company disclosed late Tuesday
that it would shed up to 600 jobs and close 180 branches in the unit. As part of the restructuring, Citigroup is dividing the business into two segments, one of which will look to originate new loans, while the other will focus on servicing troubled loans.
Mary McDowell, head of CitiFinancial North America, said in an interview with
The Wall Street Journal
that shaving off the loan servicing segment might make it easier to sell the healthier business.
"Potential buyers want to see a business that is growing and has a fair amount of assets," McDowell told the newspaper.
That is not true of all potential buyers. There are plenty of would-be acquirers out there eager to snap up troubled assets on the cheap. Would-be sellers, however, including Citigroup, believe a rebound is on the way and they don't want to miss out on the potential upside themselves. There are other obstacles to big financial deals, such as regulatory uncertainty, a difficult fundraising environment and the fact that many financial companies are still too weak to take on large acquisitions.
But by shrinking CitiFinancial and splitting it into two parts, Citigroup also can justify lowering the price, a necessary move since big financial sector deals are having a tough time reaching completion. As the accompanying chart shows, just four financial sector deals have been announced in the United States so far this year, the smallest number over the same span since 2005. An even more bearish signal can be taken from the fact that those four deals add up to just $6 billion, well below the $18 billion figure in 2005.
That is bad news, not just for Citigroup, but for other financial giants with assets they are looking to unload, like
, which recently saw its $35.5 billion deal to sell its Asian life insurance business to
fall apart amid heavy resistance from Prudential's shareholders.
The dearth of large M&A activity in the financial sector won't last forever. Many financial companies (European ones excluded) are getting healthier, and regulatory uncertainties about how much capital companies will be required to hold or how large they will be allowed to get will clear up eventually. But Citigroup still had $547 billion worth of assets left in its "noncore" Citi Holdings unit at the end of 2009. A pickup in M&A can't come too soon for the banking giant.
A resurgence in financial sector M&A would also give a boost to Citigroup's investment banking revenues, as well as those at other big banks like
Bank of America
Shares of all those banks have been beaten down over regulatory fears in recent weeks. Once new rules are in place, a boost to deal-related revenues will be a nice added benefit to what should be a strong relief rally resulting mostly from the clearing up of a host of uncertainties, affecting everything from rules on derivatives to consumer lending.
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Written by Dan Freed in New York