November 17, 2010 / 8:22 PM / 9 years ago

DEALTALK-Citigroup M&A rank droops as bailout stigma bites

(For more Reuters Dealtalk stories, click on [DEALTALK/])

* Citigroup ranks ninth in worldwide announced M&A

* Tightened lending, loss of talent led to less business

* Worst ranking since 1999 shows continuing toll of crisis

* Citi says making ‘strategic changes’ to regain footing

By Maria Aspan

NEW YORK, Nov 17 (Reuters) - Citigroup Inc’s (C.N) investment bank has slipped in global dealmaking this year as the receding financial crisis continues to take its toll on the bank and its ability to compete with stronger rivals.

The bank, still about 11 percent-owned by the U.S. government, has fallen to ninth place in the league tables for announced global merger and acquisition business this year, according to data compiled by Thomson Reuters. Citigroup has worked on about $229 billion worth of announced deals, its worst year-to-date performance since 1999.

Deal advising is a highly profitable business that can buoy revenues during slumps in other areas and bring in additional business, like corporate lending.

Citigroup’s shrinking slice of the high-profile M&A industry reflects the lingering effects of the financial crisis that drove the firm into the government’s arms, and the challenges the No. 3 U.S. bank faces as it strives to find a path to sustained profitability.

“You can be the nicest girl in school, but if you get yourself a bad reputation, it can be really tough for you to land a good boyfriend,” said Gustavo Dolfino, senior managing director at financial services recruiting firm Accretive Solutions. “It takes a long, long time to change perception.”

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M&A rankings graphic r.reuters.com/tar55q

Debt capital markets rankings r.reuters.com/qet85q

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Citigroup once relied heavily on its balance sheet to attract deals, by lending to potential deal partners. Even as the subprime mortgage crisis worsened in mid-2007, then-CEO Charles “Chuck” Prince famously said liquidity was enormous and the bank would keep financing leveraged buyouts.

“As long as the music is playing, you’ve got to get up and dance,” he said. “We’re still dancing.”

But Citigroup has extended fewer loans since massive losses drove it to accept $45 billion in U.S. government funds in 2008 and 2009.

And employees have fled to competitors who can offer them less-restricted compensation — and a home base without the reputational taint of Citigroup’s three bailouts.

“They’re fighting wounded. When you do that you slip behind,” said Roy Smith, a professor of finance at New York University’s Stern School of Business and a former Goldman Sachs (GS.N) partner.

“SIGNIFICANT HEADWINDS”

Citigroup climbed as high as No. 2 in global M&A in 2006 but fell to fourth place last year, according to Thomson Reuters data. Its current ninth-place ranking puts it at roughly half the announced M&A business conducted by No. 1, Goldman Sachs.

For completed acquisitions, Citigroup is in fourth place this year — but even that ranking is its worst since 2004. In the previous four years it ranked third, Thomson Reuters data shows.

The bank is fifth in debt capital markets underwriting this year, down from fourth last year and first for most of the past decade.

But Citigroup has improved its standing in other areas. It ranks sixth in the equity capital markets league tables, up two spots from 2009. And it has risen one spot from last year to eighth in global IPO underwriting, not including the GM initial public offering expected to price Wednesday evening.

Citigroup spokeswoman Danielle Romero-Apsilos acknowledged that the bank faced “significant headwinds” in recent years.

“We’ve made strategic changes to our model and are now more focused on profitability and long-term productivity,” she wrote in an email, adding that Citigroup has “strong momentum across our underwriting businesses, and our global M&A franchise is vibrant and expanding across all geographies and segments.”

Citi has worked on several large deals this year, including America Movil SAB de CV’s (AMXL.MX) $27.5 billion acquisition of Carso Global Telecom SAB de CV. But it has missed out on some big ones, including the collapsed BHP (BHP.AX)-Potash POT.TO deal.

BAD REPUTATION

Sanford “Sandy” Weill, architect of the modern Citigroup, built up its investment banking business from the Salomon Smith Barney unit.

Now, Chief Executive Vikram Pandit is undoing much of Weill’s work by selling or winding down units unrelated to Citigroup’s main banking businesses, including the Smith Barney brokerage. He is keeping the investment bank.

Citigroup posted its third straight quarterly profit last month, signaling to investors that it is climbing back from the massive losses that forced it into the government’s arms. Its securities and banking revenues rose 14 percent from a year earlier, but investment banking revenues fell 20 percent to $930 million.

While the bank has begun to recover, employees and industry members said its status as a government ward has not helped it win advisory mandates.

“This is the most hammered-down bank of all of our large investment banks,” Smith said. “It’s still partly owned by the government, and it’s hard to keep good people there.”

Citigroup has lost several high-profile bankers this year, especially in Europe and the United States. Gary Shedlin, chairman of its investment banking effort for financial institutions, decamped for Morgan Stanley (MS.N) in March. Mark Simonian, a global head of telecommunications, was hired by Credit Suisse in May, and a month later Barclays Plc (BARC.L) snapped up three senior Citigroup bankers in London.

“Recruiters have targeted Citi aggressively. Managing directors had a lot of stock in Citi and were (angry) at how the place was run and how they were treated,” one person close to the business at Citigroup said.

Staff turnover is par for the course at investment banks, and Citigroup has offset some of its losses with new hires. But they have not always come cheap. According to media reports, it spent $30 million to poach high-profile energy banker Stephen Trauber and his team from UBS, although Citigroup denies that it guaranteed him that amount. [ID:nN29194149]

Compensation remains a thorny political issue for Citigroup and its rivals. Earlier this year, Citigroup paid employee bonuses in stock, a trend likely to continue this year in the face of heightened regulatory scrutiny. [ID:nN10204412]

The increased reliance on stock-based bonuses may ultimately help Citigroup win back some M&A talent, analysts and recruiters said. Investors are betting that the company’s shares will rise once the government finishes selling off its remaining stake. [ID:nN25159010]

“Bankers are encouraged to be stock pickers, given so much of their compensation is in stock. Citi, among other banks, can and is using this to their benefit,” said Ike Suri, co-founder of executive search firm Options Group.

LOSING TO LAZARD

The so-called league tables, or rankings of the top banks, are often used for marketing purposes or bragging rights to court prospective clients and lure top talent.

According to worldwide announced M&A, Citigroup this year lags investment banking powerhouses Goldman Sachs and Morgan Stanley, commercial bank rival JPMorgan Chase (JPM.N), as well as Credit Suisse CSGN.VX and Deutsche Bank AG (DBKGn.DE).

It ranks slightly below UBS UBSN.VX and Bank of America Merrill Lynch, which were also buffeted by the financial crisis, and has even fallen behind independent investment bank Lazard Ltd (LAZ.N), which has less than 1 percent of the total staff at Citi and cannot offer financing as a sweetener.

“The smaller boutiques are doing very well in M&A right now — it’s more fun and more money,” said Michael Holland, chairman of money manager Holland & Co, which owns Citigroup shares. “The Greenhills (GHL.N), the Lazards — those people have a better time because they don’t have a magnifying glass focused on them from Washington, D.C.”

Many industry members expect Citigroup to start using its balance sheet again to attract business.

“Private equity doesn’t care about the brand, they only care about who brings the capital. Citi is still well positioned in that area,” a former Citigroup banker said.

Still, analysts said it will take the bank several years to climb back to a dominant position in investment banking.

“You can always rebuild, but it’s not going to happen tomorrow. I think the business was gutshot — you shouldn’t expect to see it at the top of league tables near term,” said Rochdale Securities analyst Richard Bove. (Reporting by Maria Aspan in New York; additional reporting by Jessica Hall in Philadelphia and Dan Wilchins and Paritosh Bansal in New York; editing by John Wallace)

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