Annoucement: Citigroup bought a hedge fund today as part of a deal that would put a former top executive at Morgan Stanley, Vikram Pandit, at the head of its alternative investments group.
Title: Mr. Pandit would become chief executive of its Alternative Investments unit as well as a member of Citi’s operating and management committee.
Background: According to those close to the deal, Citigroup bought Old Lane, the hedge fund that Mr. Pandit helped found a little more than a year ago, as a way to bring him aboard. The Citi unit has been absent a full-time leader for over a year and is seen as a crucial part of Citigroup’s growth. The actual price for the fund will depend on performance, those involved said.
Advantage:
- The appointment of a seasoned leader like Mr. Pandit would go a long way in helping the bank’s chief executive, Charles O. Prince III, overcome Wall Street’s perception that Citigroup has a leadership void as it undergoes a major overhaul. While Mr. Prince has dismissed the notion that he lacked a successor, Citigroup’s senior management team is seen as being too young and inexperienced for the top job. Although the recent hiring of Gary L. Crittenden as its new financial chief has bolstered the ranks, Mr. Crittenden has never run a big financial conglomerate.
- Mr. Pandit replaces Michael A. Carpenter who left Citi last May after more than a decade in executive positions to start his own venture. John Havens of Old Lane will be president of the Alternative Investments unit, and other colleagues also will be given Citi titles.
- For Citigroup, the purchase of Old Lane, which has a separate investment fund focused on real estate and infrastructure opportunities in India, may help fill other gaps.
- In order to capitalize on the meteoric growth in alternative investing. For the most part, the banks are seeking two things:
- access to the hedge funds for their private banking
- high net worth clients, and income from the gush of fees thrown off by hedge funds that do well.
Industry Reference: JPMorgan Chase blazed a path into hedge fund acquisitions in 2004, buying Highbridge Capital Management. At the time, rivals scoffed at the price and predicted the deal would fail. In fact, the fund has soared to assets of more than $17 billion this year from $6.6 billion.
Conclusion: Citigroup’s purchase of Old Lane is particularly spectacular considering Old Lane’s short and unimpressive track record.
Annoucement: Financial services giant Citigroup Inc. yesterday unveiled its acquisition of Old Lane Partners LP, a hedge fund with $4.5 billion in assets under management and headed by Mr. Vikram Pandit.
Quote: Citi's top managment were quick to defend the critics of hefty price tage: $800 million. CEO Charles Prince: "an investment as much as it is an acquisition," referring to "world-class talent" of Mr. Pandit and his colleagues.
Snapshot: Citi's current alternative-investment unit has just $49.2 billion under management, with $10.7 billion of that from Citi itself. It includes a $3.3 billion private-equity fund launched in January and a $2.5 billion multi-strategy hedge fund.
Disavantage: There is a long tradition of companies engineering acquisitions as a way to win top talent. But it is a risky bet.
- Performance: In the case of Old Lane, it is a newcomer to the hedge-fund game and has so far turned in a mediocre performance. The hedge fund has the backing of the Singapore Investment Corp. and the Harvard endowment. But it got off to a sputtering start last year when stock markets fell in May, and finished 2006 with a return of just 6%. So far this year, it is up about 4%.
- Clash over power for top spot: In addition, by luring Mr. Pandit and his team, Mr. Prince is risking the ire of his current cadre of capital-markets executives as a new group of capital-markets experts compete for top spots. The possibility of the kind of transplant rejection that occurred with Mr. Boisi at J.P. Morgan Chase arises because the Old Lane stars come from the same type of business as the two Prince deputies with the strongest credentials.
Those two executives, Michael Klein and Thomas Maheras, are co-heads of Citi's global markets and banking division and themselves earned their stripes at former Wall Street powerhouse Salomon Brothers, which was sold in 1997 to Mr. Weill's company.
The combination of the Salomon bond franchise with Citi's big lending platform has helped make Citigroup the top securities underwriter since 2002. - Unfit with Prince's turnaround strategy: the Old Lane executives' backgrounds don't fit neatly within the bank's top priorities outlined by Mr. Prince earlier this week -- bolstering U.S. consumer business growth, boosting the international share of top businesses, as well as expense and credit management. Investors want reassurance "that they won't spend too much on it," Mr. Mayo said.
Industry Reference: Wall Street history doesn't offer much encouragement either.
- In the spring of 2000, Chase Manhattan Corp. acquired Beacon Group LLC, an investment banking boutique, for about $500 million. Chase's goal at the time was to bolster its own banking ranks with a roster led by Beacon founder Geoffrey Boisi, the former investment banking chief at Goldman, Sachs & Co.
Two years later, Mr. Boisi left, after clashing with other top bankers after Chase merged with J.P. Morgan & Co. The Chase purchase of Beacon wound up being "a lot of money for not that many people," says Mike Mayo, an analyst at Deutsche Bank AG who covers banks and brokerage firms.
Profile & Background : Mr. Pandit grew up in Mumbai, India, and came to the U.S. in his mid-teens. After earning undergraduate and doctoral degrees from Columbia University, where he now serves as a trustee, he was a junior finance professor at Indiana University in the mid-1980s before joining Morgan Stanley. At the blue-chip securities firm, he became known for a soft-spoken, cerebral management style. While many Wall Street executives are known for schmoozing, Mr. Pandit rarely appears at high-profile social events. Though he joined a golf club in Purchase, N.Y., a decade ago to support John Mack, the current Morgan Stanley CEO who was recruiting members at the time, he rarely plays there, according to one of his colleagues. In the 1990s, he oversaw the firm's buildup of prime brokerage services catering to hedge funds, where it remains a leading player. He also pushed into electronic trading, keeping pressure on the major stock exchanges to keep a lid on trading fees.
At the peak of the dot-com bubble, Morgan Stanley had a commanding share of online stock issues based partly on its Internet analyst Mary Meeker. But just as those results propelled Mr. Pandit up the management ranks, the bursting of the bubble strengthened the fortunes of the firm's bond division. Mr. Pandit left the firm on the eve of a bruising battle waged by Morgan Stanley alumni who ousted Mr. Purcell in mid-2005. He left when Mr. Purcell promoted fixed-income chief Zoe Cruz to be co-president above him. His longtime colleague Mr. Havens soon followed Mr. Pandit out the door, along with a parade of other traders and bankers.
Though Mr. Pandit left quietly, Mr. Havens received a standing ovation from admiring colleagues as he walked off the trading floor.
------------------------------------------Point of View-----------------------------------------Andy: It's a showcase of how valueable an seasoned industry player along with his depth knowledge and experience in the market has become, amplifed by the example of the relentless pursuit by Citigroup with a tage price : $800 million. However, the action considers speculative as the company experiencing job cuts and major overhauls with emphasis on cost saving and revenue growth, given the short history with relatively poor performance.
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