By Mitchell Martin

Published: April 7, 1998

NEW YORK Citicorp and Travelers Group said Monday they would merge in the largest corporate combination ever, creating the world’s biggest financial-services company and offering banking, insurance and investment operations in 100 countries.

The companies described the deal as a merger, valuing it at $140 billion, but the mechanism is essentially a stock swap, with Travelers paying $70 billion for Citi’s shares. That would make it nearly twice as big as the current record-holder, WorldCom’s pending $42 billion offer for MCI Communications.

Travelers will issue 2.5 shares for each Citicorp share, and current stockholders of each company will own about half of the new enterprise.

With $698 billion of assets, the merged enterprise would be the largest financial-services company in the world, slightly larger than Bank of Tokyo-Mitsubishi. The new company, to be called Citigroup, would also be by far the most valuable in the business, with a market capitalization of about $135 billion

Its logo will retain the bank’s familiar lettering followed by an umbrella, the symbol used by Travelers.

Much of Wall Street liked the deal, and Citicorp’s stock shot up $35.625 to close at $178.50, while Travelers rose $11.3125 to close at $73. The announcement, which was made before the market opened, helped the Dow Jones industrial average move convincingly through the 9,000 level. (Page 11)

The deal would give Travelers the ability to market mutual funds and insurance to Citicorp’s retail customers while giving the bank access to an expanded client base of investors and insurance buyers. In this way, it is similar to the deal early last year that joined Morgan Stanley Group Inc. a securities underwriter and asset manager, with Dean Witter Discover & Co. a retail stockbroker and credit-card purveyor.

But there are some major hurdles to be cleared. Travelers said it would apply to the Federal Reserve Board to become a bank holding company. Current law would require it to get rid of some of its nonbanking holdings. In recent years, however, there has been much erosion of legislation designed to separate the banking and securities industries.

A key goal of the combination, John Reed, the Citicorp chairman, said at a news conference, would be to make investment products such as stocks and bonds available to middle-class customers around the world. Citicorp has built a global retail franchise alongside its worldwide corporate banking business, while Travelers is an investment and insurance conglomerate that last year bought Salomon Brothers Inc. to add to its Smith Barney brokerage operations.

We like the deal, said Tim Ghriskey, portfolio manager of the Dreyfus Fund, which has stakes in Citicorp and Travelers. They are combining a largely wholesale and a largely retail operation with numerous cross-selling opportunities.

Sanford Weill, the Travelers chairman, said he expected the Fed to quickly approve his company’s application to become a bank holding company and added: I don’t think we have to spin anything off to make this happen.

Current law, he said, allows at least two and as many as five years for prohibited assets to be divested. We are hopeful that over that time the legislation will change, he added.

He said the companies had already had talks with the Fed about specific legal impediments and said, We have had enough discussions to believe this will not be a problem.

As well as having had discussions with the Fed and the Treasury, Mr. Reed said President Bill Clinton was briefed on the announcement Sunday night.

The deal, Mr. Reed said, was not expected to require approval outside the United States because Citicorp’s Citibank subsidiary was the entity that was registered as a bank elsewhere, and the change would be at the holding-company level.

Another big question is whether the combined company can live with two bosses. Mr. Weill and Mr. Reed are to become co-chairmen and co-chief executives of Citigroup. Although Mr. Reed said they had known each other for more than 30 years, they have run their operations in very different ways.

While Citicorp has avoided acquisitions, Mr. Weill has cobbled together Travelers from a diverse group of financial concerns, the second time he has forged such an empire. During the 1960s and 1970s, he assembled a network of brokerage houses that became Shearson Loeb Rhoades, which he sold to American Express Co. in 1981. But he was unable to work with James Robinson 3d, the American Express chairman, and he left in 1985.

The next year, he began afresh, taking over Commercial Credit Co. a troubled lending subsidiary of Control Data Systems Inc. which sold most of the unit to the public that year. The following year, Mr. Weill took Commercial Credit private. In 1988, he bought Primerica, which grew out of the financial operations of American Can. Primerica already owned Smith Barney.

In 1989, Mr. Weill bought retail brokerage operations that had belonged to Drexel Burnham Lambert Inc. which was forced to close because of its problems in the junk-bond market. In 1992, he began to buy Travelers, which had been plagued by bad real-estate investments, and in 1993, he bought Shearson from American Express for $1.2 billion. Last year, he bought Salomon Brothers, the bond-trading powerhouse that had run into trouble with the government by trying to corner the market at Treasury-bond auctions.

According to Mr. Reed, it was Mr. Weill who had the idea of uniting Citicorp with Travelers, broaching the idea late in February. Mr. Reed said he found the idea instantly appealing because it allowed the two organizations to merge their distribution channels, providing one-stop shopping for consumers.

Mr. Reed said an emerging worldwide middle class would not want to shop from place to place for financial products. Nobody wants a mortgage, he said, they want to buy a house. Similarly, he said, savers do not want to own mutual funds but want to prepare for retirement as part of an overall plan.