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

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?AppendixLO1

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Balance Sheet December 31, 1997 (in $ millions) Citicorp Travelers Liabilities and Equity Deposits Trading account liabilities Securities sold under repurchase agreements Insurance reserves $199.121 Long-term debt Other Preferred stock Common shareholders' equity Total Liabilities and Equity 30.986 $ 96,166 120,921 43,782 19,785 28.352 39.809 76.441 1.903 1.450 19.293 19.443 $310,897 $386,555