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By Jennifer Yousfi
Just three short days into his tenure, newly named Citigroup Inc. (C) Chief Executive Officer Vikram Pandit has already seen his company's stock drop more than 7%, magnifying the pain in what's already been an agonizing year for the beleaguered U.S. banking giant.
Citi – the worst performer in the 30-stock Dow Jones Industrial Average – has seen its shares plunge 44% so far this year. Pandit, appointed Tuesday, faces a tough road to recovery, along which are likely scores of tough decisions – most of which are going to be highly unpopular.
Making his challenge tougher still is the fact that Wall Street clearly wanted Citi to reel in a big-name outsider – an experienced industry executive with a gold-plated resume and a so-called "platinum rolodex" network of financial-sector connections. Such executives as Deutsche Bank AG (DB) Chief Executive Officer are believed to have spurned Citi's recruitment efforts.
"Obviously, they didn't get one of the big names," said Eugene Fram, the J. Warren McClure marketing research professor at the Rochester Institute of Technology College of Business, who has studied the marketing implications of corporate turnarounds.
Pandit, a former Morgan Stanley (MS) executive, represents none of those institutional investor ideals. He was appointed in mid-October to oversee Citigroup's newly created investment banking and alternative-investments business unit. He joined the bank in July when the No. 1 U.S. bank bought out the hedge fund he ran.
At Morgan Stanley, Pandit was president and chief operating officer of the Institutional Securities and Investment Banking Group, where he focused on the trading, sales and infrastructure aspects of the business. Before that, he served as the managing director and head of Morgan's Worldwide Institutional Equities Division, and as the managing director and head of the U.S. Equity Syndicate. Pandit also served on the board of the NASDAQ stock market from 2000 to 2003.
Despite this strong financial background, Pandit has no commercial banking experience and a very short tenure at Citigroup. Doubts have been raised about his ability to be the leader that Citigroup needs.
Due to billions in write-downs of mortgage-backed assets, with the potential for more to come, Citigroup is expected to report a loss this quarter for the first time in the last 16 years. Pandit has pledged to take a hard look at the struggling firm's expenses and is willing to cut an estimated 17,000 – 34,000 jobs according to various reports. Pandit may have to eliminate, or divest via sales, entire business units or subsidiaries in order to cut costs and better focus the overall corporate strategy, experts say.
"We would not be surprised if following his review, certain businesses were either sold or restructured," Bank of America Corp. (BAC) analyst John McDonald wrote in a note to clients Tuesday. "A sale of businesses could serve as a much needed source of capital."
Sanford "Sandy" Weill, Citigroup CEO until October 1, 2003, advised on the decision to select Pandit.
"It's never a very pleasant thing [laying off employees], but it's not a pleasant thing to have a company that's not doing as well [as its competitors]," Weill told Bloomberg News. "I've believed since the day I was born that one should be the low-cost producer of a quality product, and I think we got to a position where we weren't that."
But sometimes an insider – even one with a relatively short tenure like that of Pandit – are better-positioned than an outsider to engineer a turnaround, Fram, the RIT marketing professor, said in an interview yesterday (Thursday). A case-in-point, Fram said, is Procter & Gamble Co. (PG) Chief Executive Officer . Lafley succeeded CEO Durk Jager in June 2000, after the P&G board reported forced Jager to resign. Before that he was working as president of the consumer-product giant's worldwide beauty-care business and prior to that had been in charge of the corporation's entire North America initiatives.
According to Fram, Lafley is Lafley focused on P&G's powerful existing brand names – including Crest, Tide, and Pampers.. And he was able to do so because, as an insider, he understood the company's array of products and strength as a brand. Instead of risking billions by trying to buy other companies' product lines or creating new brands,
"People at the time weren't so sure he was going to be a very good executive officer," Fram said. "But now he's credited with revitalizing P&G. A good insider will be able to do that."
One other core strength Citi and Pandit can both draw upon: Board member Robert E. Rubin, who until this week was serving as interim chairman. A former U.S. Treasury Secretary under President Bill Clinton, Rubin reportedly did not want to continue in the formal role as chairman, but does want to remain with Citi, perhaps working behind the scenes. That's a huge plus for Citi, Fram says.
"He's an internationally known name," Fram said. "He's been very successful in the past [in a number of roles and situations]. He's very well-known and very well-connected. He brings a lot of credibility to Citigroup."
Citigroup shares closed at $31.06 yesterday, down 41 cents each, or 1.3%. The shares are down 45.5% from their 52-week high of $57.
Money Morning Executive Editor William Patalon III contributed to this report.
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