Citigroup Shareholders Beware

If you own stocks, undoubtedly you want management teams to feel an obligation to work for the shareholders. This boils down to striving to maximize shareholder value. Of course, attaining customer and employee satisfaction is important too, but succeeding on those fronts will usually aid in boosting a company’s public market value, so these factors go hand in hand.

If you own shares of Citigroup (Peridot does not) you might want to consider what CEO Chuck Prince said in response to a piece in Barron’s over the weekend about the possibility of breaking up the financial services giant. The weekly paper suggested that if Citigroup’s stock remains sluggish, there could be calls for the company to be broken up. The following is an excerpt from a Reuters story published Monday.

“In the article, however, Prince flatly rejected any discussion of splitting up the company into separate units. “Breaking up Citigroup is the dumbest idea I’ve ever heard of,” Barron’s quotes Prince as saying. “You would take a franchise that people have worked almost 200 years to build and break it up into two or three parts, only to see the parts acquired by others.”

Now why should Citigroup investors be upset with this? Within the financial services sector, only insurance companies garner P/E ratios lower than the big, diversified banking giants. Citigroup, along with JPMorgan Chase and Bank of America trade at only 10 or 11 times earnings. Many investors see this as cheap, but if the multiples don’t expand, share price appreciation will only come from earnings growth, which is hard to attain in any meaningful way since these firms are so huge.

The argument for breaking up a company like Citigroup is twofold; to achieve operational efficiencies, as well as a higher public market valuation. On the operations side, smaller firms are easier to manage and can move at a much faster pace in adapting to changing business environments. From the investor perspective, right now all of Citi’s business units are getting the meager 10 or 11 multiple. Breaking up into several pieces, the logic goes, will allow some units to get higher valuations, and thus the entire Citigroup enterprise would be more valuable.

I have seen specific break up estimates on Citigroup that value the parts at between $60 and $70 per share, versus the current price in the high 40’s. By splitting into 4 smaller companies (domestic retail banking, international retail banking, global asset management, and investment banking), Citigroup shareholders could make a hefty profit, perhaps 30% or more. Chuck Prince’s blatant dismissal of the idea doesn’t bode well for investors.