Deutsche Bank’s head of global banking, EMEA, fills Geraldine Lambe in on the company’s numerous unsung successes: M&A, emerging markets and – surprisingly coming from an investment banker – cash management services during the execution of transactions.
Think of Deutsche Bank, and it is the dominance of its fixed income franchise that springs to mind; particularly the derivatives and trading capabilities, which sit within the bank’s all-powerful global markets division. What does not immediately strike you is Deutsche’s advisory, mergers and acquisitions (M&A) or underwriting businesses, which fall under what the bank calls global banking.
M&A particularly has always been seen as an Achilles heel in a bank that has transformed itself from a German commercial giant into a global investment bank in less than a decade. But David Fass, head of global banking for EMEA, says that taking this view is both to misunderstand what Deutsche has achieved already and to underestimate the business that it is on the verge of becoming.
“[As part of its transformation] Deutsche Bank underwent an M&A-heavy decade. By necessity it had to give its managers a very singular purpose: to build successful, strong, vertical businesses. We then had to take those vertical silos and integrate them laterally across the business to realise their full value,” he says.
Although there are still weak spots – the bank’s income from equities rose at the slowest pace of the 10 biggest securities firms, for example – some argue that in the past couple of years, and particularly this year, Deutsche at last began to knit the investment banking businesses together, and this process is becoming evident in M&A. Mr Fass agrees: “The rise in our price to book value and our higher share price is evidence that this integration is becoming more obvious to those outside the bank.”
Deutsche prowess
Mr Fass’s confidence is also reflected in the league tables. Many people may be surprised to learn that Deutsche heads the M&A league tables in Germany, eastern Europe and the Nordic region, and comes a close second to Goldman Sachs in the UK. Overall, Deutsche now sits fourth in Dealogic’s European M&A revenue ranking for 2006, with 7.1% market share. And the top four – led by Morgan Stanley, Goldman Sachs and JPMorgan – are only separated by 0.7%.
“In the past couple of years, particularly, we have focused on using our core capital markets strengths to drive more intensive advisory-led relations with all our clients, and then to translate that into higher value banking business,” says Mr Fass. “That has turned out to be the right approach in terms of profitability, the right approach in terms of attracting talent, and the right thing to do for our clients, because it enables us to add more value.”
There remain, however, some obvious weaknesses in Deutsche’s assault on the M&A business: it does not figure anywhere in the top 10 for France, Italy or Spain (not to mention the US or Latin America). Mr Fass is pragmatic: “You can’t do everything at once. The relationships that underpin M&A business take a long time to build.
“Of the five big markets in Europe [the UK, Nordic region, Germany, France and Italy], we have cracked three of them, and our central and eastern European business is also going very well. We will now continue our western Europe build-out to fill any gaps.”
Given that investment banking income is dwarfed by sales and trading – the latter accounts for more than 70% of the corporate and investment bank’s revenue (and 46% of group revenues) versus only 4% for advisory and 11% for origination – why throw resources at the expensive investment banking business? It is simple, says Mr Fass: the value of the relationship in investment banking is as powerful as ever. Capital markets is a crucial leg in the bank’s offering, but when you add “strategic share of mind” to the mix, you build the intimate corporate relationships that generate business of a much greater order.
“If you lead with your capital markets franchise, you can multiply a transaction by one or two times in terms of the amount of additional debt capital markets (DCM) business, say, that you can generate on the back of it,” he says. “By contrast, if you lead with the advisory franchise, you can generate substantially more additional business across DCM, ECM [equity capital markets], hedging, private banking and additional advisory work. We’re increasingly successful at leveraging the entire bank.”
Crucially, too, there is rapidly growing potential for lucrative investment banking mandates in developing markets; and Mr Fass says Deutsche is placing a huge emphasis on developing capacity in those markets. He says that the investment banking fee pool in Russia grew from €52m in 2001 to €600m last year. Over the same period, the fee pool in the Middle East and northern Africa grew from €34m to €500m, and in India from €52m to €300m. “It is by focusing on those growth areas that we will get business for our western European and US clients,” he says.
M&A still top
While Mr Fass believes that 2007 will be a “build year” for every bank’s restructuring business, he does not believe that restructuring mandates will drive this year’s revenues. M&A will still be the top dog and, happily for Mr Fass as head of the European business, he believes that this may be the year that Europe overtakes the US in terms of M&A volumes.
“Corporate balance sheets are in a phenomenal position. European, US and probably many emerging market corporates have been wringing the towel of efficiency and there is not much room left for organic growth, but shareholders are demanding returns so they must look outside for growth – and not just domestically. When that goes global, it will generate a lot of business.”
In the financial institutions group (FIG) space, he forecasts some intra-Europe consolidation. “I think there will be one to three €50bn-plus cross-border banking transactions this year; and that trend will spread to the insurance and reinsurance sector. That promises about 24 months of activity.”
Mr Fass also sees the potential for much activity in the hedge fund and alternative asset management space. “In 2006, we saw some permanent capital deals come to market – KKR in the summer and Marshall Wace in the autumn, for example, both of which were big ‘statements’; there are a few more of those lined up.
“In 2007, we will see several firms wanting to realise the value of the management company. There won’t be a lot of them, but there will be some very big deals.”
The hedge fund space is ripe for consolidation, too. “We saw the beginning with Morgan Stanley’s Landsdown acquisition. Equally, we saw funds quickly mopping up after Amaranth went down. Both are a sign that consolidation is on the cards. Twenty, 30 and 40-billion-dollar managers will become $100bn managers,” he says.
Cash management
Mr Fass believes that M&A and emerging markets are two of Deutsche Bank’s relatively unsung successes; another, he says, is the firm’s transaction business. If it is surprising to hear an investment banker even mention cash management and clearing operations, then Mr Fass says it should not be: it is good business for a client and for the bank.
“In the course of advisory work, a lot of ancillary processes become noticeable that can offer considerable value to a client if you have an integrated product set to deal with them. For example, managing cashflow efficiently during a big transaction can be very value accretive. You can save up to €10m in value; put an EBITDA [earnings before interest, taxes, depreciation and amortisation] multiple on that and it is an even bigger value. It does not make headlines, but it is good business.”
This is just another example of the way that the top management at Deutsche Bank is trying to take an ever more joined-up view of the business – and trying to get their bankers to do the same, says Mr Fass. Just as M&A bankers should start thinking about what cash management services should be offered during the execution of a transaction, so should initial public offering (IPO) bankers get private bankers on board at the early stages of a deal.
“An IPO may be the most personal wealth accreting transaction that a management team will do, and we should be generating private banking business off the back of that – it generates annuities that go on year on year. In a downturn, that – along with smoother transaction banking income – will help to protect our revenues.”
And this is no pipe-dream, he emphasises. “By the end of next year, we aim to have investment bankers taking a private banker with them to an IPO pitch, to tell clients about the wealth management services we can offer post-IPO.”
The same is true with Deutsche Bank’s financial sponsor clients, he adds. A higher proportion of them should be Deutsche’s private banking clients.
Mr Fass acknowledges the challenges involved in trying to get investment bankers to think in these terms. He believes that management diktat will be helped along by Deutsche’s ongoing migration towards an employee-shareholding business. “As shareholders, they will think differently when they see the share price moving, or see how much the transaction banking business and private wealth management contribute to the overall health of the bank.”
Mr Fass is also proactively fostering a more integrated attitude. Last month, he hosted a lunch for 80 of Deutsche’s best investment bankers and private bankers. He says: “I want to help breed a bit of familiarity.”
CAREER HISTORY
2004 Promoted to head of global banking, Europe
2002 Appointed global co-head of debt products
2000 Joined Deutsche Bank as co-head of European leveraged finance
1999 Appointed co-head of European media and telecom group
1998 Promoted to managing director of high yield capital markets
1993 Joined Chase Securities in high yield capital markets
1990 Moved to the private finance group at Paine Webber in New York
1989 While at Paine Webber, graduated from New York university with MBA
1986 Joined Paine Webber in New York in corporate finance
1986 Graduated from University of Michigan with BA in economics
