In November, Germany's Deutsche Bank said it would acquire Bankers Trust Co., the eighth-largest bank in the United States, for $10 billion, or about 2.3 times book value. This trans-Atlantic takeover proposition is significant for a number of reasons.
This would be the largest takeover of a U.S. bank by a foreign institution, creating a financial services company with $840 billion of assets. The deal represents the culmination of a series of attempts by Deutsche Bank to gain a foothold in the U.S. capital markets. But as with dinosaurs, size does not ensure long-term dominance or longevity.
How can Deutsche Bank increase its chances of a seamless integration and ensure enhanced profitability? Deutsche's CEO Rolf Breuer may wish to consider the following 10 proactive strategies to sidestep the pitfalls and grasp the opportunities:
1. Centralize management control. Deutsche Bank should establish reporting lines based on product and geographical expertise, rather than granting Bankers Trust total autonomy. In 1989, Deutsche's acquisition of the U.K.'s Morgan Grenfell came undone after Deutsche granted the firm a high degree of autonomy that proved difficult to rein in.
Centralized control is not synonymous with squashing product innovation. It typically reduces distractions that result from internal political maneuvering, and removes the uncertainty created by reporting to multiple bosses.
2. Monitor global risk. The purchase of Bankers Trust would clearly raise the overall risk profile of the new Deutsche group. In 1995, Bankers Trust's emphasis on sales and trading led to lawsuits in derivatives transactions with clients, including Proctor & Gamble and Gibson Greetings. Though Bankers Trust chairman Frank Newman has reduced proprietary trading's contribution to net income, the company lately appears to be at the mercy of adverse market conditions.
3. Geographically reallocate functional expertise. Recently, major U.S. investment banks, such as Morgan Stanley Dean Witter, Goldman Sachs & Co., and Merrill Lynch & Co., have carved out strong niches in Europe by exporting their expertise and establishing themselves as global, rather than purely national, players. The opportunity for Deutsche Bank lies in transporting Bankers Trust's and BT Alex. Brown's expertise to "Euroland" in underwriting IPOs and high-yield debt.
4. Achieve cost efficiencies. Deutsche Bank has announced a 6% reduction of the two banks' combined work force of 96,400, which would result in a one-time pretax restructuring charge of $1 billion and an annual pretax cost savings of $1 billion. Areas likely to be affected include global markets, information technology, and operations. Deutsche should also consider outsourcing non-core functions and relocating back-office functions to lower-cost regional centers.
5. Retain intellectual capital. In a recent failed buying spree, Deutsche Bank attracted talented investment bankers from rival companies with guaranteed multiyear bonus packages, only to see them quickly depart. In the Bankers Trust deal, Deutsche Bank announced a $400 million "retention pool." It should allocate the pool purely on a results-delivered basis that rewards the achievement of institutional goals and objectives.
6. Minimize culture clash. Commercial bankers who operate in a conservative, bureaucratic morass of titles and authorizations have rarely mingled compatibly with freewheeling, fee-driven investment bankers. The disparity in trans-Atlantic compensation structures could lead ruffled feathers at Deutsche Bank's Frankfurt headquarters.
Deutsche needs to let its specialized investment banking functions compete effectively, and expose them to the long-term relationships its commercial bankers have built up over decades with Germany's industrial titans.
7. Acquire worldwide stock exchange listings. Deutsche Bank needs to alter the public perception that it is a German bank expanding overseas because of domestic constraints. It needs to reinvent itself into a global bank, offering unparalleled capital market access, that happens to have a German parent.
A painless step in this direction would be to list on the NYSE, abiding by its stringent disclosure regulations, and on a major Far Eastern stock exchange. This would enable the new Deutsche group to obtain instant institutional visibility, simultaneously enhancing transparency and granting it global access to capital.
8. Develop a transnational management cadre. Senior management leadership and financial expertise is not confined by national boundaries. Truly global corporate entities, such as Nestle's, Citigroup, and Asea Brown Boveri, promote senior managers from different nationalities. Deutsche Bank needs people who are equally at home on the parent company's board in Frankfurt and hobnobbing with IPO prospects in Silicon Valley.
9. Value recurring-fee businesses. Low-risk, fee-based businesses that can provide steady earnings with minimal use of bank capital should be nurtured. Deutsche has achieved a critical mass in middle-market underwriting, international asset management, and global custody, as well as securities processing, and should be on the prowl to acquire marginal players that want to quit these sectors.
10. Set realistic financial targets. Deutsche Bank has set an ambitious target of 25% return on equity by 2001, in sharp contrast to single-digit returns achieved recently. High short-term target hurdles would encourage managers to entertain unreasonable risks. This may lead to a hasty and later regrettable deployment of resources to meet budgeted financial goals.
In conclusion, the new Deutsche group, armed with plenty of capital, a healthy balance sheet, and an array of businesses, faces two major challenges. First, it needs to alter its image as a conservative, directionless banking behemoth, into one of a dynamic financial institution comfortable in worldwide financial markets. Second, it must create a culture of innovation and loyalty, while it watches the eggs in its newly acquired basket ever more vigilantly. Mr. Singh, an adjunct professor at the University of Arizona, Tucson, is a consultant to financial services firms.