Citigroup’s (C-NYSE) investor call this morning outlined the company’s plans to cut 17,000 jobs in the current year, which will incur one-time charges of about $1.38 billion in the first quarter, with another $200 million to be recorded in the latter half of the year.  After reading this morning’s release and listening to the Conference Call, I can’t help but feel like Citi is just going through the motions on this one.

While the initial leak number was, in the end, pretty close (15,000), most analysts had been expecting (hoping) for a number quite larger, to the tune of 25 – 40,000 job cuts.  17,000 only represents about 5% of the workforce, and with acquisitions and planned hiring factored in, Citigroup will end 2007 with more employees, not less.  When the 15,000 number was in the air we took a look at Citigroup’s value and the prospects for more cuts.

Citigroup loses 20,000 employees per year just to attrition, and while the company stated that today’s cuts would be mostly deliberate, they will also be centered on middle and back office personnel – most front office folks haven’t been targeted.   

This highlights the dual problem over at Citi – while expenses have been running rampant, revenue growth is stalled, which means that Citigroup can’t announce anything that even sounds like it could be a drag on revenues.  So front office people need to stay, or so the logic goes.  It’s the extra layers of management that are most likely the expense bottleneck, but very little was said about this today.   

In the conference call I heard Chuck Prince use the term “de-siloing” about a dozen times, yet it doesn’t seem that a real strategy is in place to accomplish that.  In fact, everything announced today is pretty much standard fare for a conglomerate on the back end of an acquisition tear; off-shore some back office functions, streamline technology systems, consolidate purchasing.

Citigroup claims that $10 billion in savings will be recognized within three years.  This price tag is extremely high for only 17,000 jobs, which means that a large portion is expected to come through synergies rather than employee costs.  But consider that Citi’s operating expenses were over $50 billion in 2006.  Even if the rosy $2-3 billion/year in savings estimate plays out, that’s still only 5% of expenses, a drop in the proverbial bucket.  Given the company’s “acquisition pipeline” (their words, not mine), expenses could rise faster than revenues again this year, and take us right back to this same spot in a few quarters.   We even laid out a strategy back in February that would have allowed him to make fewer cuts than this on a raw basis if they would sell off some non-core operations, but Chuck Prince isn’t listening to anyone else on Wall Street either so why expect any more.

Citigroup’s stock is reflecting the general malaise today, down 1.5% to just under $51.65 in late-morning trading.  With all the hype surrounding this call shareholders have to be disappointed at the market reaction…it’s starting to look like 17,001 (with Chuck Prince himself being the “1”) is the headline that may come next.  Next week are the company’s results and the annual meeting, and you might as well expect a vocal audience if the stock doesn’t perform well on earnings. 

Ryan Barnes
April 11, 2007

Ryan Barnes can be reached at [email protected]; he does not own securities in the companies he covers.

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