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Western EuropeJuly 27 2010

Deutsche Bank's corporate finance business comes of age

Stephan Leithner, Deutsche Bank's co-head of global client coverage and chairman of the corporate finance executive committeeDeutsche Bank's co-head of global client coverage and chairman of the corporate finance executive committee explains how the bank's performance during the crisis has opened new doors for it both in Europe and the crucial US market. Writer Geraldine Lambe
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Deutsche Bank's corporate finance business comes of age

While its credentials in debt and derivatives, particularly in its European heartland, are beyond doubt, bulge bracket status in equity and mergers and acquisitions (M&A) has always eluded Deutsche Bank. In the crucial US market in particular, it has proved difficult to win acceptance in the boardrooms, despite its acquisitions of US banks Alex Brown and Bankers Trust in the late 1990s.

However, a string of recent advisory mandates for corporates such as Qwest Communications International and MetLife, and high-profile roles with the US Treasury and the Federal Deposit Insurance Corporation (FDIC), suggest that the German-domiciled bank's corporate finance business has finally reached a tipping point.

It is ironic that on the retirement of Michael Cohrs, Deutsche's top investment banker, and the passing of sole management of the corporate and investment bank to its global markets supremo, Anshu Jain, Deutsche's corporate finance business is coming of age. According to Dealogic's equity capital markets (ECM) ranking for the first half of this year, Deutsche Bank is fourth in the US, behind JPMorgan, Morgan Stanley and Bank of America Merrill Lynch, but ahead of Goldman Sachs. Deutsche is also currently fourth in the US for M&A.

The Deutsche story is not just about its growing US prowess. According to data from Bloomberg, it is the top takeover advisor in Europe and number three in Asia, and has done 97 M&A deals globally in the year to date. In terms of net revenue for the first half of this year, it ranks fifth globally in ECM and fifth for M&A, according to Dealogic.

A good crisis?

Deutsche has undoubtedly gained ground during the financial crisis. The bank has earned plaudits for its navigation of the crisis - taking neither state aid nor seeking rescue in the arms of a key investor. At the same time, in his role as chairman of the board of directors of the Institute of International Finance, Deutsche CEO Josef Ackermann has become a powerful voice for the banking industry.

Dr Stephan Leithner who, with Jacques Brand, was appointed last October by Mr Cohrs as co-head of global client coverage, acknowledges that the bank has benefited from clients reassessing banking relationships. "Before the crisis, clients often viewed the top 10 to 15 global and regional banks in the same way. Since the crisis they have realised that all banks are not equal and we have benefited from the flight to quality. Our underwriting business and the bank's overall stability set us apart by being very reliable during and since the crisis," he says.

While Mr Leithner maintains that much of Deutsche's corporate finance momentum is driven by a growth plan that has been in place for several years, there has been an aggressive push since the onset of the crisis to exploit the availability of good bankers and the openness of clients to doing business with new partners. The bank has hired 152 managing directors for its corporate finance business since the end of 2007. Several have been pivotal in capturing the deals that have propelled Deutsche Bank into the top five.

Take Paul Stefanick for example, a former Merrill Lynch banker who joined Deutsche as head of industrials investment banking in January 2009 after Merrill's acquisition by Bank of America. He landed the bank a lead role advising US-based Stanley Works on its takeover of Black & Decker for $3.5bn, as well as United Technologies' acquisition of GE Security.

"Key hires of bankers with deep relationships have made a significant difference in our ability to build the domestic US business in verticals where we didn't have deep penetration, such as industrials and the regional banks," says Mr Leithner.

Similarly, the hiring of mortgage finance specialists Anthony Viscardi and William Curley from Lehman Brothers helped Deutsche to win mandates from the FDIC. Last year, the bank advised on the sale of IndyMac Bank to private investors, and worked with the FDIC to find buyers for three Puerto Rican banks in April. Deutsche also worked as an agent for the US Treasury in auctioning off the warrants acquired as part of the government's capital injection into US banks.

New perceptions

These kinds of prestigious mandates make a crucial difference in terms of perception. "These are seminal deals. They earned us good credentials and helped to propel us into a different league in the way we are perceived by clients in the US," says Mr Leithner.

Its roles in other US deals, such as advising Qwest on its $10bn sale to CenturyTel and insurer MetLife on its purchase of American International Group's Alico unit for $15.5bn in the first quarter of this year, offer increasing evidence that Deutsche Bank is making headway into corporate America's heartland. Mr Leithner believes that such deals demonstrate that Deutsche's success is not a flash in the pan. In addition, it is not just about increasing strength in the US, he says.

"Our business is much broader than a stronghold in Germany, or even Europe, and we had a strong performance last year. For example, we are a top-two house in Australia; we have been at the centre of Chinese privatisations and traditionally have a very strong Russian and Middle Eastern business."

But going forward, Deutsche Bank is going to have to hold its nerve. Many argue that the fee pool simply does not exist right now to support the kind of ambitious corporate finance build-out the bank has undertaken; particularly in Europe, where Deutsche has hired extensively in markets such as Italy, France and the Benelux region. Against the backdrop of a continuing eurozone crisis, Europe, the Middle East and Africa (EMEA) ECM volumes fell by 36% and M&A fell by a quarter in the first half of the year. Overall, investment banking revenues in EMEA slumped by 26% in the same period - giving the region its lowest percentage of the global fee pool in a decade.

Forward thinking

Mr Leithner says that, first of all, expansion in Deutsche's European home market is more easily justified than expansion elsewhere. More importantly, he argues that while these markets have not yet recovered, they will; and when they do, the bank's investment will generate a lot of business across the bank. "These markets have a very broad importance to the bank. It's not just about market share; they generate business in risk management, corporate finance, capital structuring and transaction banking, therefore the business case for investment is also very broad."

The build-out has already helped to win a bigger share of the transaction banking business, says Mr Leithner, and that reinforces the case for corporate finance investment. "The corporate finance relationship is the most trust-based relationship between a company and a bank. Once the relationship is established with the CEO and the CFO, it is much more natural for the treasurer to think about choosing a bank that is trusted by the CEO and CFO on strategic topics for long-term relationships, such as a cash management partner."

While Deutsche is still looking to grow - particularly in Asia - expansion has reached a more selective stage. Whereas last year saw mass hires - including the bank's audacious poaching of Merrill Lynch's top-ranked financial institutions team, which helped to lift Deutsche's market share in the financial institutions group (FIG) from 3.6% in 2008 to 5.1% in the first half of 2010 - now it is more about fine-tuning. "There are no more big gaps to fill, but we will continue to invest and grow the business in part through hiring," says Mr Leithner.

Recent hires include Neil Kell from Bank of America Merrill Lynch for a newly created pan-EMEA FIG ECM role, and Vinod Vasan from UBS as head of FIG debt capital markets, EMEA, as part of its push to integrate FIG balance sheet management and liability management.

Still, there have been losses. One of the much celebrated FIG team which came from Merrill, David Heaton, recently jumped ship to Morgan Stanley, while Mark Epley, who had run the bank's private equity team, left for Nomura, closely followed by Michael Hill, Deutsche's former co-head of global natural resources.

"In growth phases, you always expect to lose some bankers, but our attrition rate has been lower than we have seen in several years and bankers from other institutions continue to be attracted to our growth story," says Mr Leithner.

More importantly, many fear that, with the loss of Mr Cohrs, the bank's corporate finance success will lose impetus. "Obviously Michael [Cohrs] will be missed, he oversaw a successful, decade-long strategy to build our investment banking presence; however, the change has been planned for and is natural, so it won't halt our momentum."

Mr Leithner thinks that Deutsche's corporate finance growth will not be derailed by an uncertain economic environment. Although he says that markets will remain volatile, he is not a subscriber to the fears of a double-dip recession. He believes that Deutsche's strength in transaction banking and global markets will only reinforce the corporate finance franchise.

"Post-crisis, cash management, risk management and capital structuring are even higher on the CFO's agenda," he says, "and they are looking for a banking partner which can offer all of those services in addition to advice and underwriting capabilities. Deutsche Bank is ideally placed to benefit from that trend."

Career history

Dr Stephan Leithner

2009 - Appointed chair of Deutsche Bank's newly created corporate finance executive committee

2009 - Promoted to co-head of global client coverage

2007 - Appointed co-head of European mergers and acquisitions

2004 - Promoted to head of global banking, Germany

2000 - Joined Deutsche Bank as a managing director

1997 - Elected partner at McKinsey & Company

1992 - Joined the financials institutions practice at McKinsey

1992 - Graduates with a PhD in finance from the University of St Gallen, Switzerland

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