Just over twenty years ago, Deutsche Bank bought my old employer Bankers Trust for $10 billion; now DB looks like it may well merge with Commerzbank.
My experience of the first deal makes me fear mightily for the success of the second.
In truth, I had actually forgotten that the DB/BT merger was announced on 1 December 1998 until a friend who was around at the time recently reminded me. For me, the date I always remember is 6 June 1999, when the so-called ‘change of control’ happened and I actually started work at Deutsche.
For that reason and because of my growing fatigue with all matters DB, I wasn’t going to respond to my friend’s request to write about the 1990s merger – until this week’s rumours started circulating that is. Then I changed my mind.
It seems bizarre these days, but back in 1998, $10 billion was a lot of money. So much money that, at the time, it meant that Bankers Trust was the largest American bank ever to have been taken over by a foreign concern. Back then, the resulting combined entity had more assets than giants like Citibank.
There was a crude kind of logic to the deal. Deutsche wanted to expand into investment banking and into investment banking’s biggest marketplace – the USA. The Bankers purchase allowed it to do both things.
It was also done moderately cheaply. When the deal was announced, Bankers Trust was in a precarious position having been teetering on the edge of the abyss caused by the meltdown of Russia and the hedge fund LTCM. Even with a steep buyer’s premium, the $93-a-share price tag was well below the $120+ at which the stock had been trading in the summer, mere weeks before. With eyes squinted, the deal seemed to make total sense.
However, the ground level reality of achieving the deal’s ‘synergistic growth’ (so easy to explain in glossy presentations by the Board) was a balls-ache at best and, at worst, what management consultants term ‘a total shit-show’.
First, there was the practical matter of combining the firms. I am fond of repeating the aphorism that, in essence, banks are just people and computers. In the case of Bankers and Deutsche, the computers just weren’t compatible. This meant that, on top of the already jumbled mess of Deutsche’s infrastructure, a ton of extra complexity was dumped, wholly unceremoniously.
I sweated months on one tiny piece of the puzzle: how to combine DB’s and BT’s rather successful FX warrant businesses. But a quagmire of incompatible pricing models, incompatible booking methods, incompatible computer hardware and a mish-mash of different legal names (and legal terms) made it all a frustrating chore.
This enervating and tiresome experience was repeated, mutatis mutandis, all over the bank. I would estimate that, among the people I knew personally, a good 25-30% of their managerial effort was spent in tedious, block-and-tackle integration activities in the first two years or so after the merger.
And then, in the ‘people and computers’ equation, came the problem with people. Deutsche’s i-bank, although superficially similar to Bankers Trust, just did things differently. It took ages for us Bankers people to get used to it and many of us simply quit along the way. For the ones who remained, there was an element of suspicion and ill feeling aimed at us (“these bloody loser Bankers guys coming over here and taking our jobs”) that lasted years.
At levels more senior than the one I inhabited, the political battles and turf wars wouldn’t have looked out of place in the Marvel universe.
And yet all this heartache and waste and tension eventually resulted in a bigger and better investment bank, which between (let’s say) 2002 and 2012, punched with a global weight. All told, the undoubtedly huge managerial overheads of the merger were justified by the strategic sense of the move: Deutsche was not making good enough returns in its (overbanked and only marginally profitable) home retail market and so needed to expand into something more lucrative.
Which brings me to the rumoured link up between Deutsche and Commerzbank. What is the strategic rationale for it?
It can’t be to diversify the sources of income of Deutsche and Commerz. Commerzbank is like a more domestically focused, less sophisticated and less diversified version of Deutsche. I’m sure there is some kind of investment banking activity going on in Commerzbank, but it doesn’t seem to trouble the league table compilers much.
Seen this way, the merger is just a way of throwing more chips on the table to cover an even bigger bet on ‘Homeland Germany’. Or as we say in the gambling business: doubling down on a loser.
Now that might not neccesarily be the case if Deutsche/Commerz could decrease its cost/income ratio by way of economies of scale in its domestic market. One way would be by virtue of technology (‘people and computers’). German retail is the most heavily ‘branched’ and least automated retail markets in the developed world. There’s definitely room for improvement.
But, having lived through the Bankers merger and having seen up close the twisted innards of Deutsche’s IT systems, it would astonish me if this goal could be achieved in any reasonable timeframe. The technological complexities of smooshing these two banks together makes my head spin – and I’m not going to have to do the work. It will distract management attention for years and years. If you doubt it, ask yourself this: how’s the 2010 Postbank merger doing?
Of course, even if the banks’ managers could come up with a better, automated solution, to save costs they will need to hack away at the branch network and lay off thousands (tens of thousands?) of German workers.
Well good luck with that.
I once tried – unsuccessfully – to lay off a German employee who effectively downed tools because he was dissatisfied with his comp. I struggled with German regulation and German laws for two years. He outlasted me. That’s one guy: trying to lay off thousands will be a catastrophic political mess, both internally (DB vs. Commerz) and external to the bank.
So if the merger doesn’t deliver new revenues or diversification or economies of scale and scope, what’s the point?
The public, official answer appears to be along the lines of ‘if we lash two wounded, hobbling wildebeests together, they’ll be stronger and the lions will be less likely to pounce on them’. I don’t think anyone really buys that.
Still, despite all this, the equity market’s reaction to the rumours was to juice DB’s floundering stock by 8% or more.
I suspect the reason is just that – if the merger does take place – the put option that the German government has implicitly written to save DB from collapse has just got a whole lot less implicit. Too big to fail before; too gigantic to fail afterwards.
Great for shareholders.
Taxpayers? Not so much.