Deutsche Bank's Mr. Harmony?

Josef Ackermann, heir apparent at Deutsche, must unify the bank

When Josef Ackermann lost a power struggle at Credit Suisse Group in 1996 and stepped down as chief executive, an old colleague offered him a tempting consolation prize: a post on the faculty of the St. Gallen Graduate School of Economics, the prestigious Swiss business school. But Ackermann wasn't about to give up his quest to climb to the top of European banking.

Instead of the ivory tower, Ackermann, now 52, headed for the twin towers that house Deutsche Bank in Frankfurt. The post he won on Deutsche's management board was, at best, a lateral move to an institution fast losing its European dominance. But the gamble paid off: On Sept. 21, the bank named Ackermann to succeed Chief Executive Rolf E. Breuer when his five-year contract expires in 2002.

TUG-OF-WAR. The announcement confirmed Ackermann's success in making Deutsche Bank a serious player in global investment banking. More important, it signaled that Hilmar Kopper, chairman of the bank's supervisory board, thinks Ackermann is best qualified to steer the bank through a market transformed by globalization, the euro, and the Internet.

Ackermann is very much identified in the banking world with the war that has been going on for years between Deutsche's aggressive investment bankers, based in London and led by U.S.-born Edson Mitchell, and the traditionalists who don't want to see the shriveling of Deutsche's less profitable retail and corporate banking arms. He is blamed by some for wrecking Breuer's last attempt at a big deal--the abortive effort earlier this year to merge with rival Dresdner Bank. Other observers, however, say Breuer shares the blame for the Dresdner fiasco for going public with the deal before working out the details with his own investment bankers.

Now that Ackermann has won the top job, competitors and insiders expect him to move to the center and seek a balance between the demands of global finance and the stability expected of an institution that epitomizes Germany Inc. Indeed, the affable Swiss, known for his ready smile, is seen as a compromise choice, since investment banking types like Mitchell are regarded as too abrasively American to run the bank. Says one ranking insider: "Ackermann is capable of keeping the whole bank together and making the various parts work together better."

Not that Ackermann isn't capable of aggressive action. Last year, a rival tried to lure top talent from Deutsche's newly acquired Bankers Trust subsidiary in the U.S. by inviting executives to a harborside hotel in Baltimore and handing out sign-up bonuses on the spot. Ackermann's people rented an apartment nearby and started cutting their own checks, ultimately retaining most of the team.

With Ackermann in charge, analysts expect Deutsche to forgo splashy acquisitions like Bankers Trust and try to plug gaps in the bank's mergers and acquisitions and corporate finance businesses through the purchase of smaller operations such as Wall Street boutiques. Ackermann will alter the Breuer approach at home, too. Instead of lopping off the Deutsche Bank 24 retail banking arm in a radical restructuring move--as Breuer once planned--Ackermann has signaled that he will use its 2,300 branches to sell stocks and bonds and bolster investment banking. "It would have been stupid to sell this business," Ackermann says of the retail arm. He bragged recently about how Deutsche used its retail network to move within hours a multimillion-dollar block of shares in Hong Kong's Hutchison Whampoa Ltd.

Ackermann recognizes, of course, that investment banking is where the profits are and that Deutshe's aspirations to be a global player have been frustrated. "They're still trying to transform the bank from local investment bank to a global bank," says Daniel Gresch, bank analyst in Zurich for UBS Warburg. "There is still quite some way to go."

But after years of effort, Deutsche is getting some traction. Under Ackermann, the investment banking division produced nearly half of Deutsche's profit in the first half of this year vs. 29% only two years ago. It dominates global currency trading. The bank has moved to fourth worldwide in equity issues such as initial public offerings, says Capital DATA Ltd. in London. It also runs a close second to Merrill Lynch & Co. in corporate bonds and other debt issues.

BOOSTING BONUSES. Much of that gain, surprisingly, comes from the much maligned $9 billion acquisition of U.S.-based Bankers Trust last year. After an initial flurry of staff defections, Deutsche restored morale in part by boosting bonuses toward Wall Street levels. Earlier this year, BT's holdings bolstered Deutsche's British and European equities business, allowing Deutsche to profit handsomely from from the trading that accompanied Vodafone AirTouch PLC's takeover of Mannesmann. "It has worked out much better than people thought," concedes Stuart Graham, an analyst at J.P. Morgan Securities in London.

There's still plenty to do. As an adviser in M&As, Deutsche is still a minor player: 14th in Europe and 16th worldwide. Ackermann will probably have to spend huge sums on M&A talent. At home, Ackermann must address efficiency problems; abroad, he must build Deutsche's network, use the Net to attract well-off clients, and expand in Europe's big financial centers.

Meanwhile, globalization, the euro, and the Net present huge opportunities. After years as Corporate Germany's house bank, Deutsche is one of the few institutions poised to become financier to Corporate Europe. Ackermann will draw from a well-stocked war chest. Its holdings in German industry are worth some $24 billion. Beginning in 2002, thanks to a change in German law, Deutsche can sell them without paying capital gains tax.

Ackermann's biggest asset may be his uncanny ability to spot macro trends and see where the market is going. In a 1998 speech, for example, he correctly predicted that the European common currency would experience instability in its first years of existence. "He's very holistic," says St. Gallen President Peter Gomez. And whatever the obstacles he encounters, Ackermann is not likely to take refuge in an ivory tower.

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