The collapse of the Deutsche Bank/Dresdner Bank merger gives U.S. financial institutions an opening to strengthen their global position in wholesale and investment banking - not merely because it removes a potentially dominant competitor, but also because it leaves Dresdner vulnerable to a takeover by a U.S. firm.
The failure of the two German banks to merge suggests that European bank mergers will focus on retail banking in the future rather than corporate and investment banking. That could help the competitive positions for U.S. institutions that are moving to beef up their European investment and corporate banking businesses - some of which already hold strong competitive advantages. "I hear a sigh of relief blowing across U.S. investment banks in London," said Elizabeth Morrissey, a partner with Kleiman International, Inc., a Washington-based financial consulting firm. "This has big ramifications for global competition and it means the Americans are winning out."
That the deal's collapse has such international ramifications was highlighted yesterday, when Germany's chancellor Gerhard Schoreder went so far as to describe the events as an embarrassment.
Many U.S. financial firms, including bigger banks and investments banks as well as smaller ones such as Donaldson, Lufkin & Jenrette and Fleet Boston Corp. have targeted Europe for a major buildup following introduction of a single currency in the European Union and the ensuing creation of a common capital market.
More than half a dozen U.S. financial institutions already dominate global capital markets and corporate finance. J.P. Morgan & Co., Citigroup, Goldman Sachs & Co., and Morgan Stanley Dean Witter have for several years headed the global league tables for everything from mergers and acquisitions to syndicated lending and securities underwriting.
Only two Europeans - Credit Suisse First Boston and Deutsche - ranked as serious competitors and Deutsche did it largely on the strength of last year's acquisition of Bankers Trust Corp.
Deutsche, Germany's biggest bank, and Dresdner, the country's third largest, last month announced a planned merger valued at $29 billion that would have created the world's biggest bank with more than $1.2 trillion in assets.
According to the plan, Deutsche and Dresdner would have spun off their unprofitable retail banking businesses and asset management operations into a separate company. Allianz AG, the German insurance company that helped arrange the deal, would take a major stake in this new company. The decision prompted Michael Dobson, a highly regarded board member in charge of Deutsche bank's fund management activities, to resign last month. Deutsche and Dresdner, in turn, said they would concentrate on building up wholesale and corporate banking.
But the planned merger soon ran into difficulties after Deutsche Bank chairman Rolf Breuer announced plans to scrap Dresdner Kleinwort Benson, Dresdner's London based investment banking unit and a major contributor to profits. Earlier this week, Dresdner chairman Bernhard Walter rejected moves to break up the investment banking unit and shares in both banks plunged sharply amid concerns that the two banks had failed to agree on a common strategy.
Banking sources and analysts in London estimated that Allianz is perhaps the biggest loser in the breakup while Dresdner itself may simply become a target for another bank, they said.
"Dresdner has been considerably weakened and is in a strategic vacuum," said Adrian Pilz, a banking analyst for Fox-Pitt, Kelton in London. "This opens up a window of opportunity for a lot of other large houses to jump in."
A spokesman for Citigroup in New York declined to comment Wednesday on reports carried by wire services that the U.S. company was interested in acquiring Dresdner. The reports followed defection of a team of equity analysts to Citigroup from Dresdner Kleinwort Benson and remarks reported on Reuters from Tokyo by Deryck Maughan, vice Chairman of Citigroup, that his company would make further "important acquisitions" in the world this year.
Observers have also named Chase Manhattan Bank, which last month agreed to acquire London-based Robert Fleming Holdings Inc., as being on the prowl for further acquisitions in Europe. Earlier this week, the bank declined to comment on speculation that it was considering a bid for DKB.
On Wednesday, Deutsche an-nounced a 50% increase in first quarter pre-tax earnings. The group did not supply any figures, but added that most of the gains had come from investment banking.
Citing "difficulties regarding the integration" of its own investment banking operations with those of Dresdner, it added that since "no procedure acceptable to both sides could be found, an integration management of the kind that had worked for Bankers Trust could not be found."