Autumn of a Banking Titan

Deutsche Bank's Breuer may exit early

As the dark days of a Frankfurt winter rolled in, Rolf E. Breuer had May to look forward to. The 63-year-old chief executive of Deutsche Bank (DB ), his heir apparent in place, was set for a graceful exit to cap his 17-year stint on the management board of Germany's largest bank. Now, however, he is under pressure from some of his senior colleagues to step down ahead of time. And while Breuer is unlikely to be forced out, he may conclude the controversy has so eroded his authority that he should take the hint and leave early.

No one denies Breuer has big achievements under his belt since taking office in 1997. Once the epitome of the inward-looking German bank, Deutsche Bank now has $845 billion in assets and plays in the big leagues of global investment banking and asset management. Analysts give Breuer high marks for successfully integrating Bankers Trust Corp., which he bought in 1999, for his acquisition in September of asset manager Zurich Scudder Investments Inc., and for Deutsche's listing in October on the New York Stock Exchange.

"LAME DUCK." Yet a series of missteps in the past two years and flagging results have badly weakened Breuer. In recent weeks, key outside investors and board members have ratcheted up the pressure for him to step aside early in favor of Josef Ackermann, his designated successor. "He's a lame duck who should go now," says a London-based executive in the investment banking division.

Since Nov. 17, when, sources say, frustrated executives openly criticized Breuer at a meeting of the bank's top 40 executives, Frankfurt has been awash with rumors that Breuer will resign before yearend. One issue that may give him a push: a possible merger with British Bank Lloyds TSB was derailed earlier this year in part because of Breuer's insistence that the combined company be headquartered in Frankfurt rather than London. Sources in London say Lloyds is interested in reopening the talks, but not until Breuer steps down.

Open criticism of top management from inside a company is rare in Germany. The fact that it is happening to Breuer shows how low the CEO's stock has fallen. Senior bank officials say Breuer has not provided Deutsche with the strong management it needs. As a result, tensions between conservatives and reformers on the management board, and between the heads of rival bailiwicks throughout the group, have not been resolved. Ackermann, who heads the investment banking division, is considered more in tune with senior managers elsewhere in the bank and would be better placed to tackle such problems, says the London-based executive.

Probably what has hurt Breuer most is the embarrassing failure of his boldest strategic moves, most notably last year's attempt to merge with arch-rival Dresdner Bank. One result has been a share price that trails that of its rivals--important to the bank's London and New York executives, who are paid partly in stock. Shares plunged from $92.6 in January to $41.9 in September, though they have recovered somewhat since. "Breuer has had his successes, but his track record is definitely checkered," says Jennifer Guest-Cagirtekin, head of European equities at Gerrard Ltd., a London investment manager that owns shares in the bank.

On the surface, Deutsche's woes are hardly unique. Many of its European competitors are struggling with the tensions unleashed by rapid international expansion. But what other institutions have in hearts, Deutsche has in spades. European bankers say they know of no other bank head who has faced an open revolt of his senior acolytes. In a series of blunt exchanges at the Nov. 17 meeting, they castigated Breuer for not laying down a clear enough strategy. Their loyalty began eroding in April, 2000, when Breuer unveiled a planned combination with Dresdner that he called a "merger of equals," even though Dresdner had only two-thirds of Deutsche's assets. Deutsche's investment bankers, who were earning most of the bank's profits, demanded that he restructure the deal as a takeover. Dresdner's board refused to go along.

A few months later, Breuer's plan to sell part of Deutsche's retail banking network to Munich insurer Allianz also fell apart, triggering new eruptions of discontent. To reduce the uncertainty, the supervisory board, which is chaired by Breuer's predecessor, Hilmar Kopper, took the unusual step of naming Breuer's successor in September last year--a good 20 months before his retirement date. This was interpreted as a public slap in the face for Breuer.

Things came to a head this fall, when it became evident the share price was not going to revive quickly. Some managers also complain that it was increasingly difficult by then to tell who was really in charge--Breuer or Ackermann. Meanwhile, critics noted that the asset management division--which reports directly to Breuer--was not performing well. Pretax earnings from that part of the group were just $360 million in the nine months ended Sept. 30, a meager return on the division's $5.4 billion in revenues. Its performance helped drag down group return on equity from 25.7% in the first three quarters of 2000 to 13.6% in the same period this year. Deutsche's costs as a share of income, meanwhile, surged from 72.1% to 80.1%.

LOOMING LAYOFFS. Breuer insisted to reporters on Nov. 23 that suggestions he was under pressure to quit were "absolute nonsense." The day before, he had told investors in London that the forthcoming $2.5 billion purchase of Zurich Scudder gave Deutsche what it needed to achieve the same success in fund management as it had in investment banking. Breuer has also tried to address the cost issue by unveiling plans on Nov. 1 to reduce the bank's workforce of 97,000 by 7%.

Deutsche's official line is that Breuer will serve until May and move up to the supervisory board, as planned. For his part, Ackermann protests his loyalty. But he is increasingly taking center stage. He recently said that when he takes over, he will shake up the board and try to give the chief executive--who is considered only a first among equals under German corporate law--greater authority. That would allow him to shape the institution to his vision and keep the back-benchers at bay. Watching Breuer's travails, he knows he has to do both to be successful.

By David Fairlamb in Frankfurt, with Stanley Reed in London

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