Disenchanted At Deutsche Bank

Its investment-banking unit, DMG, will get reined in

Surveying the gleaming surroundings at Deutsche Morgan Grenfell's London headquarters, a key executive sighed at the thought of the hefty cost of keeping the enterprise going. "It's a lot better to work at one of these places than to own one," he remarked.

Much to its chagrin, DMG's parent, Deutsche Bank, is discovering that there is considerable truth to that. The Frankfurt-based colossus has lavishly endowed DMG to buy itself a place in the global big leagues. But this foray has been divisive, costly, and often disappointing. At the same time, mergers--including the recent marriage of Swiss Bank Corp. and Union Bank of Switzerland--threaten to put Deutsche at a further disadvantage.

Now, Deutsche seems close to launching a reorganization that would rein in its pampered progeny. Deutsche will try to put a happy face on the changes, but they will be tantamount to an admission by CEO Rolf E. Breuer that the bank's expansion-at-any-cost strategy hasn't worked. That puts Breuer and his board in a bind. Unless Deutsche pulls off a major investment-banking acquisition, it may be doomed to also-ran status as a dealmaker. "They face serious questions on what to do next," says Matthew Czepliewicz, an analyst at Salomon Smith Barney.

In the proposed shakeup, Deutsche Bank would merge DMG with the parent's corporate banking arm to create a giant wholesale bank. A retail bank and an asset management group are also likely to be created. DMG's CEO, Michael Dobson, may step aside to become head of global asset management. The Morgan Grenfell name, a London fixture since 1854, may be dropped.

Breuer and others portray the proposed changes as evolutionary. He says that combining corporate and investment banking would present "one face to the customer" and "optimize the bottom line."

He'll need to. Czepliewicz says DMG's $492 million in earnings in 1996 amount to only about a 12% return on equity. With U.S. investment banks making 15% to 30%, it's difficult for Deutsche to justify putting roughly one-quarter of its capital on the line for DMG, he says.

Still, it's debatable whether the proposed changes will work. Deutsche's empire is already plagued by culture clashes. Trying to blend the Anglo-American-tinged DMG with the staid German corporate bank may inject a whole new set of problems. Deutsche's board has long been divided on the wisdom of the DMG experiment, industry sources say. Frankfurt also is unhappy with the U.S.-style investment bankers' pay packages: DMG's costs ate up 84% of its income in 1997.

The lightning rods for such complaints are global fixed-income chief Edson Mitchell, equities boss Michael Philipp, and North American head Carter McClelland. Known inside the bank as the three amigos, they are viewed as a cocksure group bent on enlarging their turf. The three are said to be frustrated about the degree of control Frankfurt maintains over key areas such as accounting and information technology, which cost DMG hundreds of millions of dollars each year. But the German side is likely to exert more discipline in the future. Who will succeed Dobson remains unclear. DMG may end up being run by a group of Frankfurt board members, a possibility that has led insiders to speculate on how long the American top guns will stay. "We call them the three stooges now," says a DMG executive.

TECH DEALS. Considering how rapidly DMG built up its staff of 6,500, culture clashes were probably inevitable. And lucrative pay packages created internal dissension. The suave, Cambridge-educated Dobson has never seemed cut out to handle the brash New World investment bankers or run DMG's core trading and merger businesses. Dobson, who declined to comment, came up through Morgan Grenfell's investment-banking arm--not the brass-knuckles environment of trading and dealmaking.

Still, the bank has done well in fixed income and has scored a few high-tech deals during Dobson's reign. But in 1997, in the key area of mergers and acquisitions, DMG ranked 13th in Europe and only 8th in Germany, says Securities Data. "We haven't got the motor running at full horsepower yet," Breuer says.

Deutsche is finding it's a lot harder to build a successful money machine than it looks. Will reining in DMG's freewheeling investment bankers make them work harder? Or will many abandon ship for a rival with a keener appetite for high-stakes dealmaking?

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