In a recent British film about the Oxford and Cambridge boat race, a demoralized and technically poor Oxford crew brings a high-profile American oarsman into its boat. The American doesn’t like what he sees, and brings over three of his friends. With four Americans of international calibre in the boat an ultimatum is laid down for the Brits. They are told to train and row in the American style. Otherwise, say the Americans, there is no way they can win.
True Blue is the true story of the 1987 boat race. But the film bears striking parallels with events at Deutsche Morgan Grenfell (DMG) in 1997.
Deutsche Bank’s Vorstand, its management board, has a simple goal to fashion a world-class investment bank. Call it conventional wisdom or call it plain fact, all the models of world class investment banks are American: foremost, Merrill Lynch, Morgan Stanley and Goldman Sachs. No surprise, then, that Americans have been put to the oars even though DMG was created out of Deutsche Bank’s investment banking interests and those of its 175-year-old British subsidiary Morgan Grenfell.
The increasing influence of DMG’S American crew was reinforced recently with a management restructuring that doubled the US contingent on the DMG board, giving it equal strength with that of the British. But the origins of US dominance go back to DMG’S formation in mid-1995 and the coming on board of Edson Mitchell an investment banker whose reputation matches that of the high-profile American crew member in True Blue. Hailing from Merrill Lynch, where he took the firm’s fixed-income business into the big league, Mitchell set about doing the same at DMG, and that meant bringing many of his old colleagues with him.
Now those hires are starting to wield power at DMG. Mike Philipp, who was brought over from Merrill to be head of global sales, was recently made head of global equities and given a seat on the board.
Other Americans have done well during Mitchell’s ascendancy even though they were not recruited by him. Board member and emerging markets’ head Rick Haller has been around since 1990 and has made his mark, like Mitchell, by building up a large business and making sweeping management changes. Then, there is New York-based Carter McClelland, who leads both Deutsche Bank’s and DMG’s operations in North America and has now taken on additional responsibilites as co-head of investment banking and a board member.
At the same time as the Americans are gaining the upper hand at DMG, top British executives are seeing their function change broadly becoming the administrators rather than the product heads charged with building the businesses. The two most senior Brits in the bank are not surprisingly ex-Morgan Grenfell. Both Michael Dobson, the Eton-educated chief executive, and Jonathan Asquith, now chief operating officer, started at Morgan Grenfell as graduate trainees. The organization they joined was an old-fashioned English merchant bank, complete with its insular traditions and protected businesses.
But times have changed and Deutsche Bank realizes that to achieve its ambitions for DMG requires looking more across the Atlantic than across the English Channel, especially to find revenue producers. Asquith was recently moved to the new position of chief operating officer, a somewhat administrative post, after only six months as head of global equities. Dobson who recruited Mitchell spends much of his time in Frankfurt attending Vorstand meetings. This means he is often distanced from the day-to-day management of the investment bank in London.
The changing balance of power at DMG is likely to continue as Americanized parts of the business do better, illustrating that the struggle is ultimately about profits not personalities. Mitchell’s fixed-income operation, for example, is estimated to be contributing as much as 60% of total profits, so vindicating his tough operating style, and Haller’s emerging markets section probably accounts for a further 25%. By contrast, the old Morgan Grenfell parts of the business are in disarray. In mergers and acquisitions, DMG fell from eighth in 1995 to 16th last year in the Acquisitions Monthly financial advisers league table. For the UK, it dropped to 18 from 10.
Troubles with M&A pale in comparison with the anguish at asset management. Normally very profitable, Morgan Grenfell Asset Management (MGAM) haemorrhaged over Dm1 billion last year because of rogue trader Peter Young, who took unauthorized stakes in non-listed companies. In this case, departing MGAM head Keith Percy was replaced by a straight-talking Scot, Robert Smith, who also joins the board.
Going the American way
The current board known as the investment banking board is composed of four Brits, four Americans and one German Ronaldo Schmitz, the former finance director of BASF and probably the most internationally minded member of the Vorstand. It is an indicative shift. When the board was first formed in 1995, there were three Germans and all were Vorstand members. The presence of just one German on the board is a sign that Frankfurt is watching the boat from the riverbank. But the growing presence of Americans reflects the shape DMG is taking with the Mitchell operation expanding its power and prestige.
Mitchell joined DMG to head its most powerful division, global markets. It employs over a quarter of its total staff of 8,000. Since his arrival two years ago he has hired 700 new recruits, and got rid of or alienated 500 others. He has a mandate to do what he did at Merrill, which in the 1980s was simply a US retail firm that commanded far less of the international clout it has today. At Merrill, he recruited from other firms all 15 of the senior managers who reported to him.
He is following a similar route at DMG. Although a substantial number of key staff have come from Merrill such as co-head of capital markets Grant Kvalheim, global head of sales Anshu Jain, and head of debt capital markets in London John Winter he has spread his net wide. He recruited senior staff from other firms, such as derivatives head Saman Majd from Salomon Brothers, head of London fixed-income trading David Campbell from JP Morgan, and to run sales in the US Paul Spillane who gave up a Goldman Sachs partnership to take the job.
Mitchell has already introduced US titles and organizational structures into his section. Global markets is the only division so far with “managing directors”, a change that came into effect four months ago. Even title-conscious Germany has had to toe the line on this one. For example Wolfgang Matis, the head of German fixed income, previously had the idiosyncratic Deutsche Bank title Stellvertretender Direktor (deputy director). He is now a managing director, along with two others, Christian Ganssmueller, the head of sales, and Antoine Kenkel, who runs the Pfandbrief business.
Mitchell has also changed the way his division pays bonuses. When bonus letters were received last month, staff were informed that a proportion of their bonuses would not be paid until January 1998. The proportion in question would be indexed to the performance of the global markets division as a whole. Nothing like this had been seen at Deutsche before. Some staff had 10% of their bonus deferred, others as much as 25%.
The brunt of the Mitchell revolution has been felt in Germany. Late last year he united the nine DMG trading floors, bringing the bulk of the traders to Frankfurt and leaving the sales staff in the regional centres. This caused some short-term pain. A big team from the Stuttgart trading floor went to L-Bank and Sudwest LB. The head of Germany who was also co-head of Europe resigned. One senior relative-value trader left in exasperation to manage the German Catholic church’s portfolio from picturesque Trier.
Market share, however, has increased by up to 15% in government bond trading; perhaps by 30% in Pfandbriefe. The introduction of a central risk book, instead of nine separate ones, has reduced the bank’s exposure to everyone going long as happened in 1994. And centralization has also ended the practice of Deutsche’s nine trading centres quoting different prices to clients, an anomaly that led to the bank being arbitraged on an often grand scale.
Spiteful swaps
Internal politics has also received the Mitchell treatment. In Germany it wasn’t just the nine branch trading floors that were at war with each other, departments on the same trading floor were too. Futures and options, fixed income and swaps refused to talk to one another, leading to the situation that swaps would be done outside just to spite the swaps group. “I wouldn’t describe the former situation as funny,” says new German head Wolfgang Matis. “Chaotic is a better description.” Mitchell reckons he has generated a lot of savings by getting them all to do business in house.
Prior to Mitchell no-one had the energy or the mandate to take on this chaos. For Mitchell it was all part of “globalizing” the trading book, and an important step since Germany accounts for between 25% and 35% of global markets turnover.
Inevitably some cultural conflict has arisen. In Mitchell’s division, you’re either a producer or you’re not. And if you’re not visibly doing something productive then you’re going to get “terminated” a word Mitchell does not shrink from using.
In the same mould as Mitchell and also making his presence felt as keenly is emerging markets head Rick Haller. Haller joined Morgan Grenfell before the birth of DMG and as a noted high producer obtained a lot of leeway. Like Mitchell, Haller is a builder who describes himself as “basically a businessman happy to work as a banker”. He built a fixed-income sales team from scratch because Deutsche’s salesforce could only sell triple-A credit and in a similar fashion he built equities, plus a mergers and acquisitions team. He grew his original organization of 50 to over 500 in five years. About $5 billion of resources are committed to his area. Some suggest he has built a bank within a bank. He doesn’t deny that he runs a fully integrated emerging markets investment bank.
He believes in long term profitability his definition of which is: “We need to make profits every day over the long term”.
But Haller is big on cooperation. “DMG has only been operating for one full year, and we rightly take the attitude, it’s better to do the business than create fiefdoms. Luckily we [in emerging markets] had our second-best year ever. So the economics for the division as to whether we got 50% of the profits or 75% are not that important. You worry about pennies only if the business is bad.”
What DMG has added to the Haller arsenal is extra resources, and, like Mitchell, a mandate to recruit. It was Haller who poached the top-rated ING Barings’ Latin America team. At 88 people this was the biggest snatch so far, and nearly landed DMG in a New York court. He has brought in some interesting business, such as the primary equity issue for TZI (Trans-Zambezi Industries) in southern Africa, and the first convertible issue in Argentina for IRSA, the New York-listed Argentine property company.
DMG’s mainstream equities business is also potentially very profitable. Deutche has more stock exchange seats around the world than any other firm. However, the process of knitting the business together and “globalizing” it, as Mitchell has been doing with fixed income, is a big one.
So it was natural to promote one of Mitchell’s tried and tested lieutenants to the job. Mike Philipp, previously head of global sales, was one of Mitchell’s first hires and was brought over from Merrill in June 1995 prior to that he was at Goldman Sachs. His role in global markets was to build a salesforce, a task that was an integral part of Mitchell’s strategy to break DMG’s reliance on proprietary trading. The extent of Philipp’s recruitment drive is suggested by Mitchell’s statement that 75% of his net increase in staff have been salespeople.
Philipp is a man of enormous energy and is impatient for results with the sort of short fuse that motivates bankers to deliver them. It will not be surprising if he introduces titles such as managing director and a US style organization in his new fiefdom, matching the changes already made in global markets.
As the Americans excel on the production front so the Brits are moving elsewhere in the bank. Philipp has taken the equities role from Asquith, who held the job for only six months. Chief executive Michael Dobson explains the move like this: “Jonathan Asquith had been both CFO and head of equities. We’d decided that we wanted Jonathan to remain in a central role and for it to be expanded. We felt that Mike was the best candidate to take over the equities business. It would have been hard for us to have done that earlier, because Mike was still at a critical point in putting together a worldwide salesforce for global markets. Doing it in February 1997 made it a lot easier for global markets.”
Was Asquith’s role designed to be that of a caretaker? Asquith, sitting in a room with Philipp in Frankfurt, says this was decidedly not the case. “It was intended to be a long-term role, but what we found in the end was that it was easier to get someone internally who could be effective in equities rather than find a chief operating officer.”
Amid so many changes and the introduction of so much that is new, the former Morgan Grenfell graduate trainee,who joined in 1979, smiles, “I suppose you might think I would be ossified. But I have religiously and intentionally changed what I do. I started in Latin America, then did project finance, then derivatives, was chief financial officer, then briefly head of equities. A COO needs to understand the dynamics of each of the businesses.”
The other change announced in the recent restructuring was the creation of co-heads of investment banking a move DMG reckons is consistent with the way several of its rivals have structured their businesses.
Poaching a big team
McClelland’s side-step to co-head is all the more peculiar because of the dual reporting lines it sets up. In his new role he will report to Dobson, chief executive of DMG. But in his other role as head of Deutsche Bank North America he reports direct to Schmitz, the Vorstand member responsible for investment banking as well as North America. So in effect, he reports both to and around Dobson.
McClelland’s decision to come to Deutsche after a successful career at Morgan Stanley was made during what he confesses was the best year of his life. He left Morgan Stanley in 1994 and promised to take nine months’ vacation. He spent the first three months “doing nothing”, the second looking at business opportunities, and the third going on a grand tour of Africa. Installed at Deutsche and also responsible for DMG in the US, he went about recruiting, bringing in among others a top technology team from his old firm, Morgan Stanley.
The team, led by Frank Quattrone, who is reputedly on $20 million over three years, was 45-strong, and poaching it raised a few eyebrows on Wall Street and in Silicon Valley. It has brought a number of high-tech equity deals, such as the $100 million secondary offering for Wind River Systems. “The technology team,” says McClelland, “is about as big a team as we would take on at once. We wanted to demonstrate that US corporates would deal with a non-US bank in scale.”
McClelland is co-head of investment banking with 38-year old Maurice Thompson, the ex-Warburg corporate financier. The two share a common background, and on one reading, it was natural to bring them together. “We sang from the same hymn book,” notes McClelland, nodding over to Thompson, who is wearing a grey pinstripe. “Maurice is in Europe, and I’m Captain America,” he adds.
But others read the situation slightly differently. The 52-year-old McClelland, with his background as head of Morgan Stanley’s corporate finance department and as the firm’s former head of strategy, has come in to beef up a section underperforming under a Brit.
The investment bank experienced mixed fortunes in 1996. Its equity-linked business boomed, and it did a few large bought deals for Total and PT Telkom among others but overall, equity capital markets had a quiet year. There was Deutsche Telekom, but the handling of that deal raised some issues of poor internal communications. Even inside the bank there is embarrassment on the subject of Deutsche making a grey market in the shares, even though DMG and the global syndicate had banned it.
Thanks to its top-rated telecoms analyst, Jim Golob, it has won advisory roles for the privatizations of France Télécom and Portugal Telecom. Advice itself doesn’t make much money, but when the flotation finally occurs it usually guarantees a senior place in the syndicate where lucrative fees do. “We’re not all the way there yet,” says Thompson, who goes on to describe some of the year’s highlights.
McClelland, who doodles voraciously, wants to reorganize and improve the linkage between research and origination. “In my old firm that was wired and piped. I think we can do better. We need to take it to the next level,” he says.
Fascinating cocktail
Thompson will focus on the origination side, while McClelland will concentrate on the key areas of recruiting, thinking out strategy and structuring the business. “We haven’t been nearly aggressive enough in putting in a support structure,” says McClelland. “And we’ll make a lot more money if Maurice spends 90% of his time going around seeing clients.”
Thompson, like Asquith and Dobson, is a German-speaker he took a double first in history and languages at Oxford. McClelland’s German is considerably weaker. He was in Germany for six months during the 1960s. “I can get to the airport and back,” he laughs. “It’s one of the many skills where I will have to take second place to Maurice.”
Asquith describes the culture DMG is building as a “fascinating cocktail”. The investment banking board with its gin-and-tonic Brits and margarita yanks most certainly is. All the product heads are on this board save the old Morgan Grenfell fief, structured finance. The Brits include Dobson, Asquith, Thompson, and Robert Smith, the recently appointed head of asset management. The Americans include the Merrill duo Mitchell and Philipp, McClelland, and the long serving Haller.
“Dobson says I am the one on the investment bank board who has most to say about other businesses,” says Haller. “Because the emerging markets division has been an integrated investment bank, I feel confident in encouraging and critiquing but hopefully in a polite way.”
Haller, who moved to England in 1973, says the old Morgan Grenfell culture of well-mannered politeness continues in these meetings which occur at least three times a month, and steer the bank’s strategy and approve key decisions. He doesn’t wish that to change: “The big swinging dick is an American art form,” say Haller. “I’ve chosen to spend my working life in England.”
For Dobson the responsibilities of senior management are keeping him apart from the on-the-ground action. When he isn’t in DMG board meetings, or those of the weekly management committee, he is increasingly in Germany. His role, like that of his predecessor John Craven, is “interfacing” with the investment bank’s paymasters in Frankfurt. He attends the fortnightly Vorstand meetings where he speaks English and his German colleagues speak German but the time commitment to Vorstand business is great and takes nearly a week out of every month. By Dobson’s own estimation, the Vorstand spends 80% of the time talking about issues which have no relevance to DMG.
Dobson is regarded by many as a hands-off manager an assessment he disagrees with and with his work cut out in Germany there is plenty of scope for the self-starters like Mitchell to expand their empires.
CEO’s political role
Nevertheless, Dobson is proud of the improvement in relations between London and Frankfurt. “Look at a few years ago, Morgan Grenfell was a hermetically sealed merchant bank within Deutsche Bank. I speak for all my colleagues when I say this: we are Deutsche Bank now. Whether someone is working in London or Frankfurt is irrelevant. It’s the same organization.”
On his management style Dobson says: “I wouldn’t describe it as hands-off. It’s inevitably more hands off than when I was chief executive of Morgan Grenfell. One clearly had to adapt from running a medium-sized investment bank … part of our job here is to identify the right people and give them the autonomy to go and do it.”
Dobson’s role is now more political, both in the bank and out. The flak the firm has received on excessive pay and guaranteed bonuses has pushed him into a more public role. “We are not building a culture based on money. It’s a myth and it’s time it was buried because it’s not true,” he argues. “The fact is, we are not market leaders in pay. There are banks out there some of which are our most vocal critics who I know pay considerably more than we do. They hire people we would not hire and pay them a lot more than we would pay even if we wanted to hire them. Those are facts.”
Besides, say others, when you are hiring from American firms the most vocal critics in question it’s never going to be a cheap process.
Dobson hopes to cultivate a collegiate style relationship with his senior management. But what happens in the film True Blue? The Americans in that film, far from being collegiate, try to evict their captain and his old school tie from the Oxford boat. Of course Dobson could never be chucked off an Oxford boat (he is a Cambridge man). They fail in the film as well.
However, the end of the film is the only bit that has no resonances for DMG. Oxford win the race without their prima donna American stars. When the film comes up for a remake the experiences of DMG may call for a different ending.
