The sale of Deutsche Bank’s US master trust, securities lending, and indexing business is entering its final stages, according to informed sources. The shift has not been sudden – ever since the German bank starkly announced in its 2001 annual report that it was reviewing its strategic options with regard to these businesses, it was presumed that the bank’s American institutional customers – primarily legacy clients of Bankers Trust – would have to deal with a change of custodian bank. That time appears to be nigh. As a result, for hundreds of US plans which were once serviced by Bankers Trust, the time is drawing near when a decision will have to be made whether to transfer to the new owner or to go out and do a full-fledged search for a new vendor.
With final due diligence work now under way, the final buyer of the Deutsche Bank book of business remains at this stage a matter of speculation. The deal is a complex one, not least because Deutsche Bank is attempting to bundle the index and custody businesses into one saleable package, as well as include some of its European clients, sources indicate. The investment banker for the deal is Curt Kohlberg, president of Newton-based Chatham Partners, and common wisdom has it that there are a number of interested parties, but common sense would seem to eliminate most of them. The presumptive front-runner appears to the Bank of New York, for a variety of reasons. For starters, BNY is one of the very few securities services institutions that has shown a sustained appetite for acquisition (including the custody businesses of JP Morgan and Royal Bank of Scotland), as well as a track record of making these deals work. BNY also appears to be better acclimated than the likely competition to have in place the stomach and the pricing model to deal with the inevitable flurry of customer RFPs that invariably attend such changes.
Indeed, there is very little guarantee that clients will come along with the purchase, and thus the pricing of these deals can be excessively complicated. BNY, which historically has had a limited presence in the large public and corporate master trust market, has become considerably more aggressive of late. And the ex-Bankers Trust client base – which is skewed towards large corporate plans – represents an exceedingly attractive one. BNY has a negligible presence in indexing, so it is unclear whether Deutsche Bank’s purported desire to bundle the sale of its indexing and custody businesses will hold up.
Recent aggressiveness notwithstanding, to some extent BNY’s presence at the head of the queue is a function of how short that queue is. In terms of the custody world’s 800 lb. gorillas, JP Morgan Investor Services has shown that it can acquire (witness the acquisition of Morgan Stanley’s custody business in the late 1990s) but the JP Morgan Chase empire is now so large and widespread and hungry for return that it is unlikely that the board would deem the slow if steady returns of the custody business worth another substantial capital injection – moreover, as is also the case with Citibank (which is a major player in global custody but a bit player in master trust), much larger challenges now surround the institution, as reflected in the stock prices of both JP Morgan Chase and Citibank.
State Street, a predominant player in both master trust and indexing, has until now showed little appetite for acquisition, preferring instead to pick off clients, and there is little reason to suspect a shift in that strategy. Mellon is a player of note in both the US master trust (where it is has made strides of late) and indexing businesses, but the Pittsburgh-based bank has also preferred to grow by client accretion. The same is true of Northern Trust, which despite its success over the last few years continues to be viewed more as a target than a potential acquirer.
The present travails of financial services in general argue against Deutsche Bank getting what it might consider a fair return for its custody and indexing business. Asset management revenues have been compressed, and the financial services industry – particularly banks – have been particularly vulnerable to the accounting and financial travails of the industry at large. As a consequence, all the custody banks are trading at substantial (in some cases, like BNY and Northern Trust, dramatic) discounts to their all-time highs.
By and large, Deutsche Bank’s US institutional customer base has remained surprisingly loyal in light of the bank’s vacillating commitment to custody, a vacillation that has evidenced itself in considerable staff turnover. There have been some master trust defections, of course, and some indexing, securities lending, and defined benefit payment mandates have been won by competitors, but the bulk of the business has remained in place. However, there is widespread agreement that there can now be no reversal by Deutsche Bank – essentially it has committed itself to finding a buyer. All that remains is for the winner to emerge from the bake-off, and for that winner to try and win the loyalty of a large number of irked plan sponsors.
If the US business is sold separately, which it may well be, the hope that Deutsche Bank can sell the entire GSS business in one package clearly has fallen apart. Whether a second buyer will be willing to pick up the European business (where the newly integrated ABN AMRO-Mellon combination and BNP Paribas are the main contenders) or the Asian network (where the potential acquirers would be HSBC, Standard Chartered or Citibank, but the likelihood of any one of these stepping up to the plate in an aggressive manners seems farfetched) is debatable. As GSS is broken up – and processing platforms in Edinburgh, London, Frankfurt, Singapore and Sydney are rationalized by a new buyer – staffers in Europe and Asia might well look back bitterly on the acquisition of Bankers Trust. In 1998, the giant German bank had a hugely profitable custody franchise in Europe and an impressive and growing network in Asia. But then the board decided to buy an American bank that brought with it a custody operation that turned out to be less healthy than it looked, with an ageing processing platform, a stirred-up client base, little presence in Continental Europe or Asia, and executives with a stronger appetite for high spending, strategizing, and managerial politicking than the slow grind of winning new business. Bankers Trust, once the star performer among US custodians, had, it is now clear, very badly lost its way in securities services by the time Deutsche Bank’s acquisitive eyes alighted on it.