Dresdner Bank: Who's In Charge Here?
Dresdner Bank, a perpetual follower among Germany's huge financial institutions, has long promised bold catch-up initiatives to get itself on a faster track. In July, CEO Jurgen Sarrazin hinted that Dresdner was scouting a major U.S. investment banking acquisition. That has touched off rumors in the wake of Travelers Group Inc.'s recent $9 billion acquisition of Salomon Inc. that Dresdner will bid for Lehman Brothers Inc. or another U.S. investment bank. Sarrazin further fueled such speculation in an interview with the German magazine Manager shortly before the Salomon bid. "We don't want to be niche players," he said. "We want to play with the big players worldwide."
Fine sentiments. But instead of charging ahead, Germany's No.2 bank, with $300 billion in assets, is showing signs of tumbling into turmoil and self-doubt. Dresdner's top management is in transition. Important elements in the bank's strategy are on hold. And key executives are fleeing its investment bank. Worse, nearly every other European bank is pushing into investment banking, and most think they need a strong U.S. presence to be competitive. Yet even in Europe, Dresdner seems uncertain of how fast to expand its own investment banking. "They haven't decided whether they really want to be a leader or give up on being a top investment bank," says a consultant who has worked for Dresdner.
NEW WAVE. Dallying could be costly for Dresdner. The advent of a single European currency and the institution of private pension plans on the Continent are threatening a wave of financial consolidation that will pose challenges for every European bank. For Dresdner, it won't be enough just to move in lockstep with rivals Deutsche Bank and Commerzbank. Other banks are moving faster, notably two Bavarian lenders, Bayerische Vereinsbank and Bayerische Hypotheken- und Wechselbank, that are merging into a behemoth with $420 billion in assets. If Dresdner stumbles, it could be taken over by Allianz, the insurer which is Dresdner's largest shareholder and owns stakes in the two Bavarian institutions.
Yet management turmoil could put Dresdner on hold, at least until mid-1998. On Sept. 9, the bank announced that Sarrazin will step down as CEO next May at age 62.
The timing of the departure of Sarrazin, who declined to comment, surprised some outside observers who had expected him to be reappointed for three to five years. Bernhard Walter, 55, a career Dresdner exec who rebuilt the bank's operations in eastern Germany, will take Sarrazin's place. Press leaks, apparently from the bank's supervisory board, forced Dresdner to make the announcement weeks early.
A few days later, the bank became engulfed in a tax-evasion scandal that forced Wolfgang Roller, the 67-year-old chairman of Dresdner's supervisory board and Sarrazin's predecessor as CEO, to resign. Dusseldorf prosecutors, acting on an anonymous tip, had tracked down Roller's wife, Ursula, on a golf course and got her to take them to the couple's home to cull through tax records. Roller has not been charged with any offenses and denies any wrongdoing. On Oct. 1, the bank appointed Alfons Titzrath, 65, who has held executive positions with the bank, to replace Roller as head of the supervisory board. But that could be a temporary solution. Sarrazin likely will get the job in May, when he steps down as CEO.
As troubles roil Dresdner's executive suite, a source close to the bank says executives "are really rethinking their entire strategy." The problem is that investment banking acquisitions are getting pricey. The Travelers bid valued Salomon at about twice book value, roughly what Dresdner anted up when it paid $1.6 billion for British investment bank Kleinwort Benson Group PLC in 1995. But other investment banks and boutiques now on the market carry an asking price of 2.5 to 5 times book value, according to Hansgeorg B. Hofmann, the Dresdner director who has been evaluating potential acquisitions. "It's always easy to buy at a stupid price," Hofmann says. Instead, Dresdner may settle for a minority stake in a U.S. investment bank or go it alone by providing investment banking to a few key U.S. industries, he says. The risk, of course, is that the best assets will be gobbled up while Dresdner dallies.
Adding to the pressure are rumblings at Allianz, which owns 22% of Dresdner. Allianz Chairman Henning Schulte-Noelle says he wants closer cooperation between Allianz and the bank in mutual funds and other asset-management businesses. Dresdner already sells Allianz life insurance throughout Germany, so any such deal is likely to center on Allianz reselling Dresdner products. But outsiders believe such a deal will only be a prelude to an Allianz-driven disappearance of Dresdner into the two merging Bavarian lenders. Dresdner and Allianz strenuously deny that such a merger is in the offing, but analysts and consultants argue that potential cost savings make a deal inevitable in two or three years. Dresdner's stock is up 75% since the beginning of this year, partly on rumors that a takeover is imminent.
Dresdner's previous tie-up with another lender is faltering. A much ballyhooed cooperative deal with Banque Nationale de Paris has turned out to be far less extensive than analysts expected. And a telephone-banking initiative has been delayed at least until next year. Phone banking was to have started in 1997 and was intended to garner 500,000 customers in 10 years. Now, Dresdner is citing technical problems. But the estimated $100 million or so that the effort would eat up in the four years before it would turn a profit also is a concern. Deutsche and Commerzbank are already pushing ahead with similar low-cost bank-by-phone projects.
Dresdner also has discovered that running an investment bank can be dicey. Last February, the bank forced out Simon Robertson, the bank's top manager, who has since been followed out the door by David Clementi, another key player. The two quickly took top jobs at Goldman, Sachs & Co. and the Bank of England, respectively. The defections are on top of the departure of a number of other bankers in Kleinwort's London and Frankfurt offices, largely to Salomon. So far, Kleinwort seems unfazed by the turmoil. For instance, it ranked No.12 in Securities Data Co.'s 1997 ratings of merger advisers, up from 16th place last year.
SIGNS OF FLIGHT. Defectors say many Kleinwort bankers remain rankled by the cumbersome management structure Dresdner imposed on the bank last spring. Four or five Dresdner execs now oversee Kleinwort, which is being folded into Dresdner's own investment banking operations. Direct management of the unit has been turned over to a 15-member committee, and some key operations are headquartered in Frankfurt rather than London. A Dresdner insider says the changes were necessary because Robertson was creating "a bottleneck" that prevented the bank from communicating with Kleinwort managers, but he contends that the situation is now stabilized. Yet defectors predict more departures. "They may think it's stabilized, but they don't see the resumes coming over my desk," says one departed Kleinwort executive.
Is Walter the right man to fix this mess? His career, spent almost entirely in German domestic banking, gives little hint of bold global vision. Dresdner certainly has the wherewithal to make a big move. Credit Suisse First Boston Corp. analyst Mark Hoge figures a booming stock market will help boost profits this year by 32%, to $1.2 billion. And while onerous taxes would make cashing in some of its investment portfolio painful, Dresdner does have some $10 billion in shareholdings, including a 10% stake in Allianz and 5% of BMW. That financial cushion could serve Dresdner well as the struggle for dominance in Eurobanking intensifies. Whether Dresdner's internal tensions will distract it from the task at hand is now question No.1.
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