German banks fight back as US investors seek more influence
A few weeks ago, US private equity firm Cerberus Capital Management looked set to cause a major upheaval in Germany’s banking sector after pressuring the two executives of the country’s second-largest lender to step down.
But the victory of the intruder did not last long.
Now the German establishment is pushing back into a battle for control that could determine whether the country’s banks can stop their slide into worthlessness.
Cerberus is the largest private shareholder of Commerzbank, Germany’s second largest bank. The company lobbied for drastic cost cuts and other painful changes to reverse the bank’s chronically poor profits.
The need to fix German banks became even more urgent after the pandemic caused an increase in delinquent loans. On Wednesday, Commerzbank reported higher quarterly profit than analysts’ expectations, but warned it would record a loss for the year.
Cerberus has difficulty coexisting with Commerzbank’s main shareholder, the government, which holds three times as many shares.
In June, the government remained inactive as Cerberus ousted Commerzbank’s chairman and chief executive from their posts, criticizing them for incompetence in letters to the board that were leaked to the press. This seemed to pave the way for the arrival of new management more to the liking of the company.
But on Monday, the government backed a new president over vehement objections from Cerberus, who said the candidate, Hans-Jörg Vetter, was “not the right fit for the job.”
The appointment of Mr Vetter, who has spent his career in state-owned banks, is a setback for Cerberus as it tries to recoup some of the large investments it made in German banks in 2017. It was also a reprieve for political leaders fearing severe job cuts.
Still unanswered, the question of how Commerzbank will stop a long-term fall that mirrors the decline of the banking sector in Europe’s largest economy. Weakened by the latest financial crisis, Commerzbank struggled to compete in the crowded German banking market. And Deutsche Bank, Germany’s largest bank, in which Cerberus also has a stake, lags far behind US rivals like Goldman Sachs and JPMorgan Chase.
Germany has had a complicated relationship with private equity for a long time. Sometimes politicians have vilified buyout companies as “grasshoppers“Strip the German economy; at other times, private equity money has been a welcome lifeline for struggling firms. This was the case in July when private equity firms Advent International and Cinven bought the elevator business from Thyssenkrupp for 17.2 billion euros, or $ 20.2 billion.
Cerberus bought 5% of Commerzbank and 3% of Deutsche Bank in 2017, betting their worst problems were over and they were ripe for a turnaround. Commerzbank was crawling under a pile of bad debts to the shipping industry and digesting a misguided merger with its rival Dresdner Bank. Deutsche Bank was reducing its holdings of high-risk derivatives.
The optimism was premature. Bank stocks have since lost half of their value, wiping out hundreds of millions of euros from Cerberus’ investment. An attempt to merge both banks went bankrupt last year.
Cerberus’ attempt to extract profits from both banks pits it against a German banking system structured to provide cheap credit to industry, not returns on investment for investors.
Germany has more banks than it needs, and credit is dominated by quasi-public savings institutions and cooperative banks motivated as much by political imperatives as by commercial interests. Strict labor laws and strong unions make it difficult to fire workers and reduce costs. Change does not happen quickly.
This year, Commerzbank and Deutsche Bank, like most European and American banks, had to set aside hundreds of millions of euros to cover losses from problem loans. The low interest rates have made it difficult for them to earn money by issuing loans. On top of that, Deutsche Bank is still recovering from past wrongdoing, including interest rate rigging, money laundering, and violating US sanctions against countries like Iran.
On Wednesday, Commerzbank reported net income of 220 million euros ($ 260 million) for the second quarter, down 20% from the previous year. The bank said it would end the year in the red due to restructuring measures it did not specify, but which are expected to include job cuts and branch closures.
Deutsche Bank, Germany’s largest bank, announced last week that it had a net profit of 61 million euros, or $ 72 million, in the quarter.
Cerberus also pushed for change at Deutsche Bank. Under pressure from the business, the bank accelerated its efforts to cut costs and followed Cerberus’ advice on how to handle operations such as cash management. The bank hired a Cerberus unit to provide advice on how to make its operations more efficient, although it ended the relationship last year after other investors complained of conflicts of interest. potentials. Any friction between Deutsche Bank and the company has been kept out of public view.
Commerzbank was not that cooperative. According to Cerberus’ tally, its banking specialists met 70 times with senior Commerzbank executives to offer suggestions for improving operations and profits, but were ignored.
“Unfortunately, it is a fact that Commerzbank has not yet adopted or carried out any of our suggested actions,” Cerberus wrote to management in June.
Typically Cerberus works behind the scenes. But his frustration with Commerzbank surged into public opinion after he assassinated the two most senior executives in letters that leaked to the press.
“The ill-conceived and poorly executed attempts by management to prevent the demise of Commerzbank display a level of negligence and arrogance that we are no longer prepared to tolerate,” Cerberus wrote in June to Stefan Schmittmann, chairman of the supervisory board. form the bank.
This letter and a second one a week later were signed “Cerberus Capital Management” rather than by any employee of the company, founded by billionaire Stephen Feinberg. Cerberus declined to comment.
Cerberus’ sharp tone came as a shock to the Frankfurt island banking community, as did his brazen demand to be able to appoint two members of the Commerzbank supervisory board. This would give the company as much weight on the 20-member board of directors as the German government.
Mr Schmittmann and Martin Zielke, the managing director, announced their resignation a few weeks later. Both men insisted Cerberus had not kicked them out, but admitted they had lost shareholder support.
Commerzbank’s strategy “was seen as not being ambitious enough,” Schmittmann said in a statement to bank employees. “Martin Zielke and I take responsibility for it.”
Score one for Cerberus. But then, on Monday, the supervisory board appointed Mr Schmittmann’s replacement: Mr Vetter, former managing director of Landesbank Baden-Württemberg, which belongs to state and local governments in southwestern Germany. Cerberus did not consider him to have the experience to repair Commerzbank.
Mr. Vetter will oversee the selection of a new managing director for Commerzbank, reducing the chances that the person will gain approval from Cerberus.
The government holds two seats on the board of directors of Commerzbank, and one of its representatives, Jutta Dönges, has led the search for a new president. The federal government “has no influence over Commerzbank’s trade policy decisions,” Germany’s finance ministry said in a statement.
Cerberus’ investment in Commerzbank and Deutsche Bank was a start for the company. Like most private equity firms, it typically buys controlling stakes in distressed companies and sets up its own management team. A mere 5% stake wouldn’t normally give Cerberus the weight it’s used to.
Cerberus’ losses on Commerzbank forced it to copy the harsh tactics used by activist investors. Companies like Elliott Management typically buy enough stock in a company to create problems, and then fight relentlessly for change. Attacks on the competence of senior executives are part of the playbook.
Cerberus is one of several private equity firms increasingly adopting such methods, according to a report released this month by investment bank Lazard. Because private equity shareholders are relatively new to the game, managers may have been caught off guard by the new tactics, said Rich Thomas, managing partner at Lazard and head of a team in Europe that advises investors. companies on how to deal with activist investors. . He does not advise Commerzbank.
Activist investors, including private equity firms, said Thomas, “are very engaged and should be taken seriously when they voice their concerns.”