Searching for Gold in the New World
Few things are more alluring to big European financial institutions than U.S. banks, brokerages, and money-management firms. The Europeans gaze longingly at the huge, prosperous customer base in the U.S.--the single market that is still a dream at home--and at the expertise of its financial institutions. Yet U.S. acquisitions have largely been a disappointment for European financial firms: Just ask outfits like Zurich Financial Services Group or any of a half-dozen German banks and insurance companies, all of which have either botched their U.S. buys through mismanagement or watched them succumb to misfortune.
The most recent casualty is Deutsche Bank, which on July 30 announced it was selling the online arm of New Jersey-based National Discount Brokers Group to Internet brokerage Ameritrade just a year after it bought it. NDB's business has plunged since the U.S. dot-com and tech crash, taking part of the German giant's $888 million investment with it. Deutsche's move came four days after Frankfurt rival Dresdner Bank, which was recently bought by insurance giant Allianz Insurance, unveiled plans to lay off 250 members of its investment-banking staff in the U.S., partly because its purchase of merger-and-acquisition powerhouse Wasserstein Perella Group last year hadn't generated as much new business as expected.
Europeans come to the New World, Europeans buy big operations, Europeans lose buckets of money. For the Continent's financial giants, especially the Swiss and Germans, the pattern is getting depressing--and the losses have implications. The European financial-services industry has been betting big on its U.S. gambits as a path to growth. Because of delays in pension reform at home, asset management and stock investment have still not taken off, while traditional banking in Europe is a very mature industry.
DAMAGE CONTROL. That leaves the U.S. as the only place to go. And the Europeans do have a long-term vision. They don't just want to diversify their revenues in the next few quarters. They want to import U.S. expertise in asset management and stock investment so they'll be ready when the European retirement market boom hits. But if the Europeans can't profit from their American adventures in the meantime, they will have plenty of trouble satisfying their increasingly demanding investors.
To achieve their American dream, the Europeans will have to recover from their current missteps. Some firms have already undertaken major damage control. Germany's No. 4 bank, Commerzbank, declared on July 24 that it wants to sell all or part of U.S.-based Montgomery Asset Management in exchange for a partnership with a stronger U.S. firm. "[The] U.S. business is to be reorganized by means of a strategic alliance with a major asset manager," explains Commerz management board member Heinz Hockmann. "As a result, Commerzbank will become a European asset manager with global competence."
Giant insurer Zurich Financial, meanwhile, thought it had stolen a march on its European rivals when it spent $2 billion to buy Chicago asset manager Kemper Corp. in 1996. A year later, Chairman and CEO Rolf Huppi doubled his bet by swallowing Boston-headquartered Scudder, Stevens & Clark Inc. for $1.6 billion. But the money manager, now called Zurich Scudder Investments, with $290 billion in assets, has caused a good deal of trouble for its Swiss masters. The clashing cultures of Scudder and Kemper--Scudder sold no-load funds directly to clients, while Kemper marketed load funds via brokers--sparked a mass exodus of money managers, particularly from Kemper, and many customers went with them. Last year alone, institutional and retail clients yanked $5 billion out of the fund. That helped pull Zurich's overall earnings down by 5.5% in 2000--a year in which most of its rivals flourished. Now, Huppi may be ready to sell out to Anglo-American fund-management giant Amvescap or its U.S. competitors Franklin Resources and T.Rowe Price. "Zurich's experience clearly has implications for other European financial groups that have moved deep into U.S. money management," says Ralf Dibbern, a finance sector analyst at Hamburg-based private bank M.M. Warburg & Co.
To be sure, some European financial-services companies are doing very nicely across the pond. At Dutch bank ABN-Amro, first-quarter profits for its U.S. holdings were up 19% over the same period last year. That's partly because the group successfully restructured earlier this year, selling off European American Bank, a New York based commercial bank, to Citigroup and using the money to buy Alleghany Asset Management, Michigan National Bank, and the U.S. investment-banking operations of ING Barings. France's BNP Paribas is also doing well after merging its two U.S. retail subsidiaries, Bank of the West and First Hawaiian Bank, in 1998. Integrating the two banks' IT systems helped BNP Paribas to sharply cut costs; profits in the first quarter were up 40% over the same period last year.
For every financial firm that is doing well in the U.S., however, there seem to be two that are doing badly. In some cases, the cause is sheer bad luck. It was the downturn in the markets, rather than bad management, that caused Deutsche's problems at NDB--although some competitors point out that the stock-trading slump had already started last October when the acquisition was completed. The economic slowdown in the U.S. has hurt the performance of many investment banks, money managers, and retail banks.
STILL COMING OVER. More often than not, though, the European institutions have made ill-considered acquisitions or mismanaged the ones that did make sense. Take Dresdner Bank. It bought Wasserstein shortly after its planned mergers with Deutsche Bank and Commerzbank collapsed. "We were on the rebound and desperate to prove we could make it as an investment-banking powerhouse on our own," says one former corporate finance specialist for Dresdner. "But it was quickly obvious that we couldn't. We should never have struck that deal."
Zurich's purchase of Scudder and Kemper, by contrast, made good strategic sense, but merging them under mainly Scudder management didn't. Scudder's senior staff had little experience with the load funds that Kemper sold. According to insiders, the situation was made worse by Huppi's unwillingness to delegate authority over the asset management operations to an underling.
You would think that the Europeans would know now to be wary of dreams of a land of milk and honey. Not so far. On July 30, Swiss Reinsurance Co., the world's second-largest reinsurer, announced that it would acquire the reinsurance operations of Philadelphia's Lincoln National Corp. for $2 billion in cash. Then, on July 20, Providence-based Citizens Financial Group, which is owned by Royal Bank of Scotland, offered $2 billion for Mellon Financial Services' 345 retail bank branches. Allied Irish Banks PLC, which has struggled to make its Maryland subsidiary a success, still wants to expand further in the mid-Atlantic states. You have to have an American presence, the thinking goes. The trouble is, you also have to make a profit.
By David Fairlamb in Frankfurt