| The investment banking committee (as of mid-April 1997) | |||
| Global Markets | Global Finance | Equities | Corporate Finance |
| *†Gerhard Eberstadt *Gerd Häusler Leonhard Fischer Erich Pohl |
*Bernhard Walter John Cameron Bernd Fahrholz |
†*Hansgeorg Hofmann Alan Yarrow |
†*Hansgeorg Hofmann Tim Shacklock |
| Americas | Asia | UK | |
| *Ernst-Moritz Lipp Georg Fugelsang |
Rolf Willi | †David Clementi Simon Ball |
|
| KEY | |||
| Global Markets | Fixed income trading and sales: debt capital markets; forex and precious metals; derivatives; markets risk management | ||
| Global Finance | Syndicated loans, product finance, structured finance | ||
| Equities | Sales, trading and research | ||
| Corporate Finance | Equity capital markets, M&A, financial advisory | ||
* |
Dresdner Bank board members |
||
| † | Directors of Kleinwort Benson |
||
In February, Hansgeorg Hofmann, Dresdner Bank’s most senior diplomat, ran out of patience. The tall, go-getting investment banker, who won his spurs at Merrill Lynch and Shearson Lehman in the 1980s, wasn’t his normal, jovial self.
He called Dresdner supervisory board chairman Wolfgang Röller. The bank’s father-figure heard Hofmann calmly unfold a tale of deceit and subterfuge.
The management of Kleinwort Benson was leaving its new deputy chairman out of the information loop. Kleinwort colleagues were failing to tell Hofmann about important meetings, or happened to schedule them for the same day as Dresdner’s weekly board meeting in Frankfurt. Hofmann was not given advance warning when senior managers left.
There were more subtle messages that Dresdner’s ambassador was unwelcome: Hofmann’s first office in London after Dresdner acquired Kleinwort Benson in August 1995 was a small room rather than the elegant quarters usually given to a deputy chairman of the bank. When Sir Nicolas Redmayne, the bank’s other deputy chairman, left a year later, no-one bothered to tell Hofmann that the superior office was available.
Hofmann and his colleagues on Dresdner’s board now say publicly all this was the result of a “bottleneck” in communication between Kleinwort Benson and Dresdner Bank: the fact that Kleinwort’s chairman Simon Robertson was allowed to be the single channel of communication with the Germans.
At the time, Hofmann was still engaged in quiet diplomacy. After Christmas, he made London his permanent base in an attempt to see more of Kleinwort colleagues. Now he heard all of their concerns about the Dresdner takeover and the way Kleinwort was run by Robertson and the UK board. Hofmann tried to help by giving informal advice to Kleinwort staff about how to handle their management and their counterparts at Dresdner in Frankfurt. But he left management authority in Robertson’s hands.
With hindsight, that was Hofmann’s big mistake; it appears to have destroyed any prospect of a frictionless merger between the two organizations. If Hofmann couldn’t succeed, however, could any other board member of Dresdner have done any better?
Dresdner’s Englishman
When Dresdner paid £1 billion for Kleinwort Benson nearly two years ago, four of Dresdner’s board members went to London to conduct due diligence, meet management and plan the integration of the two organizations. They included Gerhard Eberstadt, who is head of global markets as well as being responsible for the investment bank’s overall strategy; Horst Müller, who had conducted talks to purchase Kleinwort five years earlier and Bernhard Walter, the long-term head of Dresdner’s substantial business in syndicated loans, project and structured finance.
When they left, Hofmann stayed to put their ideas into practice. He has been commuting between London and Frankfurt ever since.
Of Dresdner’s 13 board members, Hofmann has the most experience of British investment banks and their culture. Before joining Dresdner in 1989 as head of financial markets (he was promoted to the board in 1994), Hofmann had been away from Germany for 24 years, working in London, Paris, New York and Boston. As a managing director of Merrill Lynch and later head of primary capital markets at Shearson Lehman Hutton in London, Hofmann got to know most of Europe’s leading bankers, and many count him as a friend.
No-one on the board doubted that Hofmann was the right man to handle the integration with Kleinwort. “Among the board members of Dresdner, he’s the Englishman,” says a friend and former director of Dresdner.
Despite their trust in Hofmann, several other board members wanted an equal or greater say in how the investment bank was run. In early 1996 Dresdner Bank had re-organized its 12-member board of directors, forming an elite group of five strategists, naming Gerhard Eberstadt as the man for investment banking.
Hofmann may be better known than Eberstadt in the international capital markets, but at Dresdner Bank Eberstadt plays the senior role. Hofmann is expected to take on Eberstadt’s role when the 63-year-old retires, probably in two years.
In the meantime, Eberstadt as strategist has the right to make policy in Hofmann’s areas: equities and corporate finance as well as in his own, global markets. Hofmann is sensitive to this: he agreed to speak to Euromoney for this article only on condition that Eberstadt was present.
Besides Eberstadt, Müller still has considerable authority in investment banking strategy, and the bank’s chief executive Jürgen Sarrazin is also involved. As a successful dealmaker, Walter remains important.
Last year, two new board members arrived who also claim an active interest in investment banking: Ernst-Moritz Lipp, a well-known German economist, who is coordinating Dresdner’s preparations for European monetary union, is in charge of asset management and North American business. Gerd Häusler, who left the Bundesbank directorate last year, has joint responsibility for global markets with Eberstadt.
“Germans have a quasi-religious respect for the Bundesbank, so Häusler must have been given a very free hand, at least at the beginning,” says one Dresdner source. Before signing with Dresdner, Häusler said he would join the board (at best a sideways move from his influential position at the Bundesbank) only on condition that the investment banking activities were controlled directly by Dresdner’s board of management in Frankfurt.
Once Kleinwort’s blocking tactics were known, the more pugnacious of Dresdner’s board saw the chance for action.
“We didn’t join up with Kleinwort Benson to eat them, but to get more bite,” says the caption on an advertisement that never appeared. It shows a delicate humming bird – Kleinwort Benson – hovering in the open jaws of an alligator – Dresdner Bank. The Dresdner board decided the takeover was too real for a joke like that. “There hasn’t been much humour around here for a while now,” confirms one Dresdner director who dares to hang the alligator on his office wall.
Studied politeness has been the posture of Dresdner’s board ever since the acquisition. Once the deal was signed, the relationship between the two banks was officially described as an “integration” rather than a “takeover”.
Dresdner executives still shudder to see how their counterparts at other German banks notably Deutsche have started the hard sell, discussing their clients in public. Kleinwort Benson, one of London’s last traditional merchant banks, appealed to the Germans’ reverence for the English gentleman’s famed refinement and reserve. The perfect example was Simon Robertson, Kleinwort’s deputy chairman and later chairman.
Moreover, Dresdner’s board had known Kleinwort Benson for years. Their relationship goes back to 1990, when Dresdner board member Müller first negotiated with Robertson and the then chairman, Lord (James) Rockley to buy the UK merchant bank. Kleinwort then was not the force it is now, but it was already strong in Dresdner’s weaker areas: international equity sales, equity research and corporate finance.
Ultimately the takeover talks broke down because of involvement from Dresdner’s partner Banque Nationale de Paris (BNP). The Dresdner-BNP alliance has been effective in providing capital and sufficient business to justify the partners’ joint ventures in eastern Europe and now Latin America. But BNP’s aspirations to be equal with Dresdner in the international capital markets were too grand – even in 1990. Dresdner felt it had a right to be the senior partner in any dealings with the British. “BNP wanted it to be a ménage a trois,” sighs a senior Dresdner source involved in the negotiations.
The two banks remained apart, but the relationship of trust and respect continued. Each needed the other, and Dresdner was clear that it chose Kleinwort Benson because the two banks complemented each other so well.
For the next year and a half, Hofmann worked closely with Kleinwort and struck up a close friendship with Robertson and other Kleinwort managers. None was more valuable than Robertson, the corporate financier who had been at the bank for over 30 years.
Hofmann dreaded losing Robertson; he was desperate to find a way of pleasing both sides, even though Dresdner as parent clearly felt that it was the senior partner. “We’re not going in with our Teutonic boots on,” Hofmann said about the Kleinwort integration.
Dresdner was determined to avoid the mistakes of Deutsche Morgan Grenfell which had lost senior staff, fallen prey to the alleged fraud of fund manager Peter Young because of lack of control, and seen rivals in London and Frankfurt scrapping over management positions.
Concessions
The Germans were so reticent, it seems, that they gave Robertson the impression of a promise that Kleinwort Benson would be allowed to remain largely autonomous from Dresdner Bank. That proved to be a fallacy.
The Germans were prepared to make significant concessions to keep Kleinwort’s board happy. Robertson started attending Dresdner board meetings whenever the investment bank was discussed, so he was effectively at board level without the formal title or the irksome extra responsibilities. Sarrazin now says the board was even prepared to consider admitting Robertson as a full member.
For the rest of 1995 and most of 1996, Kleinwort remained peaceful. Until Robertson’s own departure this February the firm’s only significant losses were John St John and Tim Horlick – managing directors in equity capital markets who took several staff with them to Salomon Brothers – and Hendrik Borggreve, head of Kleinwort Benson Germany, who also switched to Salomon.
The integration ground on slowly. Some business areas started calling themselves Dresdner Kleinwort Benson; others stuck with the old names (and still do). Each business area made its own decisions: corporate finance in Germany set up sector teams on Kleinwort’s model; Dresdner’s equity research was merged into Kleinwort Benson, while macro-economic research remained independent. Some business areas merged, while others remained apart by agreeing to split the business on geographical lines.
In New York and Tokyo, the two banks’ respective subsidiaries were merged, often with joint responsibility given to the product heads from each bank. Naming sole product heads for the organization would have been too risky; it would have meant choosing between the Kleinwort product head in London and the Dresdner product head in Frankfurt.
When choices had to be made, the board members in Frankfurt naturally favoured the Dresdner managers who had, in many cases, reported to them for years. As Dresdner directors, based only in Frankfurt, they were able to focus on the interests of the local product heads who reported directly to them. Since Hofmann was the only board member liaising directly with Kleinwort, it was left largely to him to appease Kleinwort staff.
At the same time Hofmann could not short-change the key staff who reported to him in Frankfurt: such as Michael Rohleder, hired from Deutsche Bank by Hofmann to replace him as head of corporate finance, when he was promoted to the board. “We have to be careful not to create the impression that the only people who are going to make it into top management are those recruited from outside,” Hofmann says.
Hofmann the go-between tried to please everyone. “He was in an impossible position right from the start,” says one Kleinwort source. “He made us certain promises about our future here at Kleinwort and one had the impression he was making the same assurances to people in Frankfurt.”
In order to avoid conflict, the two partners remained at arm’s length. The beginning of the rift was a plan which was in fact intended to balance the interests of both sides. That plan to merge Dresdner’s and Kleinwort’s investment banking activities came from within Dresdner Bank during the early months of 1996. Many Dresdner staff credit the face-saving idea to Leonard Fischer, who was recruited by Eberstadt from JP Morgan in 1995 to become co-head of the treasury and trading division (now known as global markets). Fischer, who is only 33, stands out at Dresdner Bank for his strategic vision and negotiating abilities. “He won respect very quickly by constantly emphasizing the bank’s need for absolute credibility,” says one long-standing Dresdner manager who reports to him. Another colleague says that Fischer has “the rare gift of being able to shift his negotiating position while speaking”.
Non-confrontation
Fischer reasoned that if Dresdner Kleinwort Benson could operate a “global network” based on product heads in various financial centres around the world, it would avoid the problem of choosing between London and Frankfurt as a headquarters. The non-confrontational plan had an obvious appeal to Dresdner’s board.
Chief executive Jürgen Sarrazin is a sensitive man who dislikes public criticism. He abhorred the criticism German politicians and media directed at Deutsche Bank’s board for its “unpatriotic” decision to base investment banking in London. By naming no single centre as the focus of Dresdner Kleinwort Benson, Sarrazin and his board had offended no-one – at least outside the bank.
The horse-trading began immediately, Fischer’s scheme was officially adopted as policy by March 1996, but little was done over the next few months to put that into effect. Although it was immediately clear that London would not be the sole centre of the Dresdner group’s investment banking effort, everything else was still to play for.
From the start, Fischer could be confident that the board would elect to base fixed-income in Frankfurt. Dresdner was far stronger than Kleinwort in that business, even though it is heavily biased towards Deutschmark trading and sales.
German patriotism has nothing to do with it for Fischer, who says he would quite like to live in London. But it allowed him immediately to recruit Frankfurt-based specialists to his team and promise them authority for their product area within the whole of Dresdner Kleinwort Benson. One notable hire was Martin Korbmacher – who previously worked for Fischer at JP Morgan in Frankfurt – as head of fixed-income trading.
In the meantime, Hofmann had persuaded one of his former colleagues from Lehman Brothers, Peter Luthy, to integrate his firm Luthy, Baillie, Dowsett, Pethick & Co into Dresdner Kleinwort Benson. Luthy now runs credit spread products and reports to Hofmann, the old friend who recruited him. That has resulted in a contorted line of reporting, with Luthy reporting to Fischer and then to Hofmann, although Fischer reports not to Hofmann, but to Eberstadt and Häusler.
Debt capital markets moved to global finance only recently, when Luthy joined and Tim Shacklock, the new group head of corporate finance, agreed to let that business go. That separated equity capital markets from equity trading and sales.
The situation became equally contorted in equities. Since that business is one of Kleinwort’s traditional strengths, it seemed inevitable that equities would be run from London, under Kleinwort’s equities chief Alan Yarrow. But that depended on whether there would be a separate equities division. With equity capital markets allocated to corporate finance, equity trading and sales was initially integrated into the global markets department under the joint management of Heinz-Jürgen Schäfer, Erich Pohl and Fischer who reported in turn to Eberstadt and Häusler. Later, Fischer and Pohl lost authority over Schäfer’s department, presumably to give a raison d’être to a separate equities division, under Yarrow and Hofmann.
Four divisions began to evolve: equities, global markets, global finance and corporate finance; two controlled from London and two from Frankfurt. Reporting lines snaked from Frankfurt to London and back to Frankfurt again as each of the four divisions split themselves into many parts, like the investment bank as a whole.
The balkanization of Dresdner Kleinwort Benson was probably hastened when reality threatened to snag Fischer’s strategy. If the entire investment banking business were based on either Frankfurt or London, the scheme would not gain credibility as a genuine decentralized bank. So the investment bank’s global plan had to include at least two other centres.
Paris, it was announced, would be the centre of equity derivatives, which is part of global markets. Although the French capital does offer considerable expertise in that business, it is by no means the undisputed centre of equity derivatives in Europe. In fact, the choice of Paris as that centre was more-or-less accidental.
In March 1995 Serge Demolière, Dresdner’s head of equity derivatives, left for Bankgesellschaft Berlin. By default, Dresdner’s Paris subsidiary Banque Internationale de Placement (BIP) offered the greatest concentration of equity derivatives expertise in the group. BIP chief Dominique Ould-Ferhat has now been named group head of equity derivatives. Likewise New York is the home of Dresdner Kleinwort Benson’s new head of emerging markets, Baudouin Cronenburghs, another recruit from JP Morgan.
In addition to these reporting lines, Dresdner Kleinwort Benson has retained the matrix structure previously used by Dresdner, although the reporting system has been reversed: product heads now take priority over regional heads. Cronenburghs, for example, is head of global markets for North America and head of emerging markets for the group, reporting to George Fugelsang in New York and to Fischer and Pohl in Frankfurt. Fugelsang, head of Dresdner Kleinwort Benson in North America is an American hired by Sarrazin from Morgan Stanley in 1994.
Robertson’s jam
So when Dresdner’s board finally came to blows with Robertson, Kleinwort’s chairman, much of the integration at grass roots had already occurred. With a management structure for all of Dresdner Kleinwort Benson taking shape, Kleinwort’s own executive board was becoming less meaningful, although the investment banking sub-committee on Dresdner’s board was more active than ever.
The differences between Robertson and Dresdner’s board became clear only at the beginning of 1997, when the board started to form an overall senior management for Dresdner Kleinwort Benson. Sources on both sides confirm that the dispute was about managerial control.
It had taken the board in Frankfurt months to suspect that Robertson never had any intention of agreeing to share the management of Kleinwort Benson with executives from Dresdner. They had been planning for some time to form an executive committee for the investment bank, but Robertson was stalling. “We had the impression that he was beginning to appreciate the need for integration and that’s why we thought that agreement was still possible,” Häusler says. Even once the board realized Robertson’s true position, they tried to persuade him to change his mind. “We were patient for a very long time,” says Häusler. Too long, say some of the other board members. But in the end, Robertson condemned himself from his own mouth by stating clearly that he didn’t agree with the board’s management structure.
At the end of February, Sarrazin summoned Robertson home from a skiing holiday in Switzerland to meet him at the investment bank’s London office. Robertson must have realized immediately that Dresdner’s board – including Hofmann – had closed ranks. His offer to resign was immediately accepted. Dresdner board members have since hinted that Robertson had wanted to be the sole manager of Dresdner Kleinwort Benson, running the entire show from London.
But, according to Kleinwort sources, Robertson simply could not agree to the convoluted management structure that had grown up. He didn’t like zig-zagging reporting lines and a grouping of Frankfurt bankers responsible for the entire investment bank. Robertson won’t comment on this.
Now that Kleinwort’s figurehead has gone, the investment bank is in danger of losing other valued senior managers in London. Without a protector, Kleinwort’s managers appear to be taking on Frankfurt directly.
After Robertson’s departure the convoluted management structure was allowed to grow in even more luxuriant form. The board’s own investment banking committee of four or five board members already existed; now a second-level executive committee was added, headed by Hofmann as chairman and link between the two levels, plus six product heads, three from Dresdner and three from Kleinwort: Bernd Fahrholz (head of global finance at Dresdner), Fischer, Pohl, Shacklock, Yarrow and David Clementi (at the time, Kleinwort’s chief executive).
But many more than these six people wanted the right to join the committee, because they assumed only members of it would report directly to Dresdner’s board and have global authority for certain products. In order to stop more big-name Kleinwort staff from leaving, Dresdner’s board was forced to make concessions.
So, the global finance division is now controlled jointly from Frankfurt and London, by two powerful managers, Fahrholz of Dresdner and John Cameron of Kleinwort, each sharing managerial control. The board admits that appointing co-heads is a compromise.
Under the new matrix, some executives assumed that product management went hand-in-hand with disciplinary authority over all the staff in that area, too. But they reckoned without powerful opposition from the two regional heads, Rolf Willi and Fugelsang.
Willi was Dresdner’s co-head of treasury and trading until 1995, and his move to Singapore as head of all Asian business for Dresdner Bank was regarded as a promotion. Clearly, Willi could not be excluded from a panel that included his former co-head Pohl and his successor Fischer. Likewise, Fugelsang was too important to be left out.
Amid all these competing claims, the board decided to enlarge the committee to more than a dozen individuals. So many of Dresdner’s board members are involved in investment banking that no fewer than five of them are included, even without long-term strategist Müller. Eberstadt and Häusler share responsibility for global markets, by far the largest division, while Hofmann runs equities and corporate finance. Walter is responsible for global finance. Lipp, the widely-touted successor to Sarrazin, appears on the committee as head of the group’s asset management arm.
The line-up announced by Sarrazin on April 10 was evidently the product of last-minute discussions. Sarrazin almost forgot to include one board member, Lipp, and completely omitted head of UK investment banking Simon Ball (Hofmann had to make a hasty correction afterwards). But the 15-strong committee ultimately included all the vital people. The job of chief executive of Kleinwort Benson was abolished, underlining Frankfurt’s new supremacy.
Initially, Hofmann was named as global coordinator of the new committee. But less than 24 hours later, Eberstadt took on that role himself. Hofmann may have been Dresdner’s ambassador to Kleinwort, but he doesn’t enjoy diplomatic immunity in Frankfurt. There, Hofmann tries to blend in with the rest of the board and avoids his UK role as spokesman of Dresdner Kleinwort Benson.
Although the two organizations have adopted an official joint name, Dresdner Kleinwort Benson, the glue holding the names together is Hansgeorg Hofmann. Hofmann is respected as a fair manager, but trying to meet demands from two increasingly hostile camps, and to please his colleagues on the board is a terrible strain. It is extraordinary that Dresdner’s board is allowing one willing worker to take so much responsibility for the integration. His friends ask whether the potential rewards are worth the physical and mental strain.
The real confrontations within Dresdner Kleinwort Benson are just beginning. As one Kleinwort source says: “If it weren’t for Hansgeorg Hofmann, all this would have happened much sooner.” Where conflict is inevitable, diplomacy invariably fails. Hofmann and his board colleagues admit that with hindsight, they would have handled the takeover differently.
Now they are sending unmistakable signals that Dresdner’s board is going to manage Kleinwort with a firmer hand. “Sooner or later leadership has to be established,” says Hofmann.
The board has been spurred on over the past few weeks by the belief that its voice is now being heard clearly for the first time. When Robertson was chairman of Kleinwort Benson, messages from Dresdner’s board evidently didn’t get through to Kleinwort’s rank and file. Many Kleinwort staff heard Dresdner’s line of argument only after Robertson left, and “were won over immediately”, says Häusler.
Others are still sceptical. But through bitter experience Hofmann has come to think that forced integration may be the only way. “The two organizations must be integrated if Dresdner Kleinwort Benson is to be even half-way successful, and this must happen as soon as possible to position ourselves vis-à-vis the US competition in Europe,” he says. Hofmann now dares to admit that he admires the uniform corporate culture of Goldman Sachs and would like to create a similar culture at Dresdner Kleinwort Benson.
Yet staff at Dresdner Bank and Kleinwort Benson still behave more like rivals than members of a single organization. While the bank’s moral leaders such as Fischer remember to talk about “us at Dresdner Kleinwort Benson”, most staff still think of themselves as either Dresdner or Kleinwort people. Embittered staff at Dresdner, feeling they were treated unfairly over the past year, have hopes of a chance to reverse the situation.
Dresdner claims that no clients have yet deserted Kleinwort as a result of Robertson’s departure. But, if Robertson takes up a new position in the City as expected, he is likely to rob Kleinwort not only of clients but of some leading staff. Bonuses for 1996 were paid on March 27, so some departures are almost inevitable in the next few weeks. Dresdner’s board won’t be surprised if they include one or two members of the new investment banking committee. That would give certain German managers the opportunity they are waiting for to regain control of their particular business area.
Most painful of all for Kleinwort’s senior management is the growing possibility that in the long run, Kleinwort Benson plc will probably disappear altogether. Dresdner Kleinwort Benson is not a legal entity, and this suits the owners under present rules, since it means that capital can be allocated in a flexible way. Officially, supervisors at the Bank of England and at Germany’s Banking Supervisory Office have never heard of Dresdner Kleinwort Benson. For the time being, Kleinwort Benson plc must continue to exist, but its executive committee is already losing importance for the strategists on Dresdner’s board.
A member of Dresdner’s board hints that once the supervisory authorities look beyond national borders to take a global (or at least a pan-European) view of the banks’ activities, the organization of Dresdner Kleinwort Benson might be very different. The first step will be the Bank of England’s forthcoming approval for the merger of Dresdner’s London branch with Kleinwort Benson.
Eberstadt concedes that Dresdner Kleinwort Benson will now have to accelerate its expansion in international investment banking. But Dresdner is not planning to sacrifice current earnings for long-term investment in a highly uncertain market. “We have to be making money before we can expand further,” he says.
With so many board members actively involved, Dresdner Kleinwort Benson is now essentially run from Frankfurt. Staff on both sides say that Dresdner has finally been forced into the takeover it wanted to avoid.
