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What Happened at Citigroup (A) Case Solution

Solution Id Length Case Author Case Publisher
999 1333 Words (4 Pages) Clayton Rose, Aldo Sesia Harvard Business School : 310004
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Citigroup is a company created from the merger of two financial giants making it one of the largest and strongest financial companies in the market. However, after a period of ten years, the company lost its reputation as the strongest player of the market and required a government bailout plan to avoid an economic recession in the market. The problem identified was the overvaluation of foreign assets of the company which became almost worthless as the financial markets froze. The strategic analysis of the company provides insight on the future steps needed for the revival of the company’s reputation in the market. First strategy focuses on general market consolidation in accordance with the prevailing financial trend of the market and partnering with profitable financial companies. Second strategy focuses on the formation of a think tank to avoid any future and to make use of the current market opportunities in order to make them companies strengths. The third strategy recommends that Citigroup has to make its departments autonomous in order to reduce its size and complexity in the operations.

Following questions are answered in this case study solution

  1. Problem Identification

  2. Strategy Alternative 1

  3. Strategy Alternative 2

  4. Strategy Alternative 3

  5. Recommended Action Plan

Case Analysis for What Happened at Citigroup (A)

1. Problem Identification

Citigroup was a financial giant resulted through a merger of two financial companies, Travelers group and Citicorp. It was a mighty merger for the financial market, and profitable performance of the company proved it to be the leader of the market. Assets of the firm rose up to $1.9 trillion and earnings $24.6 billion, from 1998 to the end of 2006. Citigroup enjoyed a high market capitalization amounting to $274 billion, making itself a financial business model in the financial market.

However, the nationalization and bailout of Citigroup after ten years of its inception marked proved to be an important event in the history of financial companies. It largely depended upon the investment in abroad and foreign countries. Assets in the global market had a greater value than their original worth. In 2008, when the financial companies resisted lending to other companies, Citigroup began to face difficulties in its operations. Although government tried to inject some capital through bailout measures but its share price decreased from $13.99 to $3.05 in two weeks. It was due to the overvalued status of foreign assets of the company which became almost worthless as the financial markets froze.

2. Strategy Alternative 1

Mergers and acquisitions are two common types of strategy alternatives used in situations such as Citigroup crisis. Although the company is already a result of a merge but considering the fact that it is on the brink of a collapse, it should move towards the strategy of acquiring similar or smaller financial companies worldwide. It should focus on general market consolidation in accordance with the prevailing financial trend of the market. Partnering with financial companies will help Citigroup to diversify its risk and prevent itself from the need of a government bailout.

The merger of Blackstone group and Kohlberg Kravis Roberts & Co is an example of a merge in the time of need. The two companies led a trend of acquisition in the private equity market which turned out to be a risk minimization strategy for all the financial companies involved in the process. However, it should be kept in consideration that merger/acquisition means an increased level of liability on the firm. It may seem to minimize risk and yield positive results, but the whole process should be implemented according to the rules of appropriate pricing and reasoning.

3. Strategy Alternative 2

A stockholder value is defined as the value which is delivered to the stakeholders and shareholders due to the sole reason of the ability of management and company’s decision makers to grow the company’s earnings, share dividends and the price of the share. The situation of Citigroup and its financial crisis can not only affect the management and the company, but it can also affect a number of shareholders, directly or indirectly, creating a chaos situation in the market. Hence, it is suggested to the management of the company that they should appoint a specialized committee of independent professionals and directors for the evaluation and examination of all the transactions in the company. The evaluation of transactions is important for the betterment in the price of the stock. The committee can suggest and find ways to make the transactions profitable enough to absorb certain shocks in the market.

The purpose of this committee would be to explore extraordinary transactions and deal the pricing and reasoning problems faced to the company. Citigroup should change its status to a risk aversive firm in order to ensure continuous increase in stockholder’s return. The cost of becoming risk aversive is lower return as compared to risky investment return. Benefits include continuous return on investments, higher reputation in the financial market, financial stability, stockholder’s protection, and appropriate stock pricing in the market.

4. Strategy Alternative 3

Diversification is a process in which a firm expands its business into other areas of similar (related diversification) or different (unrelated diversification) arenas for the purpose of increased profitability. Diversification strategy is used when the individual segments of the company are not performing up to the level and can perform better if the company pushes itself to profitable segment of the similar business. The strategy used in a condition like that of Citigroup in 2008 demands the different segments of the business to work independently without the burden of the huge amount of assets, earnings and liabilities of Citigroup. Greater the size of the company, greater would be the level of difficulty and complexity in its operations and management.

Independent financial departments of Citigroup can be beneficial in the overall risk management as a loss in a single department would not affect the rest of the areas of business; for example, a loss in global transactions would not affect the domestic business of a financial firm. This strategy can be helpful in decreasing the level of regulations and scrutiny on the firm due to its size and the amount of assets. Litigation expense can be effectively lowered to a manageable level because there is a direct relationship between the size of the firm and the litigation expenses throughout the business world. Similarly, this strategy can help the firm to lower its capital requirements and work with greater independency as compared to a large cluster of separate segments under one organization.

5. Recommended Action Plan

The share price of Citigroup has been consistently seen on a declining trend since the year 2008. Federal Reserve has been stringent in terms of rules and regulations due to the performance of the company in the foresaid year. The reputation of Citigroup has been greatly affected in a negative way, giving it a rank of 146 out of a number of 150 major financial firms. According to the principle of economies of scale, greater the scale of the firm, greater is the return. In the case of Citigroup, economies of scale principle did not work, and its scale did not help in increasing the return on its investments. The failure of this principle could be a result of various factors including the factor that the company has reached a saturation point where further expansion leads to negative growth.

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