Tribal warfare in North America

Why did Deutsche Bank gut Bankers Trust’s richest business – US bonds – and hire a new team from Merrill Lynch? Surely that’s no way to establish a new presence in North America. But such criticism ignores the tribalism that rules these amalgamated global banks, and maybe it was the quickest way to forge team loyalty.

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Six equity analysts in New York are now out of a job. In mid-February Deutsche Bank Securities, the US division of the investment bank, decided to fire them. Eighteen months ago that would have been taken as yet further evidence of how the German parent's love affair with investment banking was coming to an end.
In July 1998 Frank Quattrone had just taken his entire technology investment banking team - over 120 people - to CSFB, Deutsche's Europe-first policy was regarded as forget-US, and investment bankers were worried that they were losing out in the battle for control, to the Vorstand and the German commercial bankers.
It was no different in debt capital markets. "A lot of people outside the firm interpreted the so-called "Europe First" policy as Europe only and were telling our clients we had given up on the US market," says Grant Kvalheim, global head of debt capital markets at Deutsche, and also co-head of global markets North America. "And so did a number of people at the firm, as a result of which we lost some people, and hiring was very difficult."
One of those who did the poaching says of that period: "I would not have moved here in 1998 given the lack of an integrated North American platform." But a few months later he changed his mind: in February 1999 Thomas Gahan, formerly co-head of global credit products at Merrill Lynch moved to Deutsche, as sole head in the same role. "Clearly the platform issue has been addressed with the addition of BT," he explains.

While BT, acquired in November 1998, has by no means transformed Deutsche into a consistent rival to US firms in domestic investment banking, spending $9 billion on a US institution is a reasonable way to restate one's intentions.







Thomas Gahan

But bankers also talk about a change of mood. Despite fears of losing control to Frankfurt, Deutsche's three main investment banking businesses are run by three Americans and a Frenchman. Most praise the flat management structure at the investment bank, allowing for quick decision-making. And Joseph Ackermann has consolidated his position as the Vorstand member responsible for the investment bank, and is now regarded by many of his troops as the CEO they never got after Michael Dobson was bumped up to the Vorstand in 1996, and then took over asset management in early 1998. Ackermann has recently got himself an apartment in New York.
Deutsche has moved along so far from the dog days of 1998 that it can hire senior bankers from Merrill, Goldman Sachs, Bear Stearns and elsewhere, and can afford to get rid of equity analysts before finding replacements. One, admittedly, won't be replaced, steel analyst Michael Michalison: it's not a sector the bank intends to cover from the equities side. The other five sectors - food, insurance, capital goods, chemicals and business services - are ones the bank intends to continue to cover. "Our plan is to trade up our analysts there," says one insider. "We want to have top-rated analysts in all sectors we're involved in."
Bankers Trust clearly had its problems - you don't lose $488 million and go virtually bankrupt otherwise - but its franchise was strong enough to give Deutsche's US operations a kick up the backside it so desperately needed. From 1995, when the investment banking build up began in earnest, former US CEO Carter McClelland and US debt head Kvalheim proclaimed their hopes that within three to five years Deutsche would be a top-10 bank in all the businesses it undertook in the US. By 1998, it was clearly going to fail.
After the departure of Quattrone's team, the bank's US equities presence was limited to selling European stocks to US investors - and the bank was by no means at the top of that list - and to equity derivatives and programme trading. Deutsche has become one of the leading firms in the US in the latter two businesses after buying the equity derivatives team from NatWest Markets in early 1998.
Its beleaguered target on the other hand had just the antidote: it had bought Wolfensohn, an M&A boutique, in 1996, and added Alex Brown a year later - a national broker known for underwriting equity offerings for high-growth and mid-cap companies.
And getting hold of the BT debt franchise might just be the catalyst Deutsche needed to crank up the weakest link of its global markets business - the US bond business. BT had one of the best US high-yield franchises which had been built up over nine years, capitalizing on its former lending relationships, good contacts with financial sponsors and on the collapse of junk bond masters Drexel Burnham Lambert. Although not the biggest, it was usually in the top five.
At the time of the BT acquisition, Deutsche, despite a raft of hirings, was nowhere in US debt markets. Having slugged it out with UBS in 1996 to see who could spend the most on new hires, and competing for a top-10 slot, Deutsche was reduced to a few well-conceived structures, such as Hidro, placing Eurobonds in the US market, and making a big play for yankee bonds. The latter market collapsed after 1997, as it relied heavily on Asian issuers, and there weren't many of them left which appealed to American investors. "A lot of what we did here in the US has been driven by product ideas," says Kvalheim of the pre-BT Deutsche debt group. "And that's a lumpy business. 1998 was a very good year, 1999 wasn't as good. We started with a strategy of hiring and internal growth but all the various mergers since 1995 have changed the definition of scale and thus necessitated a US acquisition. Now I'm quite happy with where the business is in the US."
But the old BT Alex Brown debt, equity and M&A groups have fared very differently under Deutsche's ownership. While the Alex Brown bankers down in Baltimore found to their surprise that they were being given top jobs, and virtually free rein to construct a viable business in the US and even globally in some cases, the BT debt bankers in New York were at first reassured, then left in the dark, and then sidelined.
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