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  The Yellow and the Green: Commerzbank's Merger Crisis

The Yellow and the Green Commerzbank's Merger Crisis

By Christoph Pauly

Part 3: 'Not Exactly Sorcery'

Dresdner's investment bank is to be reduced by half, and will no longer be referred to as an investment bank. By dismantling the business model, Blessing will be score points with employees whose own bonuses were ruined by the investment professionals' delusions of grandeur. Dresdner's operations in Japan have already been terminated, and most of the 1,000 positions in its US offices are in jeopardy. It is rumored that electronics giant Siemens may be forced to seek a new partner if it hopes to complete a planned €10 billion ($13 billion) deal in the United States.

But these drastic measures are fraught with risk. The investment bank's specialists who devised its risky contracts disappeared from one day to the next. "Commerzbank has no idea what it got itself into," says one of the Dresdner executives who was let go.

But Ulrich Sieber disagrees, noting that Dresdner's investment banking activities are "not exactly sorcery." Sieber, the head of human resources at Commerzbank, worked at Dresdner until 2006, and developed a reputation for being a tough customer. He believes Commerzbank is now adequately managing Dresdner's toxic assets. In recent weeks, the individual assets were transferred to Commerzbank's accounts at current market prices, and many of them were promptly transferred to an internal bad bank.

At the same time, Sieber, at Blessing's behest, has stepped up the pace of cutbacks. Two of three headquarters in Frankfurt am Main (for Commerzbank, Dresdner and the investment subsidiary Dresdner Kleinwort) have already been eliminated. Almost all of the 11,400 employees there are worried about their jobs. They expect to be told soon whether their services will be needed in the future.

During a five-day closed meeting in late March, Sieber and the works council agreed on a severance scheme for the Frankfurt headquarters, where 2,200 jobs have already been slated for elimination. The operation should be complete by the end of 2011 and won't involve anymore layoffs forced by the economy. Even Hans-Georg Binder, the chairman of the works council for the Dresdner headquarters, praises "the fair negotiations."

After a disproportionately large number of Commerzbank employees on the first two levels of management were given a chance to apply for positions in the new merged bank, Dresdner employees will have the opportunity, too. According to Section C, Paragraph 8 of the Group Works Agreement, "transparency, fairness and equal opportunity, regardless of company affiliation, are the supreme principles of the process of filling positions."

In the coming weeks, several thousand employees in Frankfurt will be entitled to a "structured conversation" with their potential superiors, as they compete for roughly 900 jobs within the third and fourth levels of management. Blessing is determined to expedite the process. Employees seeking to go into partial retirement have been told to make up their minds by the end of July, and anyone who reaches a voluntary decision quickly will be rewarded with a "sprinter's bonus" of three months' salary. Employees with at least 10 years' tenure can choose to resign voluntarily and receive a lump-sum settlement.

'The Most Exciting IT Project in Germany'

Blessing may be attempting this merger during a financial crisis, but he's maneuvering in familiar territory. Blessing can structure it as he sees fit. Even his biggest critics at Dresdner know there is no turning back.

Commerzbank Chief Operating Officer Arno Walter, who spent much of his career at Dresdner, is only too aware of how massive an undertaking this is. Now his job entails managing its liquidation.

"More than half of the two banks' 60,000 employees will end up in different positions, even though many will be doing the same work in the same location," says Walter. Of the 1,540 branches Dresdner and Commerzbank branches still in existence today, 340 will be closed. By next summer, every employee will know where he or she will work in the future.

In the Frankfurt metropolitan area alone, the two banks, with their offices, trading rooms and branches, occupy 800,000 square meters (8.6 million square feet) of office space. By 2012, Walter is expected to have one-third of the space vacated -- enough space to fill five large office buildings. One building, known as the Silver Tower, has been leased to Deutsche Bahn, Germany's national railway. Once Germany's tallest building, the former Dresdner headquarters will be renovated, and the new tenant can expect to move into the executive levels before the end of the year.

The merger will generate more than €12 billion in savings, but no one knows when it will be complete. Despite the planned cutbacks, Chief Information Officer Peter Leukert has already managed to ensure that all 4,300 computer specialists at both banks will remain on board. "I need every employee," says Leukert.

Dresdner Bank's systems will be shut down on a weekend in October 2010, at which point the bank's five million customers will see their accounts automatically transferred into the Commerzbank system. "This is the most exciting IT project in Germany," Leukert says enthusiastically.

And an expensive one. One the crucial day it will take 1,000 IT consultants to ensure that Dresdner customers' bank balances don't disappear into some digital Nirvana. "I will need a total of €1 billion ($1.3 billion) for the IT integration," Leukert told the Commerzbank board of directors in his report on the Dresdner takeover. His request was approved.

The project is dubbed "Growing Together" in the tomes that management consultants hand out to executives. The aim is to ensure that the yellow and green corporate colors of the two companies can mix as efficiently as possible. But every painter knows that a bad mix can easily yield a dull gray.

Slimming Down and Ramping Up

"Upping your numbers" may sound like a hollow goal in times of crisis, but employees in the retail banking division will soon be expected to handle 30 percent more clients. One Dresdner branch manager complained to Blessing that according to the new plan, he will be expected to acquire three times as many new customers as in the past.

As pleased as the competition may be by the fact that Commerzbank will spend much of the next few months coping with its own issues, the merger in the retail banking business undoubtedly makes sense in the long term. By increasing its market share, Commerzbank stands to secure its competitiveness for the future.

This also applies to the business of lending money to small and medium-sized companies, where hardly any of market players is likely to outpace Commerzbank in the future. Even the before the merger, Commerzbank made a respectable profit in this sector last year.

But the days of strong profits will not return anytime soon. "They took insane risks in the past few years," says the chief executive of a Frankfurt bank. He predicts that in the coming years, expansion-hungry Commerzbank will face an accumulation of bad loans from the businesses it financed.

The risks are piling up. Dresdner and Commerzbank have lent a total of €5 billion ($6.6 billion) to ailing auto industry supplier Schaeffler, and the new bank will find itself saddled with the consequences until the bitter end. Besides, the bank now faces the sharp scrutiny of the German government, which wants Commerzbank to lend as much as possible. And when thousands of jobs are on the line, the bank will come under growing pressure to keep bankruptcy candidates afloat.

Blessing plans to free up a portion of the necessary capital by selling units, including many Dresdner subsidiaries, from Bankhaus Reuschel, a private bank, to mortgage lender Allianz Dresdner Bauspar AG. "We don't want to mutate into a huge savings bank," Blessing says defiantly. Nevertheless, this impression is not far off the mark, if the bank is abandoning its operations in Japan and South America, and many other entities are also under close scrutiny.

The negotiations with the EU Commission in Brussels currently revolve around how much further the bloodletting should go. One of the subjects under discussion relates to Commerzbank's Eastern European operations, which have been among the bank's success stories in recent years.

But that isn't enough for Neelie Kroes, EU Commissioner for Competition. In a face-to-face meeting with Blessing in Brussels last week, she demanded "substantial offers" in exchange for government aid. A senior Commerzbank executive complained that Kroes apparently wants the bank to "really feel the pain."

Commerzbank will probably have to part ways with its subsidiary Eurohypo, which is sitting on assets of €300 billion. Thanks to Eurohypo, Commerzbank has been a major international player in the mortgage-lending sector.

But survival is now the name of the game, not grand strategy. Eurohypo, as Europe's biggest real estate lender, has problems of its own. About a quarter of its loans were made to borrowers in crisis-ridden countries like the United States, Great Britain and Spain, where massive defaults are still expected.

In addition, Eurohypo -- much like Hypo Real Estate -- has many government bonds on its balance sheet that will require value adjustment. Because this places a strain on Commerzbank's refinancing options in the long run, Blessing has imposed a strict belt-tightening regimen on the bank.

In other words, a sale prescribed by Brussels would not be the worst thing in the world. But who would buy a real estate lender in the current environment? EU Commissioner Kroes will have to give Commerzbank a lot of time to sell Eurohypo if it hopes to make even close to what it once paid for the company.

"In times of crisis, it is important not to torpedo efforts to stabilize a bank," says German Finance Minister Steinbrück, in a remark meant for Brussels. His primary concern is to bolster the capital markets' confidence in the government's bailout programs.

Despite his admonitions, Steinbrück must also take Commerzbank's future solvency into account. To repay the government bailout funds, it will have to send €1.6 billion ($2.1 billion) to Berlin each year in the future. But selling lucrative units will only reduce its ability to come up with the payments.

When Commissioner Kroes finally rubber-stamps the second bailout package after Easter, Commerzbank will have access to significant capital reserves for the immediate future. Nevertheless, Blessing does not want to rule out the possibility that Commerzbank may be force to beg Berlin for help a third time.

The marathon runner has studied the 1929 economic world economic crisis closely. When it ended, the government owned 90 percent of Dresdner, 70 percent of Commerzbank and 30 percent of Deutsche Bank, he says emphatically, with a stony look in his eyes.

Blessing, ever the pragmatist, conveys the impression that even that would be something he could live with.

Translated from the German by Christopher Sultan