Financial Giants Backtrack From the Supermarket Model: American Express and Citigroup disposals show that diversification plans are easier to sell to Congress than to execute

The American financial services industry seems to disowning its own hype. For decades, major financial players fought to dismantle Glass-Steagall restrictions by claiming that their survival depended on selling an unlimited swath of banking, insurance, investment, and myriad other financial products to businesses and consumers. But since winning the regulatory magna carta four years ago, they have been running away from the financial supermarket concept. In the most recent high-profile examples of retreat: American Express Co. said it would spin off its investment advisory, asset management, mutual fund, and brokerage operation to concentrate on higher-return, less-capital-intensive charge card, payment system, and travel businesses. Citigroup Inc. sold its Travelers Life & Annuity unit to MetLife Inc. for $11.5 billion, disengaging from direct operations in insurance to focus on its huge commercial and investment banking and consumer and commercial finance infrastructure. If the ultimately successful pitch to Congress told a good theoretical story, the latest moves suggest that in the real world, extreme diversification costs too much to finance, offers few opportunities for cross-selling, and can stifle value creation. “It’s extremely difficult to cross-sell,” says banking consultant and economist Alan Gart, who notes that few financial giants have been able to master the practice. “The returns have been disappointing for those who have tried,” he adds. “They don’t have the right people who can cross-sell.” Neither American Express nor Citigroup are strangers to restructuring. Amex spun off the Lehman Brothers investment banking organization in the 1990s. Citigroup, which actually took shape prior to the repeal of Glass-Steagall, divested Travelers’ property and casualty operations in a 2002 IPO, and St. Paul Cos. acquired the independent company last year. Given the strategic and financial realties, the Amex and Citigroup moves suggest that other companies that have tasted diversification will be trimming their sails, and that those who haven’t will stay narrowly focused. Amex chairman and CEO Kenneth Chenault pointed to some of the financial problems in maintaining too many businesses during a web cast describing the spin-off of the $7 billion a year advisory unit. The advisory business, which includes a force of 12,000 advisers, is, he said, “both more capital- and people-intensive” than the fee-based card and payments operations and “competes in an industry where scale is increasingly important.” Chenault virtually confirmed analysts’ arguments that the advisory business has been a drag on American Express’s performance, noting that the retained businesses require “modest amounts of capital” and produce returns on equity of more than 30%. He said that with the spin-off, the company would boost targeted ROI to 28% to 30% from 18% to 20% with revenue growth of 8% a year and earnings-per-share growth of 12% to 15% annually. The advisory group, he added, should have better growth opportunities because it can raise its own capital “without the restraints of competing corporate priorities.” “There are relatively few critical strategic linkages between the two business that create a compelling case,” Chenault said. One of the ironies is that even though the advisory business did not buoy overall corporate performance as a subsidiary of American Express, it could become much more valuable as an independent. Gart notes that publicly traded asset management, advisory, and mutual fund peers typically trade at price-earnings ratios in the low 20s. The spin-off was chosen over a sale because the selling price could have resulted in a large tax bill, and Chenault said the chosen option is the “most efficient way to deliver value to our shareholders.” While Citigroup is pulling away from underwriting, it is not washing its hands of the insurance business. The divestiture includes 10-year agreements for Citigroup to sell MetLife products through its Citibank and Smith Barney units as well as through Primerica, which currently markets insurance products. That could become a more widely used model for companies that still want to bridge the various segments of the financial services universe. Copyright 2005 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com