Client Backlash Was Key to Deutsche Bank's Deal Collapse
The logos of Deutsche Bank AG, left, and Commerzbank AG sit on the banks’ headquarters in Frankfurt, Germany. (Photographer: Alex Kraus/Bloomberg)

Client Backlash Was Key to Deutsche Bank's Deal Collapse


(Bloomberg) -- Fierce resistance from corporate clients dealt a key blow to Deutsche Bank AG’s deal talks with Commerzbank AG, according to people familiar with the matter.

Many Deutsche Bank customers threatened to cut ties with Germany’s largest bank should the deal go through, said the people, asking not to be named because the details haven’t been publicly disclosed. Clients who had business with both banks were worried about going from two credit providers to one, a senior Deutsche Bank executive said on Friday.
Chief Executive Officer Christian Sewing knew early on that many of his most important clients didn’t like the idea of its takeover of Commerzbank, according to the people. Some board members of large German corporations even told him so at Davos, when speculation about the deal started heating up. Still, the backlash that ensued after formal talks were announced in mid-March was intense, the people said.

In the end, the figures just didn’t stack up. The expected revenue loss “would have compounded the chronic difficulties of Deutsche to grow its revenue base,” Filippo Alloatti, a senior credit analyst with Hermes Investment Management, wrote in a note on Thursday. For the deal, that may have been “the straw that broke the camel’s back,” he wrote.

Much of Germany’s Mittelstand -- the backbone of Europe’s largest economy -- still hadn’t forgotten their experience during the last financial crisis, when international and domestic lenders pulled the plug on lines of credit. With the German economy slowing down and worries about Brexit and a potential trade war, the privately held midsized companies weren’t keen on having all their eggs in one basket with a larger German bank.

The corporate opposition ultimately proved a decisive factor undermining the potential merger, which was already facing opposition from employees, labor unions and shareholders, the people said. Deutsche Bank expected as much as 1.5 billion euros ($1.7 billion) of lost revenue from the transaction as clients headed for the door, Bloomberg reported earlier this month.

The emergence of more “details” about the expected revenue loss during the talks was one of the important factors that led Sewing to end the discussion, he said in a newspaper interview on Sunday. Large German corporate clients in particular would have looked to diversify their banking, he said, and the new business would have needed to reduce some credit lines as a result of adding two exposures to individual clients together.

Commerzbank’s estimate for lost revenue was lower than Deutsche Bank’s and that wasn’t the driving factor for the lender’s decision to walk away from the talks, a person familiar with the matter said.

Deutsche Bank and Commerzbank representatives declined to comment beyond what they’ve already said publicly.

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The process started auspiciously enough. Sewing and Zielke, who share similar biographies, hit it off well during initial encounters, people familiar with the talks said. Both grew up in small German towns, started their careers as trainees and worked their up the corporate ladder. Informal meetings had started several months ago, with meetings frequently in locations in and around Frankfurt.

But once out in the open, the environment surrounding the talks took a turn for the worse. Labor unions -- a powerful voice thanks to their seats on the banks’ supervisory board -- came out against the deal early on. That opposition was compounded by several large investors who likewise made clear they were skeptical of the idea.

The working groups at each bank met with their counterparts daily and yet the chances of a deal never seemed to improve much. People briefed on the talks saw the prospect success or failure fluctuate daily. Five weeks in -- just a week before their self-imposed deadline -- the odds of a deal going through were still estimated at only 50 percent.

“After thorough analysis, we have concluded that this transaction would not have created sufficient benefits to offset the additional execution risks, restructuring costs and capital requirements associated with such a large-scale integration,” Sewing wrote in a message to staff on Thursday explaining his decision to abort the talks with Commerzbank.

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