The new company-resulting from the eye-popping, boundary-hopping merger of Citicorp with Travelers Group-redefined notions of scale and scope in financial services and touched off reactions and restructurings that will reverberate for years to come. Mergers, mega and otherwise, dominated the financial news. Unveiled within days or weeks of the Citigroup announcement in April were NationsBank's acquisition of BankAmerica, Banc One's of First Chicago NBD, and Norwest's of Wells Fargo. Also in the unprecedented 1998 consolidation wave, Washington Mutual of Seattle finished its march on California by acquiring the once-perennial thrift industry leader, H.F. Ahmanson; efficiency stalwart Star Banc of Cincinnati bought Firstar of Milwaukee; SunTrust of Atlanta made a successful run at Crestar of Richmond, Va.; and overshadowed by the new Bank One in the Midwest, National City of Cleveland acquired First of America of Michigan. Toward the end of the year, the Deutsche Bank-Bankers Trust deal added a multinational dimension. But the Citicorp-Travelers combination topped and loomed over all, reason enough for it to occupy American Banker's annual "pacesetter" spotlight. The merger broke new ground in the convergence of insurance, commercial banking, and investment banking. Its geographical reach-100 countries on six continents-is equaled by few corporate entities of any kind. That expanse and mix of businesses-commercial and investment banking, insurance and brokerage and asset management, credit cards and branch banking-served to advance the debate on financial reform in Congress and challenge competitors in terms of branding, technological prowess, marketing and cross-selling, and the ability to pull it all together in a one-stop shop. It was all very much in character for the co-chairmen and chief executive officers, John S. Reed and Sanford I. Weill, who over their entire careers questioned the traditional thinking that their creation now sets out to topple. Searching for the appropriate words in a yearend interview, Mr. Weill said, "It certainly has been a year where a lot of big things have happened." "I think that we thought about something that could make a lot of sense," he recalled. "It was big. It was different. It's been difficult." The bombshell dropped on April 6 and headlines blared about the $70 billion agreement, then the largest in merger history. (The summer's stock market correction shaved the value to $38.2 billion by the Oct. 8 closing date). "Before it was announced, it would have been viewed as the endgame, as something that would happen five or 10 years from now," said Robert J. Higgins, president and chief operating officer of Fleet Financial Group in Boston. Mr. Higgins and others said the Citigroup announcement electrified their boardrooms. Bankers urgently gathered to ask, What are we going to do to remain competitive? "The future arrived much more quickly than anyone imagined it would have," said Ron Chernow, a historian and chronicler of financial and industrial dynasties. "It was a quantum leap," said Mr. Chernow. His most recent book, "Titan," is about John D. Rockefeller Sr., whose brother William was a key figure in the history of National City Bank of New York, a Citibank forebear. "Everyone sensed that they no longer had the luxury of postponing until tomorrow their efforts to diversify," Mr. Chernow said. "The Citigroup phenomenon forced bankers to concentrate on the future and to wonder if they were going to be prepared," said William T. McConnell, chairman of Park National Bank in Newark, Ohio, and former president of the American Bankers Association. Citigroup essentially redrew the financial industry map for the next millennium. Many executives are predicting an acceleration of convergence and the creation of even bigger, global competitors. "What Citi has been able to create will ultimately be the global model for others," said Edward D. Miller, chief executive officer of Equitable Cos., itself a foreign-owned conglomerate of insurance, brokerage, and asset management. "It was a wake-up call." Bank One Corp. chief executive officer John B. McCoy said his view of the relevance of size changed dramatically last year and had much to do with the decision to pursue First Chicago. "I used to think that it didn't matter," Mr. McCoy said in a telephone interview. "But the smaller companies are finding it harder to compete. Size gives you the opportunity to go out and build your business." The breaking of size barriers only underscores the obsolescence of the banking industry's legal underpinning, said Mr. McCoy. "It is time for Congress to decide quickly what they want our industry to look like," he told the Bank Administration Institute's Retail Delivery Conference in December. Banks "have to get bigger to be efficient. ... If we don't get this legislation soon, we will become irrelevant to our customers." Citigroup may just be big enough to make something happen legislatively. "In many ways, Citigroup crystallized thinking on Capitol Hill," said Samuel Baptista, president of the Financial Services Council, a coalition of big, reform-minded financial services companies. "It created a certain sense of inevitability that reform would come." Citigroup's sheer $700 billion asset size was one of the earthquake causers of 1998, but it gives Mr. Weill no pause. "Size is not a problem," he said, adding that any negatives are far outweighed by the diversity of the new company's business mix and "the strength of the balance sheet." "The deal changed the whole sense of scale and scope in the industry," Mr. Chernow observed. "Increasingly, banks will feel under pressure to operate in different geographies and to offer more product choices." The Citigroup combination "showed the world that this is the direction we're going in," Mr. McCoy said. Which is one reason he concluded negotiations with First Chicago within a week of Mr. Weill's definitive handshake with Mr. Reed. The personalities themselves surprised many observers. They perceived an odd coupling of a brash dealmaker, Mr. Weill, with the contemplative intellectual, Mr. Reed, who characteristically declined to be interviewed for this article. Mr. Weill, in a series of bold acquisitions capped by a $9 billion deal for Salomon Brothers in 1997, built Travelers into a market leader in insurance, brokerage, asset management, and consumer lending. Mr. Reed, after becoming chairman of Citicorp in 1984, steered it adroitly through real estate and international crises and storms of Wall Street criticism. Then, in the 1990s, he successfully reengineered Citibank into a consumer and commercial banking money-making machine of global proportions. Mr. Weill said that is what made the deal so compelling. "No financial company has built the consumer financial franchise that Citi has, or has the ability to deal with major corporate customers around the globe that Citi has," he said. "We manufacture more different types of financial products than any other financial company, and Citi has the biggest global presence of any company." Mr. Weill said cultural differences have been among the biggest post- merger challenges, and they indeed start at the very top. He said his relationship with Mr. Reed has been "better than we could have hoped. We end up coming to similar conclusions with respect to each other's abilities." The differences are obvious to all concerned, which one executive said may be one reason the partnership succeeds. "They are very different people," said this source, close enough to the top to see the two in action. "But they know it. They even joke about it. That's one reason it works. If they were exactly the same kind of people, it probably wouldn't." "His timing is slower than mine," Mr. Weill said of Mr. Reed. "But his knowledge level on a lot of things is far greater than mine. So I think we complement each other a lot." Mr. Weill drew a contrast between Citicorp's centralization-"corporate was much bigger" there-while at Travelers, "a lot of the authority was out in the field and corporate was small and helpful." Cordiality at the top did not automatically filter down. A management shake-up in the fall included the departure of Mr. Weill's longtime protege and heir apparent, James Dimon. The company also admitted that the merger of corporate banking operations was not proceeding well, and said Dec. 15 that 10,400 jobs would have to go. Amid the pressures facing all major banks, the announcement seemed inevitable, but it was in a way counterintuitive. Mr. Weill and Mr. Reed had been insisting all along that their motivations had more to do with revenue growth than cost cutting. Mr. Weill acknowledged that the first months were "not smooth" but insisted that the company was "making progress." "We're working through (the cultural differences) today to come out where we really have to be, to have the kind of structure so that if we're dealing in 100 countries we can do it in a similar way with the same kinds of processes and yet not do it in a way where we stop progress," Mr. Weill said. "I think that we're beginning to get the ship to move in forward gear," he added. Management of morale at a 170,000-employee organization overseen by co- CEOs is just another of the acid tests setting Citigroup apart from all others. "The larger you become, the more difficult it is to manage well," Mr. McConnell of Park National said, echoing the sentiment of many bankers. Mr. Weill said there is still room for specialty firms and community banks: "We are in an industry that will continue to consolidate. But that will continue to birth new entrepreneurial companies that will do things a different way." Before the merger was consummated, Citicorp and Travelers had to endure the market turbulence of August and September. Trading collapsed in the third quarter at Salomon Smith Barney, which had a loss of $325 million and dragged down earnings for the combined company. Mr. Weill said Citigroup is stronger for that experience. "If we weathered the storm before we were together and a storm of that magnitude with all the changes, with all the issues, then I think we're in a pretty good position to do a lot of positive things now that we're married." One of those things is one-stop shopping, a controversial concept because no company has yet been exceedingly successful at it. New York-based Citigroup promises to deliver an array of products through its branches and other delivery channels, including the Internet, that few other banking companies can match, from insurance to credit cards, and from mutual funds to loans. "Offering plain banking products is probably not going to be enough any more," said Mr. McConnell of Park National. "The day will certainly come when our customers come to us and say, 'You need to start offering these products.'" Citigroup is seen as setting a new standard for product diversity. Equitable, for one, applied for a federal thrift charter last year that "will give me the flexibility I need in the event I do decide I want additional distribution capabilities," said Mr. Miller, who had Citibank in his competitive sights during many years working at Chase Manhattan Corp. and Chemical Banking Corp. "Banks are just now starting to see productive results" from cross- selling, said Mr. Higgins from Fleet. "But it is still way too early to reach any conclusions about Citigroup." Mr. Weill said preliminary indications-as in the sale of Travelers insurance to Citibank credit card customers-are encouraging. "If we prove this concept and prove the value of what can happen with a well-known brand on a global scale, you'll see the multiple of this company go to something the industry hasn't seen before," he predicted. Asked if he thinks about other corporate combinations that may follow the Citigroup pattern, perhaps even toppling it from the No. 1 position, Mr. Weill answered, "All the time. But I think that we put the best possible match together." Asset size alone does not make his day; he prefers return ratios. "Would I rather have half a trillion dollars of assets and make $10 billion," he said, "or $1 trillion of assets and make the same $10 billion?" The answer for Mr. Weill will always be on the bottom line.

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