December 12, 2007

What is in Store for Citi with new CEO and Chairman

Citi has selected Pandit as its new CEO and appointed Bischoff as its new Chairman. The move to break up the two positions speaks to the difficulty of one person to handle both positions at Citi. The other explanation is that may be none of the two newly appointed leaders are capable of handling the two position combined and the breakup is a compromise.

Dividends to stay

The new CEO did not comment on the issue when it came up, and Rubin skated around it, so there is not confirmation of the status of the dividends. That means that they may consider a cut at the board level. That is good for Citi and its shareholders. It is a very cheap way to boost capital and in the long run it will yield benefits.

It does not make sense to keep the dividends where it is; it actually hurts shareholders when the company borrows at 11% and dilute their ownership just to plow it back. And I also do not get shareholders that want their dividends to stay the same, while the company struggles to borrow money and be in a situation where it is under capitalized to earn income.

The breakup of Citi:

Many are calling for the breakup of Citi to unlock shareholder value. Well, a move like that will not be a good one at this time. Typically a breakup of a corporation into two publicly traded corporations is done to unlock value that investors are not seeing or not appreciating. It is done in well run companies with different divisions at varying growth rates. Usually management spins off the highly growing company to shareholders to be free to expand more aggressively and break free from the weight of the more mature divisions. For example, Altria will spin off its International Tobacco division due to its high growth potential from the more mature domestic division. but both companies are being run well and cost efficient and that is the key for successful breakup.

Citi is not well run and it is not cost efficient at all divisions. Newly appointed CEO has set running the business more efficiently as a top priority. All Citi's divisions are run somewhat poorly, so any breakup would result in divisions of need of a fix up, not what you call unlocking value.

Citi needs to address its internal mess before thinking about any breakup. As I said before Citi has a great international exposure that it can leverage to spur growth, however it needs to lean a bit, integrate the great empire well and get a handle on risk management and it will realize value to shareholders.

Photo courtesy of Wall Street Journal

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