Thomas Gahan, head of corporate and investment banking in the Americas at Deutsche Bank, tells Sophie Roell how he has turned around the US operation’s fortunes. Now he is looking at equities.

The pressure is on at Deutsche Bank’s US operations. CEO Joseph Ackermann has set an ambitious 25% return on equity target for the bank globally in 2005 and it’s no secret where the bulk of that profit growth will have to come from: the US investment bank.

The man in charge is Thomas Gahan, an Edson Mitchell protégé who came over from Merrill Lynch in 1999. A high yield/leveraged finance star who took over the US CEO role in 2001—while the bank was still reeling from the difficult merger with Banker’s Trust and Mr Mitchell’s tragic death in a plane crash – he’s no newcomer to tough challenges.

“I just view it as an opportunity to continue to grow our businesses and gain market share,” he says, of Dr Ackermann’s target, which left some analysts unconvinced when it was first announced. In 2004, Deutsche trailed competitors with a return on equity (ROE) of just 16.75%. But take a look at where Mr Gahan started from, and it is hard not to be impressed by his performance to date.

“I inherited a business that was losing a lot of money in the US,” Mr Gahan recalls. “And I knew one thing: no one likes to support losers.”

What followed was a period of relentless cost-cutting, as every part of the business was put under the microscope. Mr Gahan reduced headcount by a staggering 45% (it is, perhaps, no wonder he has a reputation as a hard-hitter within the bank), while at the same time trying to make a name for Deutsche in the US investment banking market. By 2003, the business was turning a profit, and the US now contributes one-third of the bank’s fast-growing corporate and investment banking revenues, up from around 15% in 2000.

Fortunately, Mr Gahan had a few useful cards to play. Most notable was his own background in leveraged finance, putting him right at the centre of a hot and hugely profitable area: leveraged buyouts (LBOs). Not only has the financial sponsor community become utterly vital to investment banking revenues across Wall Street, it has the added advantage of being more open to new ideas – and newcomers – than traditional corporates.

“Obviously we’re not the incumbent in the US,” says Mr Gahan. “It’s still going to be easier to go to your board and tell that them that you’ve hired a big US name as your M&A adviser than Deutsche Bank – that’s just a fact.”

Not so true in the financial sponsor community, and Deutsche was able to get its foot in the door early. Says Mr Gahan: “We recognised early on that these guys were smart, that they controlled large amounts of capital and that they were pragmatic. If we could help them in some way, they weren’t so concerned that they needed to have a 30-year relationship with us.

“They were more concerned with who had the best idea, who could execute, who is going to be there when things were tough, and we developed a pretty strong relationship and business on the back of that.”

Top billing

He shows a chart of 20 of the most recent large LBOs. Deutsche features in 19 of them – including an upcoming $15bn deal for Hertz. “The profitability associated with these types of transactions just dwarfs anything that can be created by one of the more high-profile, league table-driven advisory assignments because we can cross-sell other products,” he says.

It has made Deutsche a quirky institution, heavy on debt and derivative products, and not your typical Wall Street firm. As Mr Gahan says: “Joe [Ackermann] has really given us the ability to just go out there and build businesses. We haven’t been compelled to build a business based on someone else’s blueprint for what it should look like. We’re focused on where the business is going, not where it’s been.”

Mr Gahan portrays the bank as a nimble, entrepreneurial sort of place – and by that he does not mean a group of traders taking excessive risks to reach ROE targets. “We’re building out businesses based on our ability to originate, structure and distribute risk,” he says.

“And I think we have developed a pretty good mousetrap, in terms of our ability to slice and dice risk, to hedge it, to repackage it and to redistribute it, which has allowed us to grow as quickly and profitably as we have.”

The proof? The results from this year’s choppy second quarter. “We came through pretty strongly,” he argues, a view confirmed by Simon Adamson, an analyst at Creditsights, who compares Deutsche’s Q2 performance favourably with several of the US brokers in that difficult period.

Pastures new

What then of recent efforts to make Deutsche look more like a typical investment bank? After revamping its investment banking coverage with hires from around Wall Street (most recently in healthcare), the bank also decided, this year, to make a firm push into cash equities, not the easiest business to be in these days. The bank took advantage of internal troubles at Morgan Stanley to poach a team led by Robert Karofsky – and gutted Stanley’s trading desk.

“We took a fresh look at our cash equities business earlier this year,” says Mr Gahan. “And we thought: we can make it more efficient, the market is changing and we can afford to be a disruptive force because we’re not an incumbent. But we needed new people. So we went out and hired a group of 14 traders and salespeople from Morgan Stanley, some of the best on the Street. Period.”

To signify the importance he attaches to the effort, Mr Gahan is spending the year based on the equity floor of the bank’s office at 60 Wall Street.

Not all analysts are particularly happy about the equities drive. “They’ve already spent a lot of money without achieving much,” says Dirk Becker, a banking analyst at Kepler Equities in Frankfurt.

But Mr Gahan defends himself against such claims. With about a 20% reduction in headcount, he argues that his cost base is actually down year-on-year – and he believes the equities investment will increase and drive profitability, as business is coordinated across all aspects of the firm.

Follow-up service

After all, once a relationship is in place, it makes sense to be able to lever that to offer a client a full range of products. “If you think about the life-cycle of an LBO, it starts with potentially an M&A assignment and acquisition financing, and then there could be a trade sale, there could be additional acquisitions, an IPO, secondary offerings – it’s a pretty long and fruitful income stream,” he says.

And, anyway, if it didn’t make sense from a profit standpoint, what would be the point in doing it?

“There’s no ego associated with being in any of the businesses that we’re in – we don’t care about that, we don’t get paid in league tables,” Mr Gahan points out.

It’s all part of his impressively no-nonsense approach. “We’re grinding it out in the trenches every day, building our business, hiring good people, building on success, and we’re going to continue to do that,” he says. “And it’s sort of boring in the sense that there’s no big splash, we’re not coming out and saying we’re going to be number one in M&A or in equity capital markets.

“What we are saying, is that we’re going to continue to grow, we’re going to take market share, we’re going to be more profitable next year than we were this year – and we’re going to do the same thing the year after.”

CAREER HISTORY:

2004: Appointed head of corporate & investment banking, Americas, CEO of Deutsche Bank Securities

2002: Promoted to head of corporate finance, Americas

1999: Joined Deutsche Bank as head of global credit products

1998: Appointed global head of credit products

1988: Joined Merrill Lynch credit products group

1984-87: Joined brokerage firm EF Hutton as a trainee

1984: Graduated from Brown University with BA in economics

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