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For Deutsche Bank, an eye on the world German giant hopes Bankers Trust deal makes it global power; Contrasting entities; Analysts say Deutsche must overcome its history of blunders; Banking

THE BALTIMORE SUN

Deutsche Bank AG has been compared to the mighty Titanic: big, ponderous, slow to turn, and captained by a management team known to blunder.

But the bank views itself much differently, espousing the motto: "Europe first, but not only Europe."

Now it is bent on fulfilling that dream of becoming the world's largest financial services company. Its intended growth vehicle: ailing Bankers Trust Corp., and its Baltimore-based BT Alex. Brown subsidiary, which Deutsche has proposed to buy for $10.1 billion.

Analysts have been cool to the deal, which Deutsche Bank says is key to its vision of becoming a global player -- a goal it has lusted after since its founding in 1870.

They are skeptical because Bankers Trust has a shaky record, and melding the cultures that differ corporately and ethnically will be a Herculean undertaking.

"Can they transform the company into a Merrill Lynch, Morgan Stanley, or Goldman Sachs?" asked Gerard S. Cassidy, a banking analyst for Tucker Anthony Inc. in Boston. "That is the key question. I don't think anyone knows the answer. They are buying damaged goods."

Deutsche Bank is cast in the classic Prussian mold: staid, risk averse and often criticized for being autocratic and slow in making decisions.

In contrast, Bankers Trust is free-wheeling, and trades in some of the riskiest areas -- derivatives, hedge funds, and the emerging markets -- which has sometimes led not only to huge losses but a sullied reputation.

For instance, Bankers Trust surprised Wall Street analysts in October revealing a bigger-than-expected $488 million loss in the third quarter -- thanks to ill-fated investments in junk bonds and Russian securities, and lending to a hedge fund that nearly failed.

"They are all very chummy at the moment," said Bryan Crossley, a European bank analyst in London at ABN AMRO. "Honeymoons don't last very long."

Deutsche Bank executives declined a request for an interview for this article.

Local impact

However this marriage works out, it is going to have a profound impact on Baltimore, where Alex. Brown employs about 1,500 people, and has enjoyed an impeccable reputation as a blue-chip investment banking company for its two-century existence.

But in the deal's aftermath, Alex. Brown could lose more autonomy, talented investment bankers could defect, and some could lose their jobs as Deutsche Bank cuts costs. Deutsche has said it plans to fire 5,500 people in London and New York, with no jobs lost in Germany. No matter how different the two companies and how painful the merger, Deutsche Bank will emerge a hulking organization by May, when the deal is expected to be approved by shareholders and regulators.

Deutsche Bank will rank No. 1 in the world with $830 billion in assets, fourth in the world among asset managers with $683 billion, and it will have more than 96,000 employees working in 50 countries.

It still won't exactly be an industry juggernaut: The new company would rank only 14th in the United States in terms of new issues of stocks and bonds; in worldwide mergers, it would rank only 11th, according to one report.

History

It has taken Deutsche Bank 130 years to near the founders' dreams of being a global financial powerhouse.

Founded in Prussia in January 1870, in the midst of the Industrial Revolution, Deutsche Bank's organizers had global aspirations even then. They bore-sighted the British banks that dominated the financing of Germany's best exporters, and quickly opened branches in Bremen and Hamburg, Germany, as well as Yokohama, Japan, Shanghai, China and London.

From the beginning, it has shaped itself chiefly as a banker for corporations.

In the late 1880s, Deutsche Bank helped Siemens AG wire Germany for electricity, financed construction of the Northern Pacific Railroad in the United States, and served governments -- the Ottoman Empire, for example.

In one of its darker periods, it helped finance Hitler's war effort in World War II. Neutral countries would not accept the Reichsmark, so Deutsche Bank did its foreign exchange

business in gold, much of it reportedly looted from Holocaust victims, according to historians.

Today, the bank is negotiating with the World Jewish Congress to make amends.

Deutsche Bank made its first appearance in the United States in 1971, opening an investment banking office, though today it still isn't a force in the world's most important capital market.

By 1989, in a major move to break into the debt-and-equity markets of Britain, it bought that country's Morgan Grenfell Group investment bank -- a deal that would later be wrought with problems. And in 1996, it made another bid to build a base in the United States, hiring away from Morgan Stanley & Co., a group of high-priced technology investment bankers in Silicon Valley -- a foray that also backfired when the group defected to Credit Suisse First Boston.

But the real wake-up call came about a year ago, when Germany's telecommunications giant, Deutsche Telekom, hired New York-based Goldman Sachs Group Inc. -- and not Deutsche Bank -- to privatize it, said Crossley, the ABN AMRO banking analyst.

Foreshadowing

Some analysts say the problems with Grenfell and with the separate U.S. technology group foreshadow what could happen if the merger with Bankers Trust is managed as poorly.

It's missteps like those of Grenfell and the technology group, coupled with missed opportunities such as Deutsche Telekom, that lead analysts to compare Deutsche Bank to a listing ship.

In Germany, taking pot shots at the bank is considered a national sport for the financial press.

A German journalist compared the bank to the Titanic: "very big, slow to change direction, almost unsinkable and with more incompetence than should be allowed for a ship that size," according to an Oct. 8 article in the Evening Standard of London.

While it has blemishes, Deutsche Bank was rated the best European bank by Euromoney magazine.

Shirking its image as a staid, autocratic monolith that's strong in Europe but really nowhere else is an important reason Deutsche Bank feels it needs Bankers Trust.

Heavy-handedness

What worries many experts is that history may repeat itself with Deutsche Bank. There are concerns that the German bank will be heavy-handed in its stewardship of Bankers Trust and Alex. Brown.

"We don't believe in autonomy," said Rolf Breuer, Deutsche Bank's chairman, at last Monday's news conference in Frankfurt, Germany, where he formally announced the Bankers Trust deal. "We will continue with our centralized management, so there will be no autonomy."

Local Alex. Brown officials are optimistic about the takeover.

"They have agreed to allow me specifically to run the investment bank out of Baltimore," said Mayo A. Shattuck III, the former president and chief operating officer of Alex. Brown, who will jointly run the company's global investment banking business with his Bankers Trust counterpart, Yves de Balmann. "I like the deal. I think it is a good fit. It is about as complementary a fit as one could imagine."

Whether Deutsche Bank succeeds in bringing Bankers Trust and Alex. Brown into its fold will come down to execution, experts agree. And the cultural issues will be key.

Autonomy

The U.S. companies need autonomy to be creative and to act fast -- particularly in an increasingly global economy where competition is coming from all quarters and all countries, experts say. In the past, Deutsche Bank has been inflexible, as evidenced by its disastrous integration of Morgan Grenfell and its loss of the technology group. Its move to pull all decision-making back to Frankfurt led to the defection of an estimated 200 executives -- many of them the "rainmakers" who bring business into a firm.

In Deutsche's defense, the pullback came after initially granting autonomy to Morgan, which led to big losses.

If Deutsche Bank doesn't adapt, it may face mayhem and defections of the people who are the real value in the investment banking business.

"They [investment bankers] have got to be creative and imaginative. They need a lot of autonomy," said William W. Sihler, a professor of business administration at the University of Virginia. "That does not fit too well with the mentality of avoiding losses at any cost."

Shrewd move?

But in its strong public statements about centralized management, Deutsche Bank may be displaying a subtle shrewdness that few give it credit for. With the near collapse of the Long-Term Capital Management L.P. hedge fund in September, the Federal Reserve has become increasingly concerned about the health of the world's financial system. By promising iron-fisted management, Deutsche Bank may be soothing the Fed's concern and paving the way for faster approval of the takeover.

"I thought [the statement] was a signal to the Fed that you no longer had to worry about hip-shooting at Bankers Trust," said Edward E. Furash, chairman of Furash & Co., a Washington-based banking consultant. "Here is a buyer saying: 'We are going to clean up the act.' "

Making changes

Not only might Deutsche Bank be more shrewd than many believe, it might also be much less stodgy than the image it projects.

For instance, the German bank is positioning itself to be the player in the coming European Monetary Union, a plan to merge the entire European community into a single market with a single currency beginning next year.

In January, Deutsche Bank opened a high-technology investment banking center in Frankfurt, with 600 trader desks -- 700 are planned -- for trading in equities, fixed-income securities, derivatives and foreign currency.

It expects much of its trading will be in Euro-denominated securities.

While its "Europe first" mantra makes it strong in its home market, it remains to be seen if its latest U.S. expansion will end in success.

"If you learn from your mistakes, Deutsche Bank should be very smart by now," said Lawrence Cohn, an analyst at Livingston, N.J.-based Ryan, Beck & Co. "If you look on this deal on paper, there are enormous opportunities. I think all of the issues that make people cautious are very much soft issues, they are cultural issues. It is very hard to figure out how that is going to play out."

Pub Date: 12/06/98

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