Investment bankers stand in way of consolidation

Investment bankers earn their extravagant keep by urging companies to merge. Yet they themselves continue to be the main impediment to the rational consolidation of the European banking sector.

So nobody should be fooled into thinking the battle for ABN Amro will open the floodgates for all-out European cross-border banking consolidation. Why? Because when it comes to trying to combine the old continent’s biggest banks, their investment bankers will stand in the way of any deal.

Remember the “civil war” that broke out between London and Frankfurt in the late 1990s when Deutsche Bank agreed to merge with Dresdner. The supervisory boards of the two German banks gave the go-ahead for the deal, but they could not get their respective investment bankers – Morgan Grenfell in the case of Deutsche and Kleinwort Benson in the case of Dresdner – to even consider the idea of combining.

The merger collapsed in 2000 and the German banks were obliged to offer staggering inducements to their investment banking teams to persuade them to stay on. Dresdner guaranteed their investment bankers five years of bonuses while Deutsche guaranteed them three years, recalls a former Dresdner board member.

The following year Dresdner merged with Allianz, the financial markets collapsed in the wake of the dotcom bubble and the September 11 terror attacks, and for three years both Deutsche and Dresdner struggled to revive their investment banking businesses. The lesson was clear, says one of Europe’s most experienced bankers. The idea of merging large European banks with significant investment banking operations is a recipe for financial disaster.

Josef Akermann, Deutsche Bank’s Swiss-born chief executive agrees. Each time somebody mentions the possibility of Deutsche Bank combining with Credit Suisse he says it would lead to a bloodbath with the risk of the merged group losing all its best bankers. After all, says the chairman of another big European bank, investment bankers are no different from football stars. They simply go where the money is best – not only to rival investment banks but increasingly to private equity firms or companies setting up their own in-house investment banking facilities or establishing their own boutiques.

The US experience is a further salutary reminder of the difficulties of merging large investment banking institutions. After all, the JPMorgan/Chase and Citibank/Salomon Brothers mergers were hardly shining examples of successful big bank combinations. Quite the opposite. Perhaps a merger between a US investment banking group with a European could work. But then there is the old question whether national banking regulators and governments in Europe would allow such a politically sensitive transaction.

Sure, cross-border activity has been stepping up in Europe’s banking sector. But the big cross-border deals have tended to involve special situations. UniCredit snapped up HVB because the German bank was in trouble. BNP Paribas acquired BNL in the fallout of an Italian banking scandal.

What next? The most likely targets for the next wave of consolidation in Europe are expected to be retail banks with little exposure to investment banking. Banks such as BNP Paribas, Société Générale, Deutsche Bank – all with big investment banking divisions – are now all looking at retail opportunities in such markets as Italy, Spain, Greece, Germany and the UK.

Even the old idea of merging BNP and Société Générale has been buried. It might have made sense 10 years ago but now that they are both among Europe’s leading investment banking players, a combination no longer makes any sense. Their respective investment bankers would see to that.

Time is luxury

A report on luxury consumers around the world by the influential Conference Board has put luxury brands firmly in their place. For the survey of some 1,800 affluent consumers in the US, China, France, Germany, Italy, Japan and the UK clearly shows that material goods are not regarded as the height of luxury. The ultimate luxury is time and “time to do whatever you want and being able to afford it”.

The findings show that for the largest share of luxury consumers, luxury is not specifically related to how much something costs or its brand. Even more interesting is that when it comes to material goods what these affluent consumers are looking for are antiques and rare items, original works of art, and precious time pieces given their craving for time.

The majority of luxury consumers also claim they reject conspicuous consumption. Of all the country’s surveyed, China was the only one where a significant percentage of consumers believed that luxury was defined by the brand. It is not surprising that the world’s luxury goods conglomerates are expanding madly in China.

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