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The competition in the business arena has been very stiff and complex.  In this regard, the organization must be able to utilize a strategy and management system that will enhance the performance of the business so as to outgrow its rivals (Pearce & Robinson, 2000; Thompson & Strickland, 2003). In the light of this, there are certain ways or techniques that can be considered in order to emerge and continue to be competitive within the market place. One of this is the consideration of the concept of merger.


Merger and acquisitions activity in the financial sector has been one of the major vehicles in the transformation of a key set of economic activities that stand at the centre of the national and global capital allocation and payments system. It can therefore be argued that the outcome of the M&A process in terms of the structure, conduct, and performance of the financial sector has a disproportionate impact on the economy as a whole.


According to Boltzmann (1994) a merger happens when two firms combine their practices in order that each gains a new area of expertise. The end result is a broader range of services and talents for the combined firm’s clients. The main goal of this paper is to analyse how merger can help Citigroup and Travellers group to achieve sustainable advantage. In addition, this will also provide the internal and external drivers that lead to merger and to determine the strengths and weaknesses of merger.




In the rapidly changing and improving companies and businesses, individuals at all levels are also increasingly called upon to demonstrate the ability think strategically.  As the business wants to expand abroad, there are certain tasks that need to perform.  Businesses grow in two distinct ways; by natural so called ‘organic’ means, or by a merger. The merger route is appropriate when growth in traditional products and markets is restricted, due to market size or share, for instance, or when a higher level of growth in turnover is needed, for whatever reason. However, starting up or acquiring businesses outside of current markets and products diversification is an excellent way to strengthen a company (Kotler, 1983).


Mergers increased exponentially in the 1980s and are expected to continue at a strong pace in the 1990s and into the next century.  Most mergers are premised on the belief that the combined company will have greater value than the two companies alone.  According to Maris and Marks (1992), most companies executing mergers have done a reasonably good job sizing up the economic and financial characteristics of the takeover.  Typically, the dealings are led by the two companies’ top executives, some directors, investment bankers, lawyers, and third parties close to one or another of the firms.


Their primary concerns are legal and financial – how much a company is worth, what terms to negotiate, how to structure the transaction, and how to get regulators to go along with it.  Balance sheets are scrutinized, projections of demand and capacity are studied, and cost-cutting requirements are at the forefront of consideration.  Most of the analysis concerns valuation and the financial contours of the deal.


Yet the ultimate success of the deal may depend on how well the acquirers manage the difficult organizational and human resource integration issues at their newly purchased company.  For example, sometimes interpersonal conflict can emanate from the top of an organization when key executives cannot agree on a general corporate direction.  More often, interpersonal conflict arises because corporate staff and division managers have differing perspectives on what their company wants (and needs) from a merger.  If these human resource issues are not resolved, they can result in the turnover of key people, people refusing assignments, post-merger performance drops, and morale problems.


Profits and revenues are secondary ventures that could also generate business to compete in the market.  According to Kotler (1983) companies that diversify too broadly into unfamiliar products or industries can lose their market focus. Moreover in US and other parts of the world market, financial corporations also found itself having to respond not only to consumer demand but also increasing globalization and technological advantage.


Company Profile

Citigroup Inc.


Citigroup Inc. is known as one of the fines financial services corporation. The company has approximately 200 million customer accounts with its branches in more than 100 countries.  The history of the company dates back to the founding of Citibank, Bank Hand Lowy, Smith Barney, Bane and Solomon Brothers in 1812, 1870, 1873, 1884 and 1910 respectively.   Citigroup is also recognised as the first financial services company to bring together banking, insurance and investments under one umbrella. The company has many products and services to offer and the most common brand names under the company’s trademark red umbrella comprises of City Cards, CitiMortgage, CitiFinancial, Primerica, Coinsurance, Diners Club, CitiCapital and Private Bank.


Citicorp and Travellers Group


            Citicorp had assets of about $700 billion. It was a global bank with branches in 40 countries and the world’s largest issuer of credit cards, with more than 60 million credit cards. Travellers Group, known mainly for its life and property casualty insurance activities, also owned Salomon, Smith Barney (investments), Salomon, Smith Barney Asset Management, Primerica Financial Services (consumer finance), and Commercial Credit (business finance). Travellers group is known to be a diversified, integrated financial services corporation which is engage in asset management, investment services, property casualty insurance, life insurance and consumer lending the company’s operating industries include Salomon Smith Barney Asset Management, Salomon Smith Barney, Primerica Financial Services, Travellers Life & Annuity, Commercial Credit and Travellers Property Casualty Corp.


Merger between Citigroup and Travellers Group


Merger mania, which can be observed domestically, is gradually becoming an international phenomenon. The open and competitive world markets require large companies with global reach. Recently, many banks follow the general trend of mergers and acquisitions in order to reduce operational costs and be more efficient in the global financial markets. Also, severe competition from brokerage firms, mutual funds, and credit card firms forces them into the creation of mammoth banks with national and international aspirations.


One of the recognized mega mergers was the merger of Citicorp and the Travellers Group in 1998, worth $77.6 billion, formed Citigroup Inc., with a market capitalization of $153.9 billion. In 1998, two major financial organizations Citicorp and Travellers Group announced that they would merge and create Citigroup Inc.


At the time of the merger, the two organizations announced that they would focus on traditional banking, consumer finance, credit cards, investment banking, securities brokerage and asset management, and property casualty and life insurance. In April 1998, before the merger, Citibank had acquired AT&T Universal Card Services. By 2001, the new company was serving more than 200 million customers in about 100 countries. It also has 10 million online accounts.


This merger created the largest financial service company in the world and deals with banking, securities (stocks and bonds), and insurance activities worldwide. The Citigroup is in fierce competition with Merrill Lynch, American Express, Goldman Sachs, American International Group, and Morgan Stanley, Dean Witter in the field of global investment banking.


Internal and External Drivers of the Merger


The merger of these two companies is implemented due to internal and external drivers or forces that influenced each firm to consider the merger.    Merger is defined as the consolidation of two organizations into a single organization. It is said that both partners pursue a “strategic fit” or the similarity between organizational strategies (Shelton, 1988) or complementary organizational strategies setting the stage for potential strategic synergy. Hence, it can be said that one of the internal drivers of this merger to establish a strategic management system by integrating the business strategy of Citicorp and Travellers Group into one and unique strategic management for Citigroup Inc.


Citicorp and Travellers Group are global companies, which mean that these companies must be able to use strategic management to ensure that it will survive in the stiff competition in the global arena.  As part of its business strategies, the company used the concept of merger.  The main motivation behind merger n activity implemented by these two companies was to form a financial industry that will be able to adapt to globalization trends in financial and economic aspects.


In addition, the internal driver was to improve the profitability of the company by merging with another company’s products, markets, customer base, manufacturing efficiencies, assets, and R&D facilities, or by simply eliminating some of the competition. The hope is that the combination of the firms will improve the operating efficiency and profitability of the companies involved.


Another internal factor that can be considered why Citicorp and Travellers Group used merger is to be able to establish a competitive position or advantage in the global market environment. Through mergers the company may expand its business portfolio to be offered to a vast number of consumers. Hence, if the company would merge together, the company may be able to offer more innovative products which may help the company gain competitive advantage for other competitors.


On the other hand, the merger was also initiated due to some external factors in the current banking market are globalization and customization, information technology, and increased customer sophistication, all of which have wrought massive changes in the competitive environment of banks.


When Citicorp and Travellers announced their merger in 1998, it was clear that this was not supposed to be a cost-driven deal, but rather a revenue-driven transaction. With relatively limited overlap in activities and markets, there was less duplication and, as a result, less cost takeouts that were likely to occur. Indeed, Citicorp COE John Reed and his counterpart at Travellers, Sandy Weill, did not emphasize cost cutting in their April 1998 announcement of the transaction. They planned on boosting their share of wallet through cross-selling between Citibank’s 40 million U. S. customers and Travellers 20 million clients. Analysts estimated that the greatest advantage in cross-selling would go to the former Citicorp, which would integrate customers’ account information, including insurance, banking, and credit cards, onto one statement. Facing incompatible IT configurations and the mandate to generate new revenue streams through cross-selling, City and Travellers decided not to follow the traditional absorption approach, but rather to keep their IT systems decentralized to promote the advantage of specialized configurations.


Carlow (2000) said that for banks considering entry into the insurance market, they need to carefully do research on investment opportunities in the insurance market. Investors anticipate that banks will earn the average rate of return, not large profit margins. For insurance companies, the free entry of bank is likely to increase existing and potential competition. The threat of entry, if not the actual entry of banks, will lead to more competitive pricing and/or lower sales volumes.


However, insurance companies will underwrite the sales of the new bank distribution channel are expected to benefit. In addition, Technological innovations and other business forces have destabilized bank markets. Technology widens the gap between winners and losers, reflecting the concept of diverging returns first noted in the Profit Impact of Market Strategy (PINS) study, and it reduces the average profitability of the banking sector as a whole.


The overall profitability of banks has declined over the past 20 years, accompanied by diverging returns. New entrants have had a significant effect on competitive strategies of the incumbents, and also changed the expectations of customers placing incumbent banks in a vulnerable position. The immediate threats are the online brokerage firms such as First Fidelity and Charles Schwab, and the launch of simple bank products by non-financial services organizations such as retailers, telecommunications companies, and large insurance organizations.


The new entrants exploit the fact that bank value chains are being broken up into their constituent parts and the separate activities of relationship management, processing and IT infrastructure, and distribution and risk are likely to be managed across a network of organizations with distinctive skills and competencies. The next wave of competition is likely to come from retail e-commerce companies such as AOL and Amazon.


The non-financial companies have strong advantages over banks because the marketing databases and associated management information systems give them more prospective into customer behaviour and requirements than banks’ information systems allow. Although Citigroup has been well-establish and able to exploit their customer databases to segment markets and they have information on assets, payments, and sometimes investments, they sometimes do not know much about their customers in terms of their buying habits and aspirations.


Jensen (1993) proposes that most of the activities of merging activity since the mid-1970s have been caused by technological changes and supply shocks, which likely resulted in overload productive capacity in many industries.  He argues that mergers or acquisitions activities can be considered as an effective way of removing this excess capacity, as faulty internal governance mechanisms inhibit industries from shrinking themselves.


More specifically merger allow newly merged companies to enter new product and geographical markets this will show acquiring the sources of revenue, as well as new customers; it will also acquire new technologies in support of the prior objective; will reduce costs through economies of scale and scope; increase in the operational efficiency; avoid becoming a target for acquisition or unwelcome merger; and will extend local exchange carriers or embrace for long distance carriers the temporary economic power of major regional or national local exchange carriers to finance expansion..


Urban and Vendimini (1992) stated that alliances involve co-operative agreements between enterprises in which the parties co-operate on an equal footing, such collaboration requires a pooling of human, technological, productive, informational, or financial resources leading to a mutual commitment.


Global expansion and strategic alliances across borders has helped pressure some firms to link with others, it has also meant many new players looking for ways to follow their customers around the world and provide globally-available services to their multinational customers. According to Yoshino and Rang an (1995) a strategic alliance through mergers is able to provide a “trading partnership that enhances the effectiveness of the competitive strategies of the participating firms by providing a mutually beneficial trade in technology, skills and/ or products”.


Strengths and Weaknesses of the Merger



In merging two companies, there are many consequences that should be looked upon to.  It’s up to the companies if the merging will create a new response from the market.  They’ll be the one to make their new company a success of a failure.  There are so many ways for two companies to merge, and one of which is takeover. Takeover of one company to another is one business gets ownership without cooperation from the other (Anonymous, 2005).  Often the corporation that continues to function makes an outright purchase of the property and stock of the others; exchange of bonds, options, and other agreements are also employed by the corporations involved (Anonymous, 2005).


According to Morrison and Floyd (2000), it can be easily said that corporate takeover is a means of survival for companies. Morrison and Floyd (2000) continued that in this new environment, ownership matters, and managerial control stems from equity position rather than relational ties.  The strengths and weaknesses of the Citicorp and Travellers Group merger will be the focus of this section.


According to Rhodes (2002) merger and acquisition will immediately impact the company with changes in ownership, in ideology, and eventually in practice.  In order to have a more successful expansion, the company should provide some marketing strategy for the company in which Citigroup has been able to consider. Hence, one of the strengths of this merger is the diversification strategy imposed by Citigroup right after the merger has been done.


Furthermore, there are three criteria of core competencies which can also be considered as the strength of the merger. These core competencies include superior customer value, business similar in way related to core competency and difficult to imitate or find substitutes for. It seems that the creation of Citigroup through merger has achieved to a certain extend the above criteria in a way that it did provide something different and it was the first bank in the States providing insurance service to clients. Also, different businesses in the firm like credit cards, mortgage, insurance, private banking are similar in way related to core competency. Corporations can also achieve synergy by sharing tangible and value-creating activities across their business units.


The merger between Citicorp and Travellers has already created 109 billions by corporate restructuring, portfolio management. In particular, reported in Business Magazine that as a result of the merger, Citigroup was able to centralize computer systems, finance, human resource, project management, and procurement. The company estimates that this effort saved as much as 1 billion.


In addition, one of the strengths of the merger is its ability to strengthen the competitiveness of the merged company.  Strategic alliances through mergers present an especially attractive avenue for the financial industry since the multinationals will be able to integrate different communications segments quickly, capture a developed customer base, consolidate smaller niches, remove a rival and prevent competition from doing so, and accelerate the implementation of new technologies with combined resources.


Merger became the dominant methods of consolidation and the primary objective was to control assets (assets during those days were the newly invented machinery and equipment, and plants and productive capacity since the economic driver was scale and efficiency of production), and the best way to control assets was to own them (Trondheim, 1998).


In addition,  mergers enables the surviving entity to combine assets and activities, substantially lower costs, and become a strong competitor-banks merge and close branches, credit companies merge and move down the scale-economies curve; manufacturing companies merge to combine facilities, increase scale economies, and spread the cost of R&D over volume; companies merge to improve the economics of the supply chain-and in all cases, integration of physical assets is vital in achieving the economic objectives of the combination (Trondheim, 1998).


In the company given above, the advantages brought by its implementation of merging: 1) Establish a base. Obtain a going concern in a particular location.  2) Establish a niche because of the expansion of products offered in terms of financial and insurance services. 3) Increase productivity and profitability. Increase output with unchanged fixed costs, yielding higher profit and 4) Expand geographic coverage. Through merging the company has been able to establish a competitive position not only in the local market but also in the global environment.


On the other hand, merging offers the above advantages and additional ones, such as: 1) Succession planning, which is a way to secure retirement through new ownership. 2) Reduced work level: a way to share responsibility among more people and 3) Security of a larger organization. Through this, Citigroup Inc. can be able to cope with larger competitors. Merger can create or enhance strategic assets as well as distinctive capabilities. Furthermore, Kay (1993) stated that merging with other businesses can sustain exclusivity, or maintain the value of a competitive advantage, if they inhibit entry.




The above discussion provides the advantages or strengths of merger. However, these strategies also have its weaknesses or disadvantages.   A merger can sufficiently transform the structures, cultures, and employment prospects of one or both of the firms such that they cause organizational members to feel stressed, angry, disoriented, frustrated, confused, and even frightened. For the individuals involved, these feelings can lead to a sense of loss, psychosomatic difficulties, and marital as well as personal discord. Yet, what is often overlooked is that M/A’s not only disrupt the lives of individuals but inevitably destabilize the organizations involved as well.


Inter-firm consolidations often precipitate lowered employee commitment and productivity, increased dissatisfaction, high turnover, leadership and power struggles, and a general rise in dysfunctional behaviours such as sabotage. In addition, another disadvantage that merger and acquisition may bring within the company is the tendency for the company to not give enough focus or attention to its products because of many products that it offers in the market.  In this manner, the company may not have that assurance of sustaining the competitiveness of other products.


Another weakness can be attributed to the cultural context. The consequences of culture become particularly apparent in cross national operations, mergers, and acquisitions, where not only different organizational cultures but also organizational cultures rooted in different national cultures meet (Very, Libation & Caloric, 1996; Schneider and Demeter, 1991).  When organizational members from diverse cultures interact and, especially, when one culture is required to adopt the methods and practices of the other culture, disruptive tensions emerge.


These have been described in terms of the concepts of “acculturative stress” or “culture clash” (Very, et. al., 1996). The conflicts mostly result from the introduction of new management methods that are incongruent with the values underlying existing practices (Wilkins and Ouch 1983; Schwartz and Davis, 1981). An organization’s culture determines the ability of out-group members to perform within the organization. Individuals from minority subgroups face obstacles from prejudice, discrimination and stereotyping. Prejudice is a bias and prejudgment of someone on the basis of some characteristic. It may be a positive or negative inclination. Discrimination is behavioural bias toward a person based on the person’s group identity.

Reid (1988) lists three sources of prejudice and discrimination: (1) intrapersonal factors resulting from authoritarian personality, aggressiveness, low tolerance, (2) interpersonal factors such as perceived physical attractiveness, communications proficiency, and legacy effects from the history of intercrop relations, and (3) societal reinforcement factors such as laws, books, or media influences. Minority group size may determine the level of discrimination. Research suggests that majority group members tend to increase levels of discrimination against minorities when the percentage of representation increases beyond a certain, relatively low threshold.

Degree of Merger and Acquisition to ensure Sustainable Growth


Merger has been recognised to be one of the strategic ways in business operation growth and expansion.  In line with the strategy of Citigroup Inc., it can be said that the used of merging have been able to provide the company a more comprehensive, efficient and effective ways to have a sustainable company growth. Mergers and acquisitions allow the company to grow both internally and externally because through mergers the family of the company has increased, not only in its local operation but also in global environment.


Further, through the effective used of merger, Citigroup is able to gain competitive advantage among its rival companies. Competitive advantage only arises from establishing differentiation.  According to Strategic Chronicle (2002) the more competitors stake their strategic thinking upon being the lowest price producer or delivering the highest quality, the more they start to look alike in their marketplace, thus losing their competitive edge over one another.  In meaning, competitive advantage arises out of a meaningful differentiation from one other player in the market.  It is better to understand that developing a successful strategy in standard cycle market proves to be relatively simple for other companies.


However, if looked at too simply, a company will choose a strategy that is too narrow or too broad based on the other factors of choosing a strategy. Determining which customer needs to satisfy is an area where choosing the incorrect strategy can result in a decreased competitive advantage. Hence, with the merger of Citicorp and Travellers Group to form Citigroup Inc., the company has been able to produce unique products in line with financial and insurance services that suit the needs and demands of their respective consumers.   Moreover, through merger, the company had been able to gain a competitive advantage by making their product readily available in different parts of the world and always unique compared to other financial and insurance services.


Since the company, had gain different ideas on different kinds of financial and insurance products or services demanded by their customers, the company had also been able to diversify it products and established better brands which are mentioned above. It can be said that effective merger is the key factors for the success of Citigroup.  The company’s merger and acquisitions strategy allows the whole organisation to perform better in the marketplace.



The size-strategy model is a powerful framework for analyzing bank markets. However, as Citigroup become more virtual, it may need to be amended. For example, a small bank can achieve scale economies by outsourcing agreements with a large transaction bank such as Banc One of Ohio or BAN Ammo. It can then combine this scale economy with superior customer relationship software and sophisticated links to the money markets. A small bank can therefore focus on the gateway with the customer and can deliver products or fee-based services from a portfolio of product offerings actually managed by other financial service organizations. It is then possible for focus banks to achieve the benefits of size without asset ownership. The compound growth rate of new entrants in Internet banking also suggests it may be easier to grow Internet market share rather than acquire it, which makes established brands and high levels of assets of less value than on the high street. The strength of Internet brands such as Egg, Smile, AOL, and Amazon also raises the possibility of Internet brands transferring to the high street. This may be easier to achieve than high-street brands moving to the Internet. Banks have very short time periods to establish their presence, probably less than two years. If they do not react they are at risk of being overtaken by new entrants, which in terms of market capitalization, if not asset size, will be juggernauts in their own right.

Also, companies have to understand that growth does not occur naturally because you add up the sales of two companies that were separate before the merger. Growth is triggered when the right merger partner is found after a careful search and when the new company does much more than exploit efficiency synergy. Also, it is important to notice that the economies of scale that Citigroup is enjoying may soon reach a point of diminishing returns because of foreign cultures’ clash, complex product and service line etc.

Creating a successful merger between two companies used to be concentrating on logistical planning and operational integration. Today, dynamic and future-oriented process by corporate leaders seems more essential and Citigroup has been doing a lot of work on future planning by setting new growth strategy including investing easily in the consumer business, capitalising on fast-growing international markets, building up the corporate investment banking and restoring Citigroup’s reputation.

The Five Point Plan which was implemented on 1st March, 2005 which aims to make changes within Citigroup for clients. The plan includes expanded training, enhancing focus on talent and development, balancing performance appraisals and compensation, improved communications and lastly strengthened control.

Citigroup will be big and powerful if they successfully implement the above plans which will result in better financial performance and changes in their organisational culture by human resources development and penetrated the global markets by expansion of distribution channels (Direct and remote sales channels) and by enhanced online service. The merger with Travellers was generally quite successful in creating an innovative way of delivering insurance products and it is also important to be a leader in financial innovation continuously to be successful. But it also will be extraordinarily difficult to steer. The current growth of Citigroup in China, Mexico and Russia is quite significant and it is expected that these are the areas Citigroup will focus on in the next ten years. Their corporate advantage of economies of scale, experienced and worldwide employees, comprehensive set of products and services, capital strength and giant customer base will help them to develop in global market presence.  However, it is important to note that over-diversification of product might lead to misallocation of financial resources according to the discount diversification theory. Lastly, with their data hold, they are able to increase the domestic US market within five to ten years but, to a certain extend, icebergs or uncertainties lie ahead.



               Merger, as a corporate strategy of companies, can be examined in two aspects: the financial considerations and the profitability and gains of the company in merging, and the employment issues it generates, specifically, the existing employees of the company before the merger. The inevitability of mergers in the face of the increasing economic competition propelled a bulk of literature addressing the issues and considerations that companies must consider before doing so. In a fast-track economy, many companies are forced to enter mergers or involved in acquisitions in order to compete with the global market. Thus, several companies merge or acquire other companies with the purpose of bringing future financial gains for their companies. At the same time, a merger is also a refuge for company’s failures maneuvering to keep themselves afloat in the market.                 For a long time the trend of merging and acquiring has been happening in the international corporate arena.  Accordingly, worldwide mergers have increased by five folds from 1994-1998 and have fully gained their momentum by 1999. This trend is attributed to synergy —greater productivity and efficiency gained by the companies through combined operations. It is like two competing companies joining forces to become bigger and more powerful companies and probably, to dominate the present market.               In the case of Citigroup, the company used merger to stay in the competitive market and perform better within the marketplace, by providing innovative and new products in terms of financial and insurance services through the ideas that the management gain because of merging with other companies. It shows that without such strategy, the company may not be able to expand its business portfolio and reach more and more customers from local to international market.                  It can be concluded that merging, along with the con