As discussed in the chapter, on April 6, 1998, Citicorp and Travelers Group announced an agreemen

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As discussed in the chapter, on April 6, 1998, Citicorp and Travelers Group announced an agreemen

As discussed in the chapter, on April 6, 1998, Citicorp and Travelers Group announced an agreement to merge to become Citigroup Inc., a global financial service provider. Under the merger, each company’s shareholders owned 50 percent of the combined firm. Citicorp shareholders exchanged each of their shares for 2.5 shares of Citigroup, whereas Travelers shareholders retained their existing shares, which automatically became shares of the new company. The financial statements for Citicorp and Travelers for 1997, the year prior to the merger, are as follows:

 

 

 

 

 

 

 

 

Income Statement

 

 

December 31, 1997 (in $ millions)

Citicorp

Travelers

Revenues

 

 

Interest and dividends

$21,164

$16,214

Insurance premiums

 

8,995

Commissions and fees

5,817

5,119

Other

7,716

7,281

Total Revenues

34,697

37,609

Expenses

 

 

Interest

13,081

11,443

Provision for credit losses

1,907

277

Insurance benefits and claims

 

7,714

Other operating costs

13,987

13,163

Total Expenses

28,975

32,597

Income Before Taxes

5,722

5,012

Income taxes

2,131

1,696

Minority interest

 

212

Net Income

$ 3,591

$ 3,104

Balance Sheet

 

 

December 31, 1997 (in $ millions)

Citicorp

Travelers

Assets

 

 

Cash

$ 8,585

$ 4,033

Deposits with banks

13,049

Securities and real estate investments

33,361

171,568

Trading account assets

40,356

139,732

Loans

181,712

Receivables

3,288

21,360

Other

30,546

49,862

Total Assets

$310,897

$386,555

Balance Sheet

 

 

December 31, 1997 (in $ millions)

Citicorp

Travelers

Liabilities and Equity

 

 

Deposits

$199,121

Trading account liabilities

30,986

$ 96,166

Securities sold under repurchase agreements

120,921

Insurance reserves

43,782

Long-term debt

19,785

28,352

Other

39,809

76,441

Preferred stock

1,903

1,450

Common shareholders’ equity

19,293

19,443

Total Liabilities and Equity

$310,897

$386,555

Estimate the pro forma income, common shareholders’ equity, and total assets for Citigroup in 1997, using the pooling-of interests method. What concerns would you have as a shareholder about Citigroup using the pooling-of-interests method? What criteria would you use as an analyst to decide when, if ever, the pooling-of-interests method is an appropriate method of recording a business combination between two firms? Does the Citicorp-Travelers merger satisfy these criteria?

 

 

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