Though the proposed merger of Citicorp and Travelers Group would create the largest financial institution in the world, the new company would probably move quickly to get bigger still.
Travelers' announcement Monday that it will buy a 25% stake in Japan's Nikko Securities Co. shows how the proposed Citigroup plans to maintain its dominance in its chosen businesses via acquisitions. Analysts are predicting a flurry of deals for smaller financial services firms by both Travelers and Citicorp over the next 18 months.
"Any holes that can get filled will get filled," said Stephen Biggar, an analyst with Standard & Poor's Inc.
Both Travelers and Citicorp are in buyout mode across the globe, with special attention to firms devalued by the Asian crisis. Citicorp, for example, dropped an effort earlier this year to acquire a Thai bank, First Bangkok City Bank PLC, but it is considering other deals in Thailand and South Korea.
Though the Nikko transaction, valued at $1.6 billion, is clearly Travelers' deal, its appeal is enhanced by Travelers' pending marriage to Citicorp. Access to Japanese markets has been difficult for U.S. companies. But Citicorp is the largest U.S. banking company in Japan, with $20 billion of assets-and a substantial number of existing relationships.
"Citicorp knows who to talk to," said Lawrence W. Cohn, an analyst with Ryan, Beck & Co. in Livingston, N.J. "As they get to know each other, Travelers is going to be drawing on Citicorp's knowledge."
Analysts agree that the Nikko investment is a prime example of how Citicorp and Travelers will work together in other markets.
Nikko, like many Japanese financial firms troubled by the Asian crisis, has not only beat a retreat to its home country but desperately needs foreign capital and expertise in order to survive mounting losses. Travelers was able to provide the capital not only to get a stake in the company but also to combine businesses in a joint venture, Nikko Salomon Smith Barney Ltd.
Citicorp chairman John S. Reed, at a press briefing Monday at the International Monetary Conference in Vienna, said he had been aware of Travelers' talks with Nikko ever since Citicorp and Travelers agreed to their own merger deal. But it was too early to say what Nikko would bring to the proposed Citigroup.
"One way to get turned down by regulators is to assume something is going to happen," Mr. Reed said.
According to analysts, the Nikko joint venture would bring to Citigroup a presence in international investment banking that it would not have been able to secure on its own.
"John Reed was clear that he didn't want to get into investment banking," said Mr. Cohn. Citicorp "didn't have the expertise, and it would have cost them an arm and a leg" to start their own shop, he said.
But soon to be under the Travelers umbrella, Citicorp and Mr. Reed, are- willingly or not-thinking differently.
Not that Citicorp is a slouch globally. Its global banking revenues increased 22%, from $3.6 billion to $4.4 billion, from 1995 to 1997. It's the No. 1 U.S. foreign exchange bank, the No. 3 syndicated lender and among the top derivatives providers worldwide, said Ronald I. Mandle, an analyst with Sanford C. Bernstein in New York.
He called the Nikko deal a "no-brainer."
"The Citigroup deal is about globalization," he said. "Travelers gives Citibank a greater position of strength globally than it had on its own."
Standard & Poor's Mr. Biggar said he is surprised both Travelers and Citicorp would act so fast after announcing their own deal. But "anything that Travelers does to bulk up the operations is beneficial for Citibank."
Gilbert T. Schwartz, a partner at the Washington law firm of Schwartz & Ballen, said the only way the investment could affect the Citigroup deal would be if Travelers wildly overpaid for its stake in Nikko. That is not an issue here because many analysts believe Traveler's Group is getting a great deal, he said.
"This is like bottom fishing," Mr. Schwartz said. "They are getting a real value because the value is so suppressed."
But the Nikko deal has only further enraged some opponents of proposed Citigroup, who argue that the combined entity will be so large that the government would bail it out in a financial pinch rather than risk an economic panic by letting it fail.
To counter this risk, Kenneth H. Thomas, an academic researcher on banking issues, has proposed requiring Citigroup to essentially buy "too big to fail" insurance from the Treasury Department. This would compensate taxpayers for the risk to the federal treasury posed by Citigroup, he said.
"This was bad enough without Nikko," he said. "Now with Nikko, the government's umbrella is being expanded even further."