Is Bankers Trust Back On Track?
On Apr. 5, it was anything but business as usual for the methodical Frank N. Newman. By 5 p.m., the chairman and CEO of Bankers Trust New York Corp. had gotten the go-ahead from his board to buy investment banker Alex. Brown Inc. for a hefty $1.7 billion. By early the next morning, he was on a plane to Calgary, Alta., to see how his son was weathering a 40-foot ice-climbing fall. By nightfall, he could breathe easy. His son would recover, and his bank should prosper.
There had been few doubts that Newman, a former chief financial officer of BankAmerica Corp. and a former Treasury Dept. official, was the right man to fix the bank's wounded reputation and earnings, which had been sideswiped by a scandal over its derivatives sales practices. But questions lingered: Did Newman, an executive respected for his numbers acumen and integrity, have the vision to lead Bankers Trust into the corporate banking arena as a strong long-term player? In one fell swoop, the Alex. Brown deal allayed those fears. Says PaineWebber Inc. analyst Lawrence W. Cohn: "Bankers Trust is going to be a real competitor. There is no question about this now." Says Newman: "We think we have a significant opportunity and a real winner here."
ODD COUPLE. It was about a year ago that two friends--a director of Bankers Trust and a director of Alex. Brown--first broached the idea of a merger. Late last year, Newman met with the Baltimore-based investment bank's chairman and CEO, A.B. "Buzzy" Krongard. At first glance, the two would seem an unlikely pair. Krongard, 60, who has a shooting range at his estate, has a military mien, while Newman, 54, with his modest and slightly professorial air, likes hiking and the Philharmonic. But six weeks ago, the two got serious. The allure for Krongard: a big price tag, the fact that Bankers was not a stodgy commercial bank that would squelch originality, and BT's strength in fixed-income securities, where Alex. Brown was weak. To celebrate, Krongard gave Newman a box of pre-Castro Cuban cigars. As Newman told reporters by phone from Calgary: "One of the many things that Buzzy and I enjoy in common is a good cigar from time to time, though Buzzy has a better humidor."
In his first year at Bankers Trust's helm, Newman faced seemingly insurmountable problems in restoring the bank's reputation. He moved fast to settle a bitter derivatives lawsuit with Procter & Gamble Co. for about $150 million. Then he bought merger advisory firm Wolfensohn & Co., adding its chairman, former Federal Reserve head Paul A. Volcker, to the board. Now, with Alex. Brown, Newman has made the bank a bona fide player in equities. "Strategically, it makes a lot of sense," says David A. Daberko, chairman of National City Corp., which bought a regional investment bank in 1995.
Fixing Bankers' earnings, which had relied too much on trading and derivatives, has also been a tough job. Derivatives contributed 42% of 1994's income before losing $202 million in 1995. They began a turnaround in 1996 and should be in the black in 1997. Earnings, which had fallen in 1995 to $215 million from $615 million in 1994, returned to $612 million in 1996. Brown Brothers Harriman analyst Raphael Soifer sees earnings of about $800 million before merger charges in 1997 and about $900 million in 1998.
PRICEY. Making the merger work will be a challenge for Newman. There are cultural gaps, even though Bankers has done more than most commercial banks to adopt investment banking skills, pay, and style. Daberko's advice to Newman: "Allow these people a good deal of autonomy and provide them with more and more opportunities from the bank."
Newman may have overpaid, in buying at 2.6 times book value a firm that specializes in initial public offerings at the top of a bull market. But Cohn reckons that with tax and cost savings, Alex. Brown's earnings could fall by more than 40% without dragging down Bankers' profits.
But Bankers Trust may still be hard pressed to compete with bigger investment and commercial banking firms with more dominant positions. Alex. Brown, furthermore, will not take Bankers Trust off the radar screen of other suitors. Rather, says Soifer, "it may be a more attractive takeover candidate."
That said, Newman has shown the world he has the mettle to fix problems and the imagination to make bold strategic moves. Now he must prove his skill at execution.