End of the affair

When German banking giants Deutsche and Dresdner shook hands on a $30bn merger it should have been the wedding to mark the new millennium – but it was all to end in tears. Dearbail Jordan reports on the deceit of a modern day tragedy

At the beginning of the merger talks between Deutsche and Dresdner banks, the former code-named itself Daphnis and its intended partner Chloe, after a pair of lovers from classical mythology.

But the outcome of what should have been the most exciting deal of the new millennium is a far cry from the pastoral romance of the innocent youths.

A little less than a month after the two German giants announced a $30bn (£19.2bn) merger to create one of the world's largest banks, things went awry.

It was not the first time the two had flirted with one another.

Both Deutsche and Dresdner, the first and third largest financial institutions in Germany respectively, had attempted to merge their retail bank operations in August 1999.

According to Reinhard Marsch-Barner, head of company law at Deutsche, both sides had employed the services of Hengeler Mueller Weitzel Wirtz to act as mediator on the talks.

He says: “It was the place of the lawyers to take the minutes on the meeting and put in various legal points.”

However, two months later, the talks had foundered and by December, Dresdner had found itself a new beau in the form of Bayerische Hypo-und Vereinsbank.

In the background, Deutsche was talking to insurance giant Allianz, which holds a 5 per cent stake in Deutsche and 21 per cent in Dresdner, about the sale of its assets.

Marsch-Barner says that since Dresdner had again engaged the services of Hengeler Mueller, the bank turned to its sometime adviser Bruckhaus Westrick Heller Lober.

At this point only a tiny circle of advisers were invited into the fray, specifically Ralph Wollburg, a lawyer specialising in corporate law at Bruckhaus, and Georg Thoma, managing partner at Shearman & Sterling's German office, who acted for Allianz.

“There was a well put together but small group of high calibre people on both sides,” says Thoma.

In January this year, however, Dresdner's talks with Bayerische fell through and the following month it opened itself up to the possibility of a menage a trois with Allianz and Deutsche.

Dresdner chose to work with Gleiss Lutz Hootz Hirsh on the talks. Peter Hemeling, senior counsel for company law at Dresdner, is vague about why Hengeler Mueller did not continue its role on this round of talks, saying only: “I am not sure if they were conflicted out of the deal.”

He adds: “Dresdner does not have one firm which is mandated for work. We work with several firms and we always submit a particular project to a firm. Gleiss Lutz is one of those firms we had mandated before.”

At first, Dresdner was coy about entering talks.

Marsch-Barner says: “There had been some telephone calls between the heads of the boards. When Dresdner's team came in it was the second week in February.”

At this point, only Dresdner's chief legal adviser Juergen Than was aware of what was taking place.

In the best tradition of secret negotiations, Dresdner also employed a project name for the talks, imaginatively naming itself and Deutsche “green” and “blue” after the colours of their respective corporate logos.

For almost a month, each party managed to keep the negotiations under wraps as they battled with how to integrate the businesses.

Marsch-Barner says: “We had a small team at that point. We had to work out what structure would be appropriate.”

On 7 March, however, reports began to emerge that the two were in “cooperation” talks, with Allianz in the background picking off prime bits of business.

One source close to the transaction says: “In Germany it is always a miracle if a secret is kept until the late part of the deal.

“In this respect it is an outstanding result that it was only disclosed just two days before it was officially announced.”

Shortly before the talks were made public, both banks implemented teams of 16 lawyers a piece and the external lawyers began building their own teams. Bruckhaus put together a team of six lawyers.

Gerhard Wirth, a senior lawyer specialising in M&A law at Gleiss Lutz, began working on the negotiations on behalf of Dresdner, with a “small” group of lawyers across a range of disciplines, including tax, labour and capital law.

But while Hemeling and Marsch-Barner say it is important to receive objective external advice in deals of this size, their in-house lawyers handled the majority of the work.

Hemeling says: “Both sides had external legal advice but we believe in using the in-house legal team. It works as a kind of partnership.

“Both banks have a good tradition of legal standards in-house.”

The banks' supervisory boards were assembled to view the proposals and both sides finally came clean on 9 March when Deutsche's chairman Rolf Breuer and Dresdner's chairman Bernhard Walter announced to the world that the rival banks would join to create a “merger of equals”.

But some merger partners are more equal than others.

While Dresdner firmly believed that it was on an equal footing with Deutsche, in reality it would hold just a 36 to 40 per cent share in the merged operation, while Deutsche would retain the rest.

It was this arrangement that would lead to the collapse of the deal.

Another potential problem was that the agreement to move the merger forward had been made in a short space of time. Marsch-Barner says: “I thought there might be other options we should have looked at so I was surprised that it went so quickly at that stage without any difficulties.”

One lawyer says: “I know many people from both institutions and they knew that at the stage it went public there were some stones in the way. But in the public eye it was exciting.”

Allianz meanwhile looked forward to moving into the “bancassurance” market as it was announced that the insurer would take an “active role” in Deutsche's retail bank subsidiary Bank 24, which would be spun off into a separate unit, as well as its DWS fund management business.

Thoma says: “The deal was very important as it was part of a major investment into Germany Inc.”

Both banks' legal teams sprang into action.

Hemeling says that Dresdner had set up about 25 internal teams which fell into either one of three categories – integration, region and function.

He says: “We were part of the function group, which co-ordinated the legal issues. Within integration they were developing the structure of the merger.”

According to Marsch-Barner, the two banks had signed an initial agreement but due diligence had still to be organised and some integration questions dealt with.

However, just three days after the merger was announced to much fanfare, rumours began to circulate that in an ultimate act of deceit, Deutsche planned to sell off London investment house Dresdner Kleinwort Benson (DKB) after promising to integrate it into the merged structure.

On 10 March, Breuer made an announcement stating that the reports were “pure nonsense” and DKB was “a jewel”.

However, one source says: “On a board of members there is always going to be different opinions if the process is still open. If things can still be influenced people will do so.”

This, coupled with disgruntled employees demonstrating outside the banks' Frankfurt offices because of the proposed 16,000 job losses worldwide, began to take the shine off the deal.

In the meantime, Marsch-Barner says: “Every day we were working with the auditors and meeting with the board members, working on different possibilities of the merger.”

But should this not have been sorted out before the banks had gone public?

Hemeling says: “It would have been impossible to get the whole structure done before it was announced. We had got the key structure done but not the terms.

“The complexity of the deal with all the anti-trust issues, competition laws and regulatory considerations made it very complicated. The banks have a presence in over 30 countries.”

He adds: “It had to be balanced between rushing out the announcement and leaving out potential issues.”

A shareholders' vote on the deal had been scheduled for November 2000 with the merger due to be completed by January 2001.

But by 16 March, Breuer had changed his tune about the future of DKB, stating that he would now consider an offer for it. The “jewel” was not so precious after all.

It was a deadly mistake.

The following day, board member Michael Dobson, head of Dresdner's asset management business, resigned while conflicting messages continued to seep out about DKB.

Marsch-Barner says that when the integration committee had discussed DKB, things seemed positive. “I had a good feeling. I had a comfortable relationship with the lawyers at Dresdner.

“I knew the colleagues at the 'green' bank already and had a good opinion of them. I looked forward to working with them.”

If only things had remained as positive with the board members.

Speculation was rife that certain senior members resented the fact that Breuer alone had taken a decision to sell the investment bank when the partnership between Deutsche and Dresdner was supposed to be a “merger of equals”.

Over the weekend of 1 April, discussions between the two banks raged.

By the afternoon of 4 April, Allianz had stepped in as a mediator to try to resolve the deadlock over the structure of the deal.

For a brief moment there was calm as it seemed a compromise had been reached that DKB, which had lost more than 100 employees since January, would be integrated.

But Marsch-Barner says: “It came to a climax on this famous date of 5 April. The day before there had been anticipation of what would come in the morning.

“There had been discussions again but no common opinion could be found.”

Something had to give and by the afternoon of 5 April, Dresdner had abandoned talks and Walter tendered his resignation.

Thoma says: “I was certainly surprised. I was just about to go to a meeting with the working groups.

“But the meeting finished rather quickly.”

Marsch-Barner was on his way to a meeting when the merger was called off. “So I went and prepared a disclosure document. You have to get on with it now rather than later. It was a bit of a surprise.”

Though the romance is over and Dresdner is attempting to get on with everyday business, it appears that Deutsche is still in talks with Allianz about the future of its retail banking group.

Marsch-Barner says: “It was not expected or intended to end this way. In the first discussions I always doubted that something would come out of the talks, I doubted they would come to a conclusion. There were too many open questions.”

It remains to be seen if, like their mythological namesakes Daphnis and Chloe, the romance will be revived, but what is certain is that, as one source says, “The public effect has been so embarrassing.”