INVESTMENT, M&A PROS FEAR PENDING CITIBANK MERGER: TRAVELERS NAME’S FITTING, AS MORE EXECS FLEE FIRM

Almost as soon as Travelers’ chairman Sanford Weill and Citicorp chairman John Reed shook hands on a deal to form the world’s biggest financial services company four months ago, speculation began that the merger would send many executives to the exits.

That exodus is clearly under way, with Travelers bearing the brunt thus far. The company has tried hard, with mixed results, to stem losses — especially in key growth areas, like asset management and investment banking, that hinge on maintaining personal relationships with clients. More than a dozen key people have departed.

Regardless of how many executives eventually depart, the disruption is likely to be magnified by the fact Travelers is still digesting last year’s acquisition of Salomon Brothers Inc. It is in Salomon’s lines — investment banking and capital markets — where the greatest overlap between the new partners exists, analysts say.

There also is some duplication on the asset management side, where it has not been determined which organizational approach will hold sway.

The merger is expected to close by yearend.

“You put two organizations of this size together,” says A.G. Edwards Inc. bank analyst Diana Yates, “and some people flee, some stay and some don’t know what to do. Unfortunately you end up losing some good people in the process.”

entire teamS out the door

The most highly publicized defection took place in July when Jeffrey B. Lane, one of Mr. Weill’s top lieutenants, surprised many of his Travelers colleagues by joining New York money manager Neuberger & Berman LLC as chief administrative officer.

Travelers’s Salomon Smith Barney unit, meanwhile, has seen entire teams pull up stakes. Four mergers-and-acquisitions executives, including managing director Conrad L. Bringsjord, left last month for New York securities firm CIBC Oppenheimer, which has also hired 18-year Citicorp veteran Henry Sandlass as a managing director in its asset securitization group. And last week, Michael J. Carr, co-head of the global M&A group, joined Goldman Sachs Group LP as a managing director.

Also in July, three large-cap value managers left the institutional arm of Smith Barney Asset Management to join growth shop Nicholas-Applegate Capital Management (InvestmentNews, Aug. 3).

The defections come on top of Salomon Smith Barney’s loss of about a half-dozen stock analysts since its formation last year following Travelers’s acquisition of bond-trading giant Salomon Brothers Inc.

“When you throw Citicorp into this pot, all the sorting out that has taken place in investment banking and capital markets (with the combination of Salomon and Travelers) suddenly has to happen again,” says Peter Russ, an analyst with Laidlaw Global Securities Inc.

The turnover since the megamerger’s announcement has been no greater than expected, a Travelers spokeswoman says, and the company has moved swiftly to replace most of those who have left. A Citicorp spokesman says that turnover at the bank hasn’t been unusually high, but those departures that have taken place, such as the defection of a junk bond team to Fleet Financial Group, have been singled out because of the Travelers deal.

“There are always opportunities being dangled before the strong players and the strong houses,” says the spokesman, John Morris. “The merger turns the spotlight on it.”

Some executives have seized those opportunities rather than waiting to learn their fate as the merger partners move to establish new hierarchies — and have recruited others to join them.

For instance, the four M&A specialists who left for CIBC Oppenheimer have been joined there by four executives from the investment banking side of Salomon Smith Barney, according to a CIBC spokeswoman.

And some suggest the exodus will continue to build.

“When you have as many corporate entities pulled together as you have there, some of the overlapping will take time to become more visible and some of the egos will take time to become truly bruised,” says Lawrence Lieberman, managing director of the Orion Group Inc., a Princeton, N.J.-based mutual fund executive search firm.

Some executives have landed at much smaller firms where they say they can make a bigger impact and won’t have to compete as vigorously for attention and resources as they would at the leviathan to be called Citigroup.

Mr. Lane, a former Travelers vice chairman, has said his departure had nothing to do with the pending merger, but the move to Neuberger & Berman allowed him to refocus his attention on his first love, asset management.

Others also have left to join companies with a singular focus.

back to basics

“We were with a firm that developed over time a number of different priorities,” says Edmund W. Keeley Jr., one of three Smith Barney managing directors who left to start up a value shop in New York for Nicholas-Applegate of San Diego. “They are becoming a mega-financial services firm with many different priorities and with that, the various segments of asset management had to compete for attention, resources and support,” he adds.

Smith Barney, he says, was “extremely aggressive” in trying to retain him and two fellow portfolio managers, Philip J. Miller and Victor J. Raskin. “They wanted to respond to the issues we were raising. They did a tremendous job of trying to do that,” says Mr. Keeley.

Although the three are not bound by noncompete agreements, they have not taken any clients with them, says Mr. Raskin. Still, he says, they don’t rule that out.

Such departures have begun to raise eyebrows among large clients like the $17 billion Ohio Bureau of Workers Compensation and the $85 billion Florida State Board of Administration. Both are watching closely to see how Smith Barney handles the changes, paying particular attention to whether it can replicate the trio’s research abilities. The three were part of an eight-member team. A Smith Barney spokeswoman said a search for replacements is underway.

One of the big merger-related questions was decided in May, when Travelers’s Tom Jones was tapped as chief executive officer of asset management and Citibank’s Peter Carman as chief investment officer. But the business may experience more defections if one organizational strategy is adopted at the expense of the other. Mr. Morris, however, says the choice of approaches is unlikely to have “people consequences.”

not about synergy

In any case, the deal is not expected to result in as many departures and firings as have other marriages of more similar organizations.

Indeed, Wall Street has largely shrugged off the turnover. While shares of Travelers and Citicorp were battered last week along with most other financial services stocks, their prices rose by about 8% and 11%, respectively, between May and the end of July.

“They’ve really played this (consolidation) down as a result of trying to keep key employees in play,” says Ms. Yates from A.G. Edwards in St. Louis. “From day one, they’ve said that this wasn’t a synergy play but a cross-sell play.”