Everyone has heard the persistent Citigroup (C-NYSE) discussion about reducing workers and streamlining costs and the coming cuts are just more undefined than they are tentative, but how many job cuts are really needed? 

Citi still wants to be buyers of foreign banks and brokerage firms – that itch to keep growing just is too hard for them to not scratch, even though they have shown managing what they already have is too much.  The Nikko Cordial bid, the minority stake in a brokerage firm in India, the Grupo Financiero buyout in Central America, and investing where it can in China continue to show a company hellbent on growing through acquisitions than a company willing to trim its excesses and focus on organic growth.  So it keeps adding to its global cadre of companies and operations, but the company has an expense issue that needs to be brought in.  Prince Alwaleed bin Talal was even quoted as saying something to the tune of “Draconian measures need to be taken to curb expenses.”

The $2 billion or so estimated cost savings from the rumored job cuts would amount to less than 5% of total operating expenses, an amount that would be simply lost in the quarter-to-quarter adjustments in revenue, charges, and currency fluctuations seen at Citi. Most importantly, it doesn’t answer any of the big questions surrounding the company’s future strategy, and it probably won’t be swift or meaningful enough to save the one job on everyone’s mind, that being Chuck Prince’s.  Wall Street sent the message on this yesterday with a lower close based on the “news leak.”  We noted that whatever the job cuts are, the tally needs to be “Plus One” to include Chuck Prince.  He filled a gap that should have only been on an interim basis, and that interim period should have ended long ago.

It’s hard to imagine Prince still holding his job a year from now if quarterly results from here don’t show both: a) impressive revenue growth, b) noticeable operating improvement, and c) more trimmings than they telegraphed.  The economy may not be conducive to the first, so the latter two might have to do it all – a tall order to say the least.  Chuck Prince also runs the risk of being the hatchet man and still getting axed himself, which is like having the reputation of voting a town dry and then moving to Las Vegas.

The whole thing serves to suck all the oxygen out of any room where shareholders are discussing Citigroup’s stock, which is basically unchanged over the past few years, much like its industry giant brethren Microsoft (MSFT) and Pfizer (PFE).  If Citigroup didn’t have this dividend yield of more than 4% shareholders might be screaming bloody murder based on the last pay packages given to Chuck Prince and Robert Rubin.  LEAPs on Citigroup expiring in JAN08 value the stock at under $55.00 per share (implied) and the JAN09 only shows a $56.25 indication.  Many feel that a 10% upside could be gained simply on the news of a Chuck Prince departure. 

Many reports have proposed that Citigroup could “enact” a lot of job cuts simply by holding back on hiring and letting attrition do the numbers work for them.  But attrition is a mutual handicap across all divisions; it’s also the easy out and will take far too long to pan out.  At this point investors need to see decisive action that tells them that management “gets it”, and understands that their company is arguably trading for less then its fair value because of how they are running things.  Real job cuts get rid of divisions, branches, and layers of management.  Real jobs cuts also tell investors where the company sees growth and where management acknowledges that it’s reached a bit too far.  At this point Chuck Prince’s future is not certain, but what is certain is that job cuts are coming.  If it is only 15,000 then investors should just assume that the “next bump” will come from the next 15,000 or whatever else comes from a newer management.

Financial firms are among the easiest businesses to control costs through management of the workforce.  When the business looks bad, they can hand out pink slips and wait out the storm.  Since the number of jobs to be cut is unknown, it is hard to calculate a charge. $1 Billion or $2 Billion could easily come in.  It has 8,100 branches that could also be put up for review and there are some likely locations that could be consolidated.

Wall Street signaled that the 15,000 leaked out yesterday is not enough, but if they make too bold of a statement it can telegraph the image of desperation.  Headlines of 30,000 or 40,000 might erode the image gain and scare away potential investor interest because of the massive impact that could take on operations.  The long and short is that the company has redundant back offices, IT expenses that are too high and an IT infrastructure that reportedly doesn’t entirely communicate across all areas. There are potentially entire divisions that the company could carve out, and there is a buyer in almost every single segment it operates in. 

So what could this mean for Citigroup stock?  We still feel the underlying value is much higher than Monday’s close of $51.54, as discussed in our break-up analysis of Citigroup back in February.  Frankly, any scenario that increases the chances of a break-up at Citi would probably move the shares swiftly towards the bottom end of ranges that have been put on the total break-up value by investors and analysts.  Ours starts in the low $60’s.  If Citigroup decides to stand tall and stop tip-toeing, the stock could actually get there.  The good news is that the calendar has April 16 as the earnings date and April 17 as the annual shareholder meeting: investors should have the first phase of determinations by then.

Written by Ryan Barnes, edited by Jon Ogg
March 27, 2007

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.