Does Citigroup Shakeup Mean Breakup?

NEW YORK (AP) – Charles Prince is walking out Citigroup's doors with potentially millions in his pocket, leaving behind a bank that many believe needs serious therapy.

Investors are not only worried about the $8 billion to $11 billion the bank expects to slash on its investments. They're also concerned that Prince's successor as CEO may not administer the bitter medicine many say the bank needs to revive, including lancing some of its businesses.

Citigroup Inc. shares plunged $1.78, or 4.7 percent, to $35.94 in late trading Monday.

Many market watchers have said Citigroup's stock would soar once Prince was out. But shareholders' displeasure was not with Prince the person, but rather his unproven strategy and hesitancy to break up the nation's biggest financial services company, built by his predecessor Sanford I. Weill.

Chairman Robert E. Rubin and acting CEO Sir Win Bischoff have indicated that they plan to continue with Prince's strategy, keeping Citigroup intact and focusing particularly on international operations.

“Investors were seeking more value from Citigroup, value that they haven't been given under Chuck Prince's leadership,” said Kris Niswander, senior industry analyst at SNL Financial LC. “The consensus was, a change in leadership would help extract value. Whether that is realized will be anyone's guess.”

Of course, everything depends on the next CEO. Industry watchers have pointed to several potential replacements for Prince, including Rubin, Citigroup CFO Gary Crittenden, NYSE Euronext CEO John Thain, BlackRock CEO Laurence Fink, and Dick Parsons. Parsons, a member of Citigroup's board and CEO search committee, said Monday he is stepping down as CEO of Time Warner Inc. at the end of the year.

The person the search committee chooses and nabs will have quite a clean-up on his hands and some noisy, antsy shareholders to satisfy.

“Investors are going to be demanding results quickly, and that's going to be difficult to achieve,” Niswander said.

One spin-off possibility that could bring in some cash for the company and its shareholders is Smith Barney. According to Robert Ellis, senior analyst at financial search and consulting firm Celent LLC, Citigroup's brokerage arm is easily severable, and that large European banks like HSBC Holding PLC could be potential bidders.

Smith Barney did well in the third quarter — its revenue jumped 24 percent to a record — and investors believe it's undervalued right now as part of Citigroup.

Other businesses that could break off include Citigroup's investment banking arm, its capital markets unit, and its retail operations, Niswander said. It's not about their strength or weakness, but rather about “synergies” — essentially, if they are providing help to or benefiting from Citigroup's other businesses.

Until a new CEO takes over, Wall Street will keep trying to assess the portfolio damage at Citigroup and other banks.

In a conference call with analysts Monday, Crittenden said the portfolio writedowns of $8 billion to $11 billion in the fourth quarter, which ends in December, are an estimate. “It depends on what happens in the markets between now and then,” he said.

If the market improves, the writedowns could be lower and the bank could eventually make money on the marked-down investments. If it doesn't, the bank may be forced to mark them even lower or sell them at bargain-basement prices.

So far, Citigroup — which said it has exposure to collateralized debt obligations of $43 billion — has been loathe to unload assets at lower prices than they were bought. “Selling them at distressed values wouldn't make sense at all,” Crittenden said.

Prince will be leaving with about $100 million, based on calculations by compensation consultant James F. Reda using public filings. That figure includes Prince's 1.6 million shares at the recent share price of $38; a $1.7 million pension; a stock award worth $8.5 million; and nearly $29 million in unvested stock awards.

Citigroup's stock has fallen so sharply that most of his 1.1 million stock options aren't worth anything now. Reda said the options that aren't under water are worth $1.8 million. The Black-Scholes value of all Prince's options is $4.6 million, so he could end up seeing that at a later date.

Merrill Lynch & Co.'s outgoing chief executive Stan O'Neal left with $161.5 million, after the investment bank posted a third-quarter loss.

“That's kind of the funny thing about it. If someone comes in and cleans the mess up, there might be a nice stock bounce. And it'll make Prince and O'Neal lots of money,” Reda said.

Citigroup has not yet filed with the Securities and Exchange Commission on Prince's official payout.