Citigroup & Espeed

Citigroup

Citigroup is the world's largest financial institution. Citigroup stock is trading around $37 down from $53 just a few months ago. Citigroup's shares have drastically underperformed those of its peers since CEO Chuck Prince took over in 2003. This reality has led to increasing pressure on management, specifically Prince, to improve returns. Calls for the company to break itself up in order to increase shareholder value have thus far been ignored by management. Instead Prince has highlighted his own plan to help reinvigorate growth at the financial behemoth. Under new CFO Gary Crittenden, the company has outlined its own three-point plan that includes improving returns on capital, managing expenses and investing in higher-growth business. The first part of this plan was the announcement that Citigroup would cut 17,000 jobs as part of a three-year plan to save $4.6 billion in expenses. (Mara Der Hovanesian , 2004)

Some stockholders believe if the company is successful in turning things around, it could again see the premium price-to-earnings ratio it has enjoyed in the past. The stock currently sells for barely 7 times next year's earnings, vs. 12-13 for its peer group. As CEO, Prince inherited a corporate monstrosity whose various parts continue to operate independently. If Citigroup is to reverse its current trend, Prince needs to implement a growth strategy which will lure and retain top talent. He also needs to be intuitive enough to walk away from failing deals. If Prince's plan proves unsuccessful, he should expect to be fired. According to recent press releases, Prince has already announced that he will offer his resignation to the board. (Ray Hennessey, 2007) This action, taken in light of recently renewed fears of additional exposure to the sub-prime lending fiasco and a recent one day stock price decline of over 8%. Prince is one of the staunchest supporters of the company's current international business model and Prince's absence could lead to Citigroup breaking up into several smaller companies. A breakup may create considerable shareholder value.

A relatively cheap stock, Citigroup pays a hefty 4% dividend which ranks in the top twenty-fifth percentile when compare with similar institutions. This large dividend rate may have helped investors and board members accept declining shareholder value. However, at this point it seems that even in view of this fact Mr. Prince may have outlasted his welcome.

Analysis

Lester is faced with an opportunity that is similar to situations which faced Citigroup in the past. The opportunity for exponential growth through merger and acquisition activity does not guaranty profitability in the long term. If Lester chooses to facilitate a consolidation of Avral, TEC, Shang-Wa and Lester they may create initial shareholder value. However, caution should be exercised to ensure that the various corporate cultures, visions and missions are compatible. Without some level of compatibility and focus of purpose, one or more of the assets acquired through a merger could become a greater liability.

eSpeed

Tullet Prebon PLC made a $12 per share bid for Electronic trading network eSpeed in April 2007. The offer, valuing eSpeed Inc. at $350 million was dependant on Controlling owner New York-based fixed-income broker Cantor Fitzgerald cutting all ties with eSpeed. Cantor currently controls 88% of eSpeed's voting rights through a dual-class share structure which prevents minority shareholders from gaining a majority vote. (Jeffrey Goldfarb, 2007) In May minority investors urged Cantor, in writing, to dismantle that structure. Minority shareholders argued that the proposal was in the best interests of eSpeed's shareholders other than Cantor and those associated with it. Shareholders further argued that the deal would unlock shareholder value that has been unavailable to the minority shareholder.

Electronic trading networks, and companies providing them are in demand