Brokerage BT Alex. Brown Inc. may be the "crown jewel" that Germany's biggest bank, Deutsche Bank AG, gets by acquiring Bankers Trust Corp. in a $9 billion deal the boards of the two parent companies will vote on today.
But what happens to this Baltimore institution after the merger, how it gets managed and whether it gets to keep any of its remaining identity built up over nearly 200 years of investment banking is anybody's guess, banking industry analysts and experts say.
"I'm not bullish on this deal," said Evangelos Kavouriadis, international bank analyst with Sanford C. Bernstein in New York. Deutsche Bank "is very centralized with its decision-making. They might try to manage their corporate banking and investment banking units as one. And that could cause a lot of friction."
For the second time in less than two years, Alex. Brown is getting a new owner.
The first time, it was New York City-based Bankers Trust, which in September 1997 took control of the nation's oldest investment banking house in a deal valued at about $1.7 billion when it was first announced and $2.5 billion when it was finalized.
This time, the new owner will be Deutsche Bank, which is hot to be a player in the hottest market for stocks in the world -- the United States.
Neither Bankers Trust nor Deutsche Bank is an ideal parent since both are afflicted by problems, say many familiar with the investment banking industry.
The marriage with Bankers Trust was heralded as a perfect match because it and Alex. Brown offered completely different services: Bankers Trust was big in junk bonds and other types of corporate lending; Alex. Brown's $1 billion-plus in revenues made it one of the blue-chip underwriters of stocks -- especially in the ultra-hot technology, telecommunications and health care sectors.
Defections and low morale
As it has played out, the deal hasn't lived up to its billing. The aristocratic leadership at Bankers Trust has rankled many at Alex. Brown, and the New York investment bank pulled much of the decision-making to its headquarters. Defections from Alex. Brown followed and morale has plunged.
What's more, some risky lending done by the parent company backfired and has reduced the value of the overall company -- the opposite of what was supposed to happen after the Alex. Brown acquisition.
With completion of the proposed Deutsche Bank-Bankers Trust merger, Alex. Brown gets a new parent -- this one a German investment bank noted for sometimes-sloppy management, "opaque" European-style accounting, and decision-making that's highly centralized and yet also much slower than is often needed to compete in today's frenetic capital markets.
But the once-independent Alex. Brown is probably one of the main reasons Deutsche Bank is making this deal, securities analysts and industry experts say.
In terms of stock underwriting -- raising cash for private companies by taking them public, or raising additional money for already public firms by doing secondary stock offerings -- Wall Street firms such as Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley Dean Witter & Co. are the elite.
But Alex. Brown is a pristine regional firm, said John E. Fitzgibbon Jr., editor of the IPO Reporter, a New York-based newsletter that tracks new stock offerings.
"It's a crown jewel among regional empires," Fitzgibbon said.
What's not clear is whether that crown jewel will be burnished -- or tarnished -- under Deutsche Bank.
It's generally agreed that Deutsche Bank badly mismanaged its acquisition of London-based investment banker Morgan Grenfell, which it acquired about nine years ago. Decision-making was eventually pulled from London back to Frankfurt, rankling many of Grenfell's high-profile players and causing highly publicized and embarrassing defections.
In June, the German bank even said it was retiring the Morgan Grenfell name, announcing that Deutsche Morgan Grenfell would from then on be known as Deutsche Bank Securities.
Deutsche Bank said the change was made in order to develop a single brand name in the U.S. banking and securities business.
A flubbed foray
Then there was Deutsche Bank's flubbed foray into the high-profile, potentially lucrative and fast-growing arena for financing high-tech companies.
In 1996, well-known Frank Quattrone and members of his technology group left Morgan Stanley to join Deutsche Bank Securities, by most accounts cutting a deal that benefited them more than their new employer.
Even so, there were some successes: In 1997, Deutsche Bank Securities took public Amazon.com, the online bookseller that has made a huge splash and now has a market value exceeding many well-established companies even though it's not yet profitable.
However, Quattrone and his cadre have since left, opting to join Credit Suisse First Boston's new technology group, yet another embarrassing defection and another black mark on Deutsche Bank's effort to build a reputation as a respected and effective global investment bank.
Alex. Brown has already lost some of its identity thanks to the merger with Bankers Trust. The company's red-and-white flag, which adorned clipper ships carrying cargo across the ocean, was replaced by the official Bankers Trust logo, the pyramid.
Nonetheless, one analyst believes the Baltimore operation will get to keep some of its remaining autonomy -- at least for a while -- after the deal. The deal could actually be good for Alex. Brown because of the poor year that its parent has had.
Entree into U.S. markets
Joan T. Goodman, a vice president and analyst with the Pershing Division of Donaldson, Lufkin & Jenrette Inc. in Chicago, said the Alex. Brown operation is "very important" to Deutsche Bank because the German bank wants an added entree into the U.S. capital markets.
She likes the merger in general because trading losses caused by imploded lending deals to Russia and to the Long Term Capital Management hedge fund have reduced Bankers Trust's "book value" in the past year by about $10 per share.
Book value -- essentially the value of a firm's assets as carried on its books -- is one measure of how a company is faring at managing its resources.
By destroying book value, now about $45 per share according to Bloomberg News, BT was clearly not managing its assets well.
In fact, even with the expected takeover offer of $93 per share, Bankers Trust shares remain in the mid-$80s, about 38 percent below their April 22 high of $136.4375.
Though the shares of many financial services companies have ** been hit hard because of the Asian contagion, meltdowns in Russia and Latin America and hedge-fund snafus, Bankers Trust has been heavily criticized for its ill-advised moves.
"It would take BT about three years to regain the $10 in book value lost" through its missteps without the Deutsche Bank deal, DLJ's Goodman said.
Selling the company helps recoup some of Brown that loss and gives Bankers Trust -- and through it Alex. Brown -- access to Deutsche Bank's much deeper pockets. The combined entity is expected to have about $850 billion of assets, making it the world's largest financial services company.
That could be good for Alex. Brown; Goodman believes the German bank will at least for a while not push to put on its imprimatur.
"I think that Alex. Brown, initially, for its first year, will be let go on its own," she said. "But if it doesn't come in with the kind of return on equity [a measure of how effectively a company employs its capital], they might put their own management in."
If anything, Deutsche Bank may give Alex. Brown access to stock-offering deals in Europe, which is seeking to become one market next year -- with one currency, the "euro."
Because the European Monetary Union will be 380 million people strong -- compared with 270 million in the United States -- some experts such as Goodman have speculated that the euro will eventually become the main currency in global trading.
Other experts say the dollar will remain king.
Alex. Brown's affiliation with Deutsche Bank might give the Baltimore operation entree into that newly consolidated European market, which can be expected to erect barriers to outsiders.
Ironically, the wild card in this deal could be Bankers Trust itself, an investment bank that makes its money doing risky lending deals -- not conservative lending deals using money placed with it by consumer depositors, as do traditional commercial banks where consumers cash and stash their paychecks.
Despite Deutsche Bank's attempts to become a player in the investment-banking arena -- an effort in which it has invested $3 billion, by some estimates, with only marginal results at best -- the German bank remains a fairly staid institution. The chances for another culture clash are pretty high, one expert predicts.
"The investment banks basically trade on ideas. They are idea people, they have got to be very creative," said William W. Sihler, professor of business administration at the University of Virginia in Charlottesville.
"On the other hand, the banker's tradition is they are lending money and they want to see it coming back. They are very much more cautious. Innovation makes them nervous."
Goodman, of DLJ's Pershing Division, agrees, noting that more big trading losses by Bankers Trust could cause Deutsche Bank to retrench yet again, which in a roundabout way could hurt Alex. Brown.
The reason: Deutsche Bank could turn off the money spigot for any deals it sees as risky.
"He who has the purse strings has control," Goodman said. "We all know that. To say that isn't the case isn't true."
Pub Date: 11/29/98