Thursday, June 26, 2008

The Associates - Sandy Weill's greatest miss

People seem to have decided that the merger of Citigroup and Travellors was a failure - indeed the great failure of Sandy Weill's vision.

That may be true - but given that JPMorgan is buying Bear Stearns Citigroup effectively buying Salomon Brothers might just be "prescient".

Anyway - everyone appears to have forgotten the most awful Citigroup acquisition of all time - The Associates.

The Associates (or more correctly Associates First Capital) was the financial arm of Gulf and Western. It was later purchased by Ford - and then spun to Ford shareholders in 1998.

Less than two years later Citigroup purchased it for stock and wound up giving away more than a tenth of Citigroup.

Yes that is right - long term shareholders of Ford who did not sell out now own a large amount of Citigroup - and that is worth more than the residual Ford holding.

You make your money in the stock market often in odd ways.


The history of the Associates is here.


Associates had two main businesses - a leading US subprime mortgage business and a Japanese consumer lending business.

It was the Japanese consumer lending business that most attracted Weill. The press release announcing the merger is headlined about Citigroup growing its overseas consumer finance business. To quote:

"This transaction, which will be accretive to Citigroup earnings by at least $.10 per share in the first year of combined operation, accelerates our consumer financial services expansion globally," said Sanford I. Weill, Chairman and Chief Executive Officer of Citigroup. "In one step, we catapult our international earnings in these rapidly growing segments by more than 40%. We are particularly excited about The Associates' strong presence in Japan, where it is the fifth largest consumer finance company, and in Europe, where it has more than 700,000 customers.

The Japanese consumer lending business however has almost been regulated out of existence - it is unprofitable (having once had an 80% ROE) and Citigroup is trying to close it. They are by repute having difficulty doing so.

In the end the Associates was probably worth less than zero.

Warren Buffett complains endlessly about having given away 1.6 percent of Berkshire for the essentially worthless Dexter Shoe business. I have never heard the top brass of Citi make the same complaint about the Associates - but I have heard it from upper-level Asian Citigroup executives.

That is the true legacy of Sandy Weill.

Resources: For those that don't remember The Associates - this linked press article should be sufficient...

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