As it closed in on the acquisition of AT&T Universal Card Services, Citicorp had the rest of the credit card industry contemplating the breaking of a new size barrier.
The two companies' combined card receivables would exceed $60 billion, leaving MBNA Corp. a distant second at $42 billion. Only two other banking companies would be as much as half Citicorp's size.
Word of the impending deal began to spread Wednesday after a report in The Wall Street Journal. Citicorp and AT&T Corp.'s credit card units both declined to comment.
Michael Auriemma, a consultant familiar with the discussions, said the AT&T board met Wednesday but no announcement was made. He said AT&T's $14 billion portfolio, for which Citibank reportedly would pay a $4 billion premium, would be "a great addition" to the banking company's business.
"If Citi does indeed go ahead with this deal, they're acquiring a tremendous platform," said Mr. Auriemma, president of Auriemma Consulting Group Inc., Westbury, N.Y. "They need it at this point. There's not been a whole lot of innovation coming out of Citibank recently."
Aside from gaining an opportunity to extend the economies of scale that are said to be critical in credit cards, Citicorp could also cause some interesting political and structural shake-ups.
Internally, Citicorp's credit card chief, Roberta Arena, resigned this year. Her successor, A. Sami Siddiqui from Providian Financial Corp., took over the North American portion of the portfolio.
AT&T Universal, ironically, has been run since January by Richard J. Srednicki, who spent the previous 13 years with Citicorp, mostly in card marketing. He could conceivably bring back the international management perspective that Citicorp might be seeking; his last assignment for the New York bank was as chief executive of its German consumer subsidiary.
On the industry level, AT&T's predominantly MasterCard portfolio would tilt Citicorp's balance away from Visa for the first time in two decades. Citi has a seat on the Visa board; Mr. Srednicki is a MasterCard director. Citicorp presumably would have to make a choice.
Citicorp, which as a Visa loyalist has been testing that association's Visa Cash smart card, would be gaining AT&T's interest in the competing, MasterCard-controlled Mondex group. AT&T was a "global founder" of Mondex International and owns 10% of Mondex USA. Other shareholders include Wells Fargo Bank at 30%, Chase Manhattan Bank at 20%, and MasterCard at 10%.
David Robertson, president of the Nilson Report, said the AT&T acquisition would be a "shot in the arm" for Citibank.
"It's clear already that an elite class of issuers has been created," Mr. Robertson said. That class is led by Citi at $47 billion of outstandings, MBNA at $42 billion, Banc One Corp. at $37 billion, and Chase at $32 billion. "Then you drop down to First Chicago NBD at $17 billion," Mr. Robertson said.
Donald Berman, president of Cardholder Management Services, Plainview, N.Y., said the "fully loaded price" that Citibank was said to have offered reflected "the decision that it's important for the bank and the franchise to remain the No. 1 card issuer."
Adding AT&T would "hold them well ahead of whoever is No. 2 for a long time to come," said Robert Hammer, president of R.K. Hammer Investment Bankers in Thousand Oaks, Calif.
This year, Mr. Hammer said, $21 billion of credit card receivables have been bought and sold, and there were 22 deals larger than $15 million. Last year, he said, only $7 billion of portfolios changed hands.
"The size of deals has risen at an exponential rate," he said. "First there was Bank of New York at $4 billion, and we thought, 'Gosh, that's enormous.' Then came Advanta at $10 billion, overshadowing that. And here comes $14 billion."
AT&T, which took the credit card business by storm in 1990 with its "no fee for life" guarantee, put its Jacksonville, Fla.-based Universal Card unit on the block in October.
Only a few of the biggest banks were among the supposed suitors: Chase, Banc One, First Chicago, and BankAmerica Corp.
Though AT&T Universal is highly prized for its brand name, its profitability suffered because the fee structure attracted customers who pay their balances in full and do not generate interest income.
Mr. Hammer said Citibank's challenge would be to boost AT&T's percentage of revolvers from 47%-48% to 55%-60%.
Mr. Hammer said the AT&T portfolio presents "a terrific opportunity for Citicorp to take inactive accounts and activate some portion of them."
Pointing up the internal brand battle that could be brewing, Mr. Robertson said Citibank had 23.2 million Visa cards and 14.8 million MasterCard cards at yearend 1996. AT&T had 4.1 million Visa cards and 16.5 million MasterCards, a result of MasterCard's more aggressive cobranding policy in the early 1990s.
Citibank is "not going to shed too many tears if they switch their allegiance from one product set to another," said James Shanahan, a partner at Business Dynamics Consulting of Nyack, N.Y.,
Industry consolidation has brought about other card brand conflicts, Mr. Shanahan said, as when Fleet Financial Group-a Visa bank-bought Advanta Corp.'s card unit. Advanta had a MasterCard directorship, and Fleet hired MasterCard's board chairman, Joseph Saunders, to manage the combined card business.
Mr. Auriemma said Citibank's ownership of Diners Club has proven that the bank "likes to keep its options open." He said Citi would be unlikely to pick one association or smart card system entirely over the other.
Mr. Shanahan said the opportunity to hold part of Mondex turned Citicorp's prospective new property into "more than a bunch of receivables. It's a strategic acquisition."
AT&T has been "investing a lot of time and resources" in electronic commerce, Mr. Shanahan said. He said that Citibank "is committed to being a player in these new fields but hasn't been showing too much in the last few years."
Mr. Auriemma predicted that neither the AT&T management team nor the "no annual fee for life" guarantee would change under Citibank.
"A $60 billion portfolio is large enough to require lots of good talent, and it's a team that has worked at Citi before," Mr. Auriemma said. "You can't just take the Jacksonville portfolio and crash it into South Dakota," he said, referring to Citicorp's card operations base.
