Deutsche Bank Goes On The AttackPhillip L. Zweig
A sleeping giant is awakening on Wall Street. Its name is Deutsche Bank, and it has begun to stomp on some important toes. After five years of hand-wringing over whether and how to become a player in global and U.S. investment banking, the mighty Frankfurt institution is staging a frontal assault on the business in the U.S. Most visible has been its hunt for talent. Deutsche Bank has riled U.S. investment banking firms, notably Merrill Lynch & Co., by luring away top capital-markets professionals with fat compensation packages and guarantees.
Says one Merrill official with a shrug: "Some were good bankers. It doesn't hurt Merrill, but it's a pain in the neck." Adds M. William Benedetto, president of Benedetto Gartland & Greene, a New York investment bank: "All the firms are worried now that their best bankers will get a call from Deutsche Bank. It's raising the cost...to do business."
But Deutsche Bank has bigger plans than that. It intends to acquire a 25% stake in Gleacher & Co., a merger-and-acquisition advisory firm with whom it has an informal fee-sharing arrangement, as soon as it gets Federal Reserve Board approval. It recently acquired ITT's commercial finance unit for $868 million, one goal being to obtain inventory for asset-backed securities deals.
And on July 5, Deutsche Bank, whose global investment banking activities have been fragmented, consolidated them with Morgan Grenfell, a British merchant bank it acquired in 1990, into a new London-based unit, Deutsche Morgan Grenfell. It will be headed by Deutsche Bank board member Ronaldo Schmitz, regarded as the mastermind of the strategy. "We're trying to be one of the most powerful universal banks in the world," declares John Rolls, chief of Deutsche Bank's U.S. operations.
CRUMBLING BARRIERS. Deutsche Bank is joining a small coterie of other big foreign banks, notably Union Bank of Switzerland and Swiss Bank Corp., that are pursuing a global investment banking expansion drive. They are motivated by the recognition that they cannot consider themselves global institutions without strong investment banks in the U.S., particularly at a time when remaining regulatory barriers separating commercial and investment banking are expected to crumble. To a greater or lesser extent, each is building its business with talent lured away from other firms, but Swiss Bank has also expanded through a major acquisition: On July 3, its takeover of S.G. Warburg, Britain's largest investment bank, became official, making newly christened S.B.C. Warburg the largest European investment bank. The merger will take effect in the U.S. when the Fed gives its O.K. Germany's Dresdner Bank has also joined the global free-for-all with its plan, announced last month, to buy Kleinwort Benson Group PLC, the British merchant bank, though its moves in the U.S. so far have been modest.
These institutions bring to the table the immense financial clout--Deutsche Bank and UBS both have triple-A ratings--of their parents. They are also aided by the weak dollar and strong relationships with U.S. subsidiaries of European multinationals.
Still, even the Europeans don't believe they will soon be able to rival powerhouses such as Goldman Sachs, Morgan Stanley, and Merrill Lynch. Few European institutions are household names in corporate America. Indeed, UBS bankers fret that prospects west of the Hudson often confuse the firm with the package delivery service with similar initials. Says Perrin Long, veteran Wall Street analyst at Brown Brothers Harriman & Co.: "No foreign securities firm from Europe or the Far East has made any headway in this country on their own." And he doubts that the people they're hiring will be as productive at foreign firms as they were at American ones.
Nonetheless, Wall Streeters are eyeing the foreigners, and now particularly Deutsche Bank, with vexation--though their displeasure stems more from Deutsche Bank's success in recruiting talent than in grabbing business. In April, Deutsche Bank lured away Edson Mitchell, Merrill's highly regarded debt capital markets chief, who in June recruited his successor, Grant Kvalheim. Deutsche Bank has also raided other foreign firms and U.S. commercial banks. In early May, as reported in the trade magazine Investment Dealers' Digest, a top S.G. Warburg merger-and-acquisition specialist lambasted senior Deutsche Bank officials for stealing its staff, at a meeting in Frankfurt. And Citibank is still miffed over Deutsche Bank's raid last year on a first-string foreign exchange team.
But according to Rolls, a former United Technologies Corp. chief financial officer, the New York operation is getting business as well as people. "We're clearly not going to match [the big Wall Street] firms when it comes to domestic equity deals," he says. "What we want is for them to participate with us in deals from abroad and let us participate in domestic deals."
Rolls points proudly to secondary and rights offerings for Daimler Benz as examples of Deutsche Bank's U.S. capabilities. While he acknowledges that the January, 1994, secondary offering was a slam dunk because Deutsche Bank itself already owned Daimler shares, he says the July, 1994, rights offering demonstrated the bank's ability to distribute securities in the U.S.
Among other things, says Rolls, Deutsche Bank aspires to become one of the top global dealers in swaps and one of the three leading foreign exchange traders. For now, Rolls forswears interest in bridge loans, proprietary trading, or high-yield underwriting. "We've got too many other things to do," he says. While he doesn't rule out more specialized acquisitions, he doubts Deutsche Bank would buy a major U.S. full-service firm: "You're buying people. It's a tough thing to make it work."
Rolls acknowledges that until now, Deutsche Bank hasn't exactly moved with great haste. Why not? "Heredity plus environment," he says coyly. Rolls says he has no doubt that members of Deutsche Bank's board in Frankfurt were opposed to expanding into investment banking to begin with. Big Wall Street compensation packages were a tough sell. But he adds that Deutsche Bank has now resolved to do whatever it takes to snare top talent. By 2000, thanks to revenues from the commercial finance unit, Rolls says, Deutsche Bank's U.S. unit should be generating pretax income "well over" the $500 million it previously expected to earn from investment banking alone.
AN EDGE. Most analysts doubt that Deutsche Bank and the other Euros will make major inroads. They face formidable cultural and competitive obstacles in the U.S. New hires often chafe at their employers' risk aversion and cumbersome audit and approval procedures. Former Morgan Grenfell specialists describe Deutsche Bank officials in Frankfurt as "control freaks."
Further, while a triple-A rating provides an edge in derivatives transactions, where firms can be exposed if a counterparty reneges, corporations, says analyst Long, "go where they perceive they can get the best advice, or [where they] like certain individuals on a personal basis."
Close ties with U.S. arms of European companies may not much help, either. Chief financial officers at U.S. subsidiaries of European multinationals insist that they award business not on the basis of national ties but to the investment bank that can deliver the best product at the most competitive price.
As global investment banking warfare heats up, those prices will likely become more competitive indeed.
Eurobanks Take On Wall Street
WHAT'S GOING FOR THEM:
-- Deep-pocketed parents
-- Top credit ratings
-- Weak dollar
-- Close ties with European multi-nationals
WHAT'S GOING AGAINST THEM:
-- Stiff competition from strongest U.S. Wall Street firms
-- Weak U.S. securities distribution apparatus
-- Cultural differences, such as aversion to risk and cumbersome controls
-- Few relationships with U.S. companies