Citigroup/Legg Mason swap assets
We've often noted on this site that oligopolies play a game not unlike gin rummy, where assets are discarded and picked up in turn, as the business that one company thinks gives them an advantage another company is only too happy to get rid of, and vice versa. Even better when the companies trade assets and both feel satisfied.
An illustration of this tendency is the recent $3.7 billion deal between the world's largest bank Citigroup and rising asset manager Legg Mason. In the deal, Citigroup gave up most of its asset management businesses (including mutual funds) to Legg Mason, and in return got that company's brokerage assets.
Citigroup thus effectively got out of asset management business to concentrate on its Smith Barney brokerage business, where it will be #2 to Merrill Lynch in terms of brokers. On the other side, Legg Mason dropped the brokerage division (its original business), in favor of enhancing its asset management portfolio. Legg Mason also recently announced the acquisition of Permal Group, a hedge fund group. The moves make it the #5 asset management company in the world.
According to a Wall Street Journal article ("Citigroup Sells Its Asset Management; Will Others Follow?", 5/27/05), the deal "allows each to sidestep the conflicts of interest now dogging firms that sell their own financial products and advise clients on which products to buy." It is also an admission by Citigroup that its asset management arm has been a failure.
The article goes on to note that a number of other large financial institutions who thought they could get synergy between these divisions are thinking of similar moves. Many had build up both sides through acquisitions during the 1990, and now they are facing interest from regulators. Another case of synergy gone bad.
In this way, oligopoly in the financial sector alternate between one-stop shops and being specialists and leaders in specific areas.
