Citigroup: going for brokerage

28th June 2005

Citigroup has agreed to sell most of its asset management business to Legg Mason.

Citigroup has agreed to sell most of its asset management business to Legg Mason in exchange for Legg Mason's broker-dealer business. This will more clearly define Citigroup as a brokerage/advisory operation and eliminate regulators' and investors' concerns about potential conflicts of interest arising from the firm selling its own funds.

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Citigroup's [C] acquisition of Legg Mason's [LM] broker-dealer business will add 1,354 financial advisors to its wealth management division, which includes Smith Barney and the private bank. In exchange, Citigroup will give up substantially all of its asset management business, which has assets of $437 billion under management, but will receive approximately $1.5 billion of Legg Mason's common and convertible preferred shares, and about $550 million in a five-year loan facility.

Citigroup's decision to sell indicates that the company believes its asset management business is beyond a cure. This division has struggled in the past few years, with net income falling by 34% in 2004, down from $393 million in 2003 to $258 million in 2004, and assets under management falling slightly over the same period. These declines were seen mainly in US operations, which fell by 57% compared to 2004, reflecting increased legal expenses from SEC investigations. In contrast, the Mexican business, which is not part of the Legg Mason deal, fell by just 8%, and is a substantial business, with revenues of $99 million in 2004.

While Citigroup's decision to exit the asset management business to focus on brokerage is somewhat risky because margins are comparatively lower in brokerage, the group is confident that it can boost its profit margins.

Furthermore, with the additional financial advisors, Citigroup's distribution force will be within striking distance of Merrill Lynch, America's largest brokerage. It will have the additional advantage of appearing more independent than Merrill or several of its other competitors, including UBS and Morgan Stanley, all of which still have both brokerage and asset management under the same roof. Indeed, with concerns about potential conflicts of interest by regulators and investors showing no signs of abating, Citigroup's decision to eliminate this risk by focusing on distribution puts it ahead of the game.
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