As usual, the affable Deutsche Bank chairman roamed the corridors of the Grandhotel Belvedere and pop-up bars on the Swiss ski resort’s main Promenade, exchanging gossip and sounding out deals. But this January he had a special mission.
After working behind the scenes for months to persuade politicians and shareholders of the merits of a merger with local rival Commerzbank, he was now touting the benefits of a deal more openly, according to several people who met the grandee of German finance at the World Economic Forum.
His hard work paid off. With widespread support for exploratory talks now secured, he only had to wait. Within days his chief executive Christian Sewing received a call from Martin Zielke, his counterpart at Commerzbank, who said it was time to hammer out a deal to unite Germany’s two biggest banks.
The conversation started a three-month saga that gripped the financial world. The long-touted combination would have created a banking juggernaut and given a jolt to Europe’s fraying and fragmented banking sector.
The combined entity would have commanded €1.8tn of assets, 141,000 staff and 30m German clients. Deutsche’s humbled investment bank would have cut its soaring funding costs, which were pricing it out of deals by more muscular Wall Street rivals.
A merger would have helped draw a line under a gruesome seven years for both banks, blemished by scandals, regulatory probes and poorly executed management changes that undermined Germany’s financial centre.
For Mr Achleitner, one of Deutsche’s strongest internal advocates for a deal, the merger was a chance at personal redemption, after a torrid time in charge. The upper echelons of Commerzbank were similarly keen, as they were about to abandon yet another set of middling financial targets.
However, the Deutsche chairman realised his dreams of doing a historic deal to transform Germany’s banking industry were dashed when Mr Sewing consulted him in the middle of last week about his fears that such a move could backfire.
By the next morning the deal was dead, leaving both banks scrambling to find convincing plan B’s. The FT has spoken to more than a dozen people involved to understand how a deal that had seemed inevitable ended in failure.
A ‘duty’ to step in
By the end of 2018 Germany’s finance minister Olaf Scholz and his deputy — the ex-Goldman Sachs banker Jörg Kukies — had decided they could no longer wait on the sidelines. They owned 15 per cent of Commerzbank after a 2009 bailout.
Deutsche’s share price had tumbled to record lows, confronted by a series of humiliations. These included a police raid on its headquarters, the revelation that it had cleared $150bn of suspicious Russia-linked money for Danske Bank’s Estonian unit and questions from the US Congress about its links to President Donald Trump.
The market’s nervousness echoed late-2016 when rumours of a potential $14bn US fine rocked Deutsche, before it eventually settled for half that.
“Back in 2016, we were wetting our pants and Deutsche’s stock was at €13 — now it was [almost] half that,” said one government official close to the merger discussions, adding they now felt a “duty” to step in and push the two banks to start talks.
Mr Sewing and Mr Zielke knew each other well, having crossed paths in the summer of 2016, when the two sides briefly looked at a tie-up.
The two Germans have a “genuine personal chemistry” rooted in their similar backgrounds, those closest to them said. Both were apprentices at Deutsche Bank and have since spent long spells working for homegrown companies.
Since taking over as CEO a year ago, Mr Sewing repeated ad nauseam his desire to “get our house in order” before considering a deal. His approach was undermined by a steady stream of leaks about potential talks and a steep fourth-quarter loss.
By late February, the Deutsche boss asked his board’s permission to open a back channel to Commerzbank. That leaked too, piling pressure on Deutsche to act.
Six sleepless weeks
Formal discussions were announced at midday on a Sunday in March. About 20 due-diligence groups were created to examine issues from retail banking synergies to corporate client overlap, tax questions, accounting implications and capital needs.
The FT reported internal calculations showing that Deutsche might need to raise up to €10bn in capital and fire 30,000 people to make a deal work. Implacable unions mobilised street protests and lobbied politicians in Berlin.
Paranoid about leaks, Deutsche limited its team to a tight-knit group led by Mr Sewing. The bank was represented by chief financial officer James von Moltke, general counsel Florian Drinhausen, head of corporate M&A James Ruane, head of strategy Alex von zur Mühlen and chief operating officer Frank “the tank” Kuhnke — so-named for his “robust” communication style.
The six-foot-seven Mr von zur Mühlen — a close confidant of Mr Sewing — “was the guy that really held it all together,” according to one person involved.
On Commerzbank’s side Mr Zielke was backed up by CFO Stephan Engels, head of strategy Jörg Hessenmüller, general counsel Günter Hugger and Carsten Schmitt, an investment banker.
The teams met at a variety of Frankfurt venues from their respective skyscraper headquarters to the offices of their lawyers and advisers. Rothschild’s offices — easy walking distance for both one block south of the city’s stock exchange — was a favourite site.
Mr Sewing and Mr Zielke also held one-to-one meetings on Sundays to escape the constant interruptions of underlings.
The fact that negotiating teams spent six weeks locked in talks shows how serious they were about the deal, according to one executive involved.
“If it had been a slam-dunk, black and white thing, we would have come to a conclusion some weeks ago,” the executive said. “It was very transparent and collaborative.”
However, the talks ran into a number of obstacles. One roadblock emerged over how much access Commerzbank — and one of its main advisers, Goldman Sachs — would have to see the inner workings at Deutsche’s investment bank.
Deutsche worried its Wall Street rival would use its privileged position to gain a competitive advantage, said a person directly involved.
Managers justified their blocking tactics by saying “we would be buying Commerzbank and it is clear which investment bank we are keeping; we are just going to shut 100 per cent of their operations”, the person said.
By April 24 it was clear talks were faltering. Mr Sewing barely left his office on that Wednesday — his 49th birthday — poring over arcane spreadsheets of merger maths and debating with his inner circle. He turned for advice to the deal’s grandfather, Mr Achleitner, who had so far stayed neutral on the outcome of the talks.
By the evening Mr Sewing had decided to walk away. The cautious risk manager in him concluded the transaction’s pitfalls were too numerous and the returns too nebulous.
A first-quarter performance that beat analyst forecasts bolstered his confidence in Deutsche’s standalone chances and he knew it had other options, such as talks to merge its asset management operations with those of Switzerland’s UBS.
On April 25 the CEOs and chairmen met for a typically plain German breakfast of salami and cheese rolls at the top of Commerzbank’s tower. Few felt like eating.
Mr Sewing broke the news, explained his reasoning and both sides agreed to present the break-up as a mutual decision.
Commerzbank’s signature drink “Apfelsecco” — a peculiar non-alcoholic sparkling wine made from apples, a favourite of Mr Zielke — remained in the fridge.
At 10:34am both lenders issued identical statements blaming “execution risks, restructuring costs and capital requirements”.
In most scenarios produced by the deal teams, the enlarged lender had to raise between €6bn and €8bn of additional capital, but still expected a return of well below 10 per cent, said a person working on the deal.
A crucial factor was a doubt over how much “badwill” — the discount Commerzbank traded to the value of its net assets — could be used to bolster capital.
“Calling the merger off wasn’t a strategic decision,” a top regulator said. “They could just not afford the deal.”
“Without the one-off [accounting and tax] effects the transaction would have triggered, the deal stacked up,” the person said, adding it was “unsettling . . . [that] both banks do not have enough firepower to bring forward a merger that makes strategic sense”. Deutsche disputes that it lacked firepower to do the deal.
Deutsche has said it will “continue to review all alternatives to improve long-term profitability and shareholder returns”. Mr Achleitner told the FT its lossmaking investment bank does not need a fundamental strategic overhaul. Privately, fatigued executives’ morale is strained.
One executive said: “Speaking personally, I was aware it was going to be hard work, continuing the healing path for Deutsche, but there have been fewer upside surprises than one would have hoped.”
Commerzbank for its part can now shift its attention to its two other suitors — Italy’s UniCredit and Dutch bank ING — with the German state’s aversion to a foreign acquirer weakened by the absence of a domestic partner.
“Before the government could move on to a foreign acquirer [for Commerzbank] they had to show that they at least tried the German solution,” the CEO of a rival European lender told the FT. “Now that path is cleared.”