Sell out now and run

MEMO to shareholders of Citicorp and Travelers Group: sell.

The two companies plan a $83.9bn merger - the biggest ever by far - winding up with a colossus called Citigroup that will offer personal bank accounts and business loans, underwrite and trade stocks and bonds, and sell mutual fund shares and casualty insurance: everything, in fact, that rich upstarts and ageing baby boomers need. Ron Chernow, a historian of the securities trade, calls the merger "an absolutely staggering event".

Still, Citicorp and Travelers stockholders should take the money on the table and run. They have already seen huge gains: in the five years ended 31 March, Travelers Group shareholders had a total return (rise in price plus dividends) of 469 per cent, and Citicorp shares returned 420 per cent. In the same period, the benchmark US S&P 500 index gained 174 per cent.

Shares of both merger candidates jumped after the announcement on Monday. Citicorp rose 38 cents, or 26 per cent, to 180, and Travelers stock rose 11 cents, or 18 per cent, to 73. What more do you need? Sell.

To begin with - whisper this to avoid ridicule - there's a market risk here. Do you really believe stocks will rise 75 per cent this year?

There are risks to this merger, too. Citigroup may simply be trying to do too much. Can Travelers possibly have absorbed its 1997 acquisition of Salomon? Citicorp has had no recent experience with mergers.

There seems little prospect of great cost savings in this transaction, as when banks take over banks. Historically, attempts by financial services companies to peddle each other's products and services have flopped; there seems little likelihood of a plus there for Citigroup.

What's more, commercial banks and investment banks haven't been happy partners in the past. Credit Suisse Group only recently began to bear the fruit of its years-ago purchase of First Boston. Here in the UK, Barclays recently sold its securities and mergers advisory businesses at a loss, and National Westminster is quitting the securities business too.

Cultures clash. Citigroup power will supposedly be shared equally between Travelers chief Sanford Weill, 65, and Citicorp head John Reed, 59. Mr Weill doesn't look ready for social security; Mr Reed has held power at Citicorp since 1984. As Lehman Brothers analyst Thomas Facciola said: "Co-heads usually don't last." Add to that mixture Mr Weill's number two, James Dimon, 42 and known to be a touch ambitious.

Shares of banks and Wall Street firms - already sky-high on the chances for merger savings and an indefinite boom in the markets - leaped higher on the prospects for further bank mergers such as, perhaps, Barclays and NatWest.

Wild-eyed investors no doubt already see the proposed Citigroup combining with the imagined Barclays-NatWest combination into the ultimate entity, Citiworld.

This really is where you should get off.

Copyright: IOS & Bloomberg