Monday March 27. Hermann-Josef Lamberti, Deutsche Bank board member in charge of global technology and services is hosting an offsite meeting in the Sheraton at Frankfurt airport.
The mix is about 70% Deutsche Bank people, 30% Dresdner. Lamberti reassures the troops on both sides: there’s no dogma about which structure will prevail in my line of business, global transactions. But the underlying message is clear: Deutsche Bank’s IT system will prevail, and Dresdner’s will go onto the scrapheap of history, along with its specialist operators.
The day, which started friendly, “ended with a lot of long green faces”, says one eye-witness, referring to Dresdner’s corporate colour. Gerhard Barth, Lamberti’s nearest counterpart on the Dresdner side, was due to make a closing speech at the evening gathering in Frankfurt’s Mess-Turm, but he had long since fled with his tail between his legs. The revellers had to console themselves with the antics of a ventriloquist and a pair of dummies. No prizes for guessing what analogies were drawn.
It was 20 days since the Deutsche and Dresdner rank and file had seen people standing in the street gasping at the Bild-Zeitung front page headline, “Giganten-Fusion”, which told them the two banks were merging, (alongside another eye-catching story). Two days of initial euphoria at the thought of creating a world-beating megabank, climaxing in a global press conference by the two chairmen, Rolf Breuer and Bernhard Walter, were abruptly punished by the stock market, which drove Deutsche and Dresdner Bank shares back below pre-announcement levels. Analysts decided Deutsche and Dresdner were giving away too much to Allianz, the third party behind the deal.
Even three weeks later the share prices languished, but three weeks was too soon to judge the pluses and minuses of a merger which will reshape corporate and financial Germany.
However, it was clear that the merger masterminds, having drawn the big picture, were facing an almighty and bloody mess at ground level.
Maybe that wasn’t important. The rationale for the merger was pretty simple. Allianz, the “spider in the web” of corporate Germany, wants to get rid of embarrassingly large stakes in two German banks: Dresdner Bank (21.7%) and HypoVereinsbank (17.4%), and it wants to expand in retail fund management and distribution of its products. Paul Achleitner, Allianz’s CFO, who joined from Goldman Sachs in January, drew up a structure in which the spider would sell its Dresdner shares, reducing its stake in the new bank to below 5%, using the proceeds to pay for three gems from Deutsche: fund manager DWS (costing e3.8 billion to e4.1 billion), 49% of the retail bank Bank24 (costing around e1.5 billion, including Dresdner’s retail operations and 70% of Deutsche’s Italian retail arm Finanza&Futuro), and life insurer Deutsche Herold (e600 million). In the meantime Deutsche and Dresdner would merge, by means of a share exchange in a ratio of roughly six Deutsche shares to Dresdner’s four, and combine their corporate, private and investment-banking capabilities. Their pooled hidden reserves (industrial holdings) of e33.5 billion would become a “war-chest” for further acquisitions – which could include buying a US investment bank, such as Merrill Lynch, Goldman Sachs or JP Morgan, or an internet company.
That’s the big picture, why bother about the detail? “Nobody cares about investment banking,” said a former Deutsche banker the day the merger was announced.
But the investment bankers care and they will fight tooth and nail for their turf. Breuer dismissed as “absolute rubbish” a report in the Financial Times on March 9 – the day of the global press conference – that parts of Dresdner Kleinwort Benson, Dresdner’s investment-banking arm, might be shut down or sold. “It’s a precious jewel and a valuable addition to the investment portfolio of Deutsche Bank,” he smarmed. “We can only win if we keep this jewel.” But dismay at the merger among DKB’s investment bankers, and integration-fatigue at Deutsche, after the absorption of Bankers Trust, made sale or closure look increasingly preferable to integration. Within a week, Breuer ate his words and admitted that DKB might be for sale after all.
Dresdner’s investment bankers are proud of what they have built since buying UK merchant bank Kleinwort Benson in 1995. They outperform Deutsche in UK and German corporate finance and advisory. But they also have credible equity and debt capital markets operations. TJ Lim, global head of markets, brought a fixed income and derivatives team with him from UBS which he integrated successfully with the rest of DKB, says a former close colleague. Lim and his team emphatically don’t want to live through a repeat of the massacre experienced by the old-UBS investment bank when taken over by Swiss Bank Corporation in December 1997.
Lim used to work for Edson Mitchell, Deutsche’s head of global markets, when they were both at Merrill. Unless Mitchell goes onto the Deutsche board, it’s unlikely that Lim would accept a position beneath him now.
There will be similar stand-offs in all investment-banking disciplines. Michael Dobson, Deutsche’s board member in charge of asset management, resigned on March 17, faced with the sale of Deutsche’s fund manager DWS and the prospect of sharing responsibility for asset management in the new bank with Dresdner’s Leonhard Fischer, a capital-markets specialist with little experience in that area.
Insiders expect a showdown between Yves de Balmann, Deutsche’s corporate finance co-head who sits in New York – a man with a short track-record in this area – and Tim Shacklock, Dresdner head of corporate finance in London, whom his colleagues regard as “the best”.
The investment bankers rebel
The more the detail is examined, the worse the overlap appears, and unnecessary bloodshed seems inevitable. At the first historic meeting between investment-banking co-heads, both sides agreed on one thing: they didn’t want to go through integration. The Dresdner side knew they would be destroyed, the Deutsche side balked at reliving the destruction they had wrought on Bankers Trust.
They told their respective boards they wouldn’t do it.
The overlap could hardly be worse. A colour-coded spreadsheet devised by Dresdner Kleinwort Benson analyzing its 30-odd business groups was superimposed on a universe of 15 to 20 potential acquirers. A white flash shows where Dresdner brings nothing to a potential acquirer, a green flash where it provides a good fit, and a yellow flash where it brings headaches and overlap. For one candidate there is nothing but yellow flashes. What a surprise: it’s Deutsche Bank.
Until it is sold, DKB is a lame duck. Its clients might as well deal with Deutsche Bank.
Even if they deal with Dresdner, which must remain a legal entity until January 1, they can’t be sure the person they’re dealing with will survive.
Why then, did Walter herald the deal, when he proudly broke it to his Dresdner board on March 1, as a “merger of equals”? Because, it seems, no-one of the 12-or-so people in Allianz, Deutsche and Dresdner, involved in the high-level discussions had bothered, or dared, to sound out their people, even fellow board-members. Perhaps the danger of a leak was too high. As it turned out, the story broke weeks earlier than the merger parties had planned.
manager magazin, the well-connected Hamburg monthly, had the story in mid-February. To protect its sources, and not to jeopardize the merger, it held off until March 7 when it placed the bombshell with Bild-Zeitung, and its own on-line service.
Some board members, and many below board level, felt betrayed. Dresdner Kleinwort Benson’s department heads decided they had to fight for their own future, which might involve finding a buyer, probably an American, such as Chase Manhattan.
By the end of March there were signs and hopes that the whole deal might fall apart. American institutional investors were up in arms, threatening to vote against the merger at the annual general meeting in May and at the extraordinary general meeting (EGM) in November. Their argument: Deutsche and Dresdner shareholders are being sold down the river. Allianz is the winner.
But those close to the deal are impatient with what they say is a misunderstanding, not helped by bad PR from the banks themselves. As for the investment bankers that may be lost.
One insider says: “Investment banking includes a lot of egos and prima ballerinas, and that’s fine. But their compensation contains a risk premium. People move around. I don’t see why some of them can’t be integrated. As Walter said at the press conference ‘a blending of the best’.” To keep things reasonably stable the risk premium went up. DKB staff were promised 50% of their last year’s bonus if they stay until mid-year.
What drove the deal then, and how and why did it get done?
Once upon a time Deutsche Bank and Allianz were close partners, dominating corporate Germany. Then in 1983 Deutsche decided to move into insurance, setting up a life insurance company in 1989 and buying a majority stake in Deutsche Herold in 1992. Allianz saw this as a direct challenge and moved closer to Dresdner, feeding it the corporate finance mandates it used to give Deutsche.
Hilmar Kopper (chairman of Deutsche’s supervisory board) and Ulrich Cartellieri (fellow supervisory board member) have always dreamed of getting back together with Allianz, says a former Deutsche banker. Ronaldo Schmitz, board member in charge of corporate finance, until he retires in June, “kept trying to get back together with Allianz”, the banker says. But to little avail.
For the last two years, logically the most promising domestic merger in Germany appeared to be the Deutsche-Dresdner one. Management consultant McKinsey recommended it to Dresdner last year. The year before it had recommended the same to Deutsche, before Deutsche hired four of its staff. The key to such a merger was Allianz, because of its dominant 21.7% stake in Dresdner.
But Allianz and the influential players on Dresdner’s supervisory board had other ideas: they wanted to marry Dresdner with newly merged Bavarian giant HypoVereinsbank. That flirtation persisted until January this year, when it became clear that Hypo chairman Albrecht Schmidt would not budge: he wanted a commercial “bank of the region” not a wannabe global investment bank, and he wanted to be in the driving seat. Moreover Schmidt was pursuing a “Bavarian solution”: a merger or alliance between Hypo and Munich Reinsurance.
Munich Re didn’t want Dresdner to alter the equation.
Allianz changes tack
Walter who became chairman of Dresdner in 1998 almost by default, because of a board-level tax evasion scandal, knew something had to happen to Dresdner, and he made no secret of being a merger candidate. “We’ve been married off to practically everyone except the World Bank,” he quipped to one speculator.
| Breuer and Walter look forward to a “blending of the best” of Deutsche and Dresdner | ||||||
According to manager magazin Breuer, in April 1999, following initial talks with Walter, set up operation “Sturm und Drang” (storm and stress): a merger with Dresdner. But there was resistance from Allianz, which feared a concentration of banking power in Germany, and from Walter’s supervisory board, which still favoured the Hypo solution.
Then in the summer the two bank chairmen discussed a “mini-merger” of their retail operations (codename Daphnis&Chloe), but that too was vetoed by Allianz.
Allianz chairman Henning Schulte-Noelle has been there for nine years and is extremely cautious. He is wary of seeming to exert too much influence over the German corporate or banking landscape, and reluctant to leave too much on the table for the German tax man.
Three factors changed the equation. First, Schulte-Noelle hired Achleitner, Germany’s number one corporate financier, from Goldman, with effect from January 1 2000. Second, German finance minister Hans Eichel on December 21 proposed tax changes, including tax exemption for sales of corporate stakes from one German company to another, although if passed in June as planned, these won’t come into effect until 2001. Third, upstart Vodafone AirTouch fought for and won control of Mannesmann, a successful telecom company which most Germans judged to be unassailable.
This last event, clinched in late January, showed everyone, including Breuer, Walter and Schulte-Noelle, that even large and successful companies and banks aren’t impregnable to hostile takeover. “We want to be the drivers of consolidation, rather than those who are driven,” said Breuer at the press conference.
There are rumours that Dresdner, and even Deutsche, were being threatened by hostile takeover. “Only in the abstract,” say sources close to the two banks. Eichel’s proposed tax reform cut both ways: it promised to free up the banks’ industrial holdings, but that also made Deutsche, even more than Dresdner, an attractive target to plunder for its hidden reserves.
Achleitner is credited with persuading Schulte-Noelle to change his mind. The Bavarian solution for Dresdner was no longer a runner and there was a chance Allianz could sell its 17.4% stake in HypoVereinsbank to Munich Re instead. Walter visited Schulte-Noelle in Munich on February 7, then saw Breuer on February 11. But how much he was the pawn and how much the errant knight is open to question. Another version has it that Breuer and Schulte-Noelle had already cut a deal in January, and only then did they tell Walter.
manager magazin had the story by mid-February.
Walter’s role is heavily criticized by colleagues past and present. He’s not a dealmaker but he decided to do this alone, speaking to only one or possibly two of his colleagues on the board and to the man now in charge of the Dresdner side of the integration, Klaus Rosenfeld. Even a special strategy adviser, Felix Hufeld, hired last summer from Boston Consulting to run a think-tank reporting directly to Walter, was kept in the dark. It didn’t help the chairman’s image that the chain-smoking Walter appeared at the press conference to have secured a five-year contract for himself, as co-chairman of the new bank, while leaving his colleagues and employees to take their chances. Few people expect him to last longer than Frank Newman did after selling Bankers Trust to Deutsche.
Those familiar with how Walter was elected, by eight votes to three in the Vorstand, blame two members of the supervisory board, Wolfgang Röller and Wolfgang Leeb, for letting Walter out of their sight to negotiate this deal alone.
Walter made his own choice of board members to come with him. Originally there were to be 16 board members of Deutsche Bank Neu. But strongman Kopper insisted the count should be eight to six in Deutsche’s favour. Walter concurred. That meant he had to lose four of his 10-man managing board. Two of them were easy: Andreas Bezold, head of risk controlling, a newcomer to the board, and Heinz-Jörg Platzek head of compliance, since they didn’t head revenue-earning divisions. Walter also ditched Gerd Häusler, chairman of Dresdner Kleinwort Benson, and Ernst-Moritz Lipp, co-responsible for global corporates and institutions. Most insiders say this was for personal reasons: Häusler and Lipp had both been hired by former Dresdner heavyweight Gerhard Eberstadt, now retired. Eberstadt, suave, international, and Walter, parochial, Swabian, were like chalk and cheese. Häusler the tall, rather remote former Bundesbanker and the vertically challenged, chain-smoking Walter, had never seen eye-to-eye, although they hadn’t rowed openly as some press reports had it. Other sources say Häusler was “weak” and had to go.
Lipp had shot himself in the foot in the style of General Haig, telling the world, on no authority whatever, what Dresdner Bank would and would not do. Last September at a high-profile banking conference in Frankfurt he said Dresdner Kleinwort Benson had to merge, or form a pan-European partnership, to achieve critical mass in investment banking, but, he said the partners would not include Deutsche Bank or Paribas because they were Dresdner’s main rivals. Dresdner issued a correction.
But Walter had to get his board behind him, so in private conversations he kept them hoping they would make the cut. On March 1 at an offsite meeting in Königstein, Walter broke the news of the merger to his full board. It was only on March 8, a day before the momentous press conference, when all the world would know, that Häusler and Lipp, Bezold and Platzek, learned their fate.
No such sacrifice was apparently necessary at Deutsche Bank: only one had to go and that was Schmitz, who is due to retire anyway in June.
But in allocating responsibilities to the new joint board there was a problem. Leonhard Fischer, Dresdner’s former JP Morgan capital-markets Wunderkind, could not be sacrificed.
Yet, aged only 37, he might well lose a power struggle against the Deutsche Bank global markets machine. Mitchell runs his own fiefdom, and his lieutenants Michael Philipp (head of equity markets, Saman Majd (head of fixed income derivatives) “are at least as good as Fischer”, says a Deutsche Bank source.
Deutsche’s investment-banking board member Joe Ackermann reportedly warned: Fischer joins the board as an investment banker “over my dead body”. Fischer side-stepped this threat by taking over responsibility for asset management. But that brought him face to face with Dobson, Deutsche’s asset management chief. Dobson simplified matters by deciding to walk the plank. He had been wanting to leave anyway, and the last straw was the sale of 20% of his business to Allianz.
But Fischer has to prove himself, says the Deutsche source: “He has to show he understands asset management as well as capital markets. If he doesn’t, he’s out.”
That is no more than the expected Darwinism which is beginning to operate even at the board level of some German banks. All the board members, and candidates for the board, have to justify their position by performance.
Dobson’s exit leaves a Deutsche vacancy on the 14-man board, later to be reduced to 10. It is no secret that Mitchell would like a board position (“he’s already tried it once,” says a Deutsche source). Breuer’s view used to be that producers like Mitchell are wasted on the board. Sitting on the Deutsche board requires a weekly visit to Frankfurt to spend the day sitting through discussions in German, most of which are irrelevant to global markets. But the future Deutsche board is empty of capital markets leadership. If the London-New York axis of Deutsche Bank is so strong, it needs representation at board level. Ackermann, board member for the US and investment banking – and at the moment Breuer’s presumed heir-apparent – is a Swiss, and is chastised for his slow speech and lack of charisma.
Insiders assume that Edson will rise to the board to support him, or even finally replace him.
“Edson can make a heck of a lot of money. We need him on the board,” says a Deutsche source. But a down market could make all the difference to this equation. “The downside includes the bad press we’re getting at the moment. If the client doesn’t believe in what we’re doing, we get hammered. We need the stable earnings of asset management and we have to be swift with our e-commerce plans.”
At the moment, as for the last few years, Deutsche’s appetite for adventure is being fuelled by earnings from lucrative investment banking in buoyant markets. “If investment banking has just a normal year we have to look around,” the insider says.
The winners and losers
That brings us to the question, what has Deutsche Bank Neu gained from the merger, and what has it lost? Stock analysts say it agreed too high a price for gigantism. Deutsche loses its prize German mutual fund business DWS (e94 billion under management): either it or Dresdner’s equivalent, dit (e48 billion), had to go for anti-trust reasons. “It takes two to tango – there’s a price for everything,” said Breuer nonchalantly at the press conference.
Deutsche also sells its retail business, Bank24 to Allianz, although it retains the right to distribute its products through the network in perpetuity. Allianz has the option to take a controlling stake in Bank24 although it says it will probably stick at below 50%.
Deutsche undertakes to limit its stake to 10%.
Is this so tragic? Deutsche retains the distribution right without the headache of costs. On the other hand, unlike Allianz, it won’t be able to seize control even if that becomes the right strategy. Deutsche also lets go control of its promising on-line service Brokerage24, although it has other big investments in e-commerce.
The merging banks scrambled to correct the impression, given at the press conference, that they were abandoning low-net-worth clients. The impression was deepened by remarks from Dresdner board member Joachim von Harbou suggesting that the cut-off point for private clients of Deutsche Neu would be wealth of Dm200,000. “He’s been rapped over the knuckles,” said a Deutsche source.
Deutsche Bank’s biggest task, over the next few months, is to tell a better story to analysts, shareholders and the press. None of them have been won over.
For Allianz it is another story. It has exchanged one fifth of a bank that had lost its way for a head-start in domestic fund management and retail distribution. It will add DWS to the US fund manager Pimco which it bought last year. And it will share distribution of its insurance and savings products through Bank24, developed and branded by Deutsche Bank. Its declared goal for expansion is the field of old-age provision, a growing market given the stretching of life expectancy, and the need for funded pensions Europe-wide.
Given that wisdom it is unlikely to clash head-to-head with Deutsche on its retail products.
But the “grey area” admitted by those close to the deal is private banking. What is the threshold of the private client? Allianz will not want to let go of retail clients that become high-net-worth individuals – it will be selling private banking products too.
The other unknown is how far the retail market might become the direct end-user of investment-banking products, and products once thought of as exclusively wholesale. There is a trend in this direction and distribution via the internet is likely to reinforce it. Deutsche’s separation, however cosmetic, from its retail base, may come back to haunt it.
However, in the shorter-term Deutsche’s investment bankers – those that reckon they will survive the cut, if it comes to integration – are salivating at the prospect of the corporate finance activity that will be triggered by their own merger. Allianz must sell around e6 billion worth of its Dresdner Bank stake. That suggests a number of block trades, and the sale of exchangeable bonds, which can be converted after Eichel’s tax break comes into effect. Then there are the IPOs of Bank24 and Brokerage24, planned within three years.
But biggest of all is the placement of Deutsche Neu’s own e33.5 billion industrial portfolio assuming that at some time it will want to turn that into cash. Deutsche Bank Neu could practically sustain itself with its own self-generated business.
Market visionaries don’t expect Deutsche Neu to buy a Goldman tomorrow. It will need a part of the cycle in which investment banks suddenly look cheap. It has chosen a rarefied stratosphere occupied by only a handful of players – Goldman, Merrill, Morgan Stanley – in which to compete. Its only rival for this league in Europe is Credit Suisse (UBS still lacks a US presence). In the US its rivals are Chase, Lehman and JP Morgan.
“If Deutsche hadn’t made this move,” argues a source close to the deal, “it would have had a JP Morgan problem: lack of throw-weight.” Now with its new throw-weight, Deutsche Bank is ready for tougher times ahead. It could become a safe-haven for a US investment bank in trouble.
