Commerzbank and Müller: A marriage of convenience?
SPEAK TO VIRTUALLY any member of the senior management at Commerzbank or Eurohypo and they will suggest that in a number of areas the alliance between the two has amounted to something that approximates to the banking industry’s equivalent of a match made in heaven.
"On the investment banking side of the business things are going remarkably well. The business is gaining a momentum of its own, which we are delighted by," says Nicholas Teller, overall head of investment banking and member of the board of managing directors. If there is almost a hint of pleasant surprise in this observation, that is understandable, given the speed with which the alliance was negotiated late in 2005.
It is also understandable given that the integration of the two banks already appears to be comfortably ahead of schedule. For proof of that, Klaus-Peter Müller, Commerzbank’s CEO, points to his recent appointment of Jochen Klösges as head of the group’s strategy and controlling department. Until the start of March, Müller explains, Klösges was effectively responsible for overseeing the integration process, a role he was expected to fill until September. "If you move your chief integrator to a new role six months early, either you are bananas or it proves that the integration process is running much more smoothly than anticipated," says Müller.
Granted, some Commerzbankers remind you politely but firmly that the transaction should be referred to as an acquisition rather than a merger. In so doing, they tacitly re-emphasize the role that Commerzbank played as a white knight when Hypo Real Estate’s bid for a stake in Eurohypo dashed the bank’s hopes for an IPO and an independent future. The disappointment of its staff at being unable to pursue that option is an open secret. But those involved on either side of the transaction are also quick to report that the alliance has been entirely free of the sort of nastiness that has been the inevitable by-product of some other bank mergers, as well as of some aborted merger negotiations.
That, they say, is especially applicable to the new entity’s overall franchise in investment banking, which until very recently was perceived as having done little more than burn a hole in Commerzbank’s pocket. There, they say that overlaps between the two operations have been few and far between, given Eurohypo’s raison d’être in real estate, which was a notable gap in Commerzbank’s armoury before the completion of the acquisition at the end of March 2006. It is Eurohypo’s specialization in real estate finance that leads Commerzbank’s board members to reject the suggestion that there are now two investment banks being managed along parallel lines within the group. "We have one investment banking unit, which has been massively strengthened by Eurohypo’s real estate expertise," says Teller.
One of the most compelling examples of that strategy in practice was Eurohypo’s role in last year’s €5.5 billion commercial mortgage-backed securitization refinancing of the €7 billion purchase 15 months previously by Deutsche Annington of the Viterra housing portfolio from E.On. Eurohypo was a joint arranger of Grand (German residential asset note distributor), which was a milestone as the largest CMBS ever completed in Germany, with the capital market transaction led in July 2006 by Barclays Capital and Citigroup. "Our role there was as one of the joint arrangers of the €6 billion of debt that was originally raised to finance the Viterra acquisition," says Peter Denton, head of debt capital markets origination at Eurohypo in London. "We held that position while the exit was jointly arranged and the bonds were ultimately sold by the distribution houses. We played no role in selling the bonds, because we have no distribution capability. For agency transactions one of our unique selling points has always been that as arrangers and underwriters of real estate debt we have no conflicts of interest that may arise from also acting as a distributor."
Personnel
It’s one of the reasons why the two brands will continue to operate within the same family but under distinct names. "Culturally we already feel that we are part of Commerzbank," says Eurohypo’s CEO, Bernd Knobloch. "But we have been able to preserve our business model and we will also be keeping the Eurohypo name, because our brand is the biggest advantage we have in the real estate business." Crucially, Knobloch adds that Eurohypo has also been able to preserve its key personnel, and that it has even been adding to its headcount since its acquisition by Commerzbank. "A big advantage for us is that the core team has stayed in place, which is very different from the UniCredit/HVB experience," he says.
Where duplication has existed in the two banks’ investment banking operations, it has tended, thankfully, to be in areas a safe distance from Germany, where local public opinion frowns on the job losses – "cost synergies" in the industry’s shorthand – that are the usual by-product of consolidation. According to Knobloch, the only meaningful overlap between the two investment banking operations was in part of the US business, where Commerzbank’s real estate unit has been absorbed by Eurohypo.
That is not to say that the acquisition has failed to deliver cost synergies, with one stated objective being the reduction of the group’s IT cost base by 20% by 2009. But those cost savings that have been generated so far have been restricted principally to the retail mortgage side of the business, with Eurohypo’s retail banking operations having been transferred since the start of February to Commerzbank’s management, leaving Eurohypo to focus exclusively on commercial real estate and public finance. "We always indicated that the bulk of the cost synergies would come from the low-margin retail mortgage business," says Teller. "In the real estate investment banking business we knew that cost synergies would be marginal."