Commerzbank acts fast to bury Kleinwort

May 11, 2009

alex-smith— Alexander Smith is a Reuters columnist. The opinions expressed are his own —

Dresdner Bank spent 15 years tinkering with the investment banking operations of Kleinwort Benson, the UK merchant bank it bought in 1995.

The German bank first expanded the unit, buying an expensive U.S. boutique, then mulled the idea of merging it with another bank, and finally contemplated spinning it off to management. But all these plans came to nothing.

Commerzbank has been more decisive. Having taken control, it has already moved to close most of Kleinwort’s London equities operations, and the whole of its Japanese presence. Around a third of the 3,600 London employees of the combined firm are going. The Dresdner name is being dropped and the historic Kleinwort one is likely to follow.

Dresdner got into a muddle because it could never quite give up on the idea of having a glamorous presence in the City of London. Various spurious rationale were concocted to justify this — including the need for Dresdner’s parent, Allianz, to have access to complex securitisation markets.

But it was never clear why Kleinwort needed to be in the UK equities business, where it was a small and increasingly irrelevant presence.

Commerzbank has been able to resist this pickle because it cannot afford to do otherwise. The bank has made huge losses as a result of structured credit and real estate lending and was forced last autumn to turn to the German government for help.

Berlin now owns 25 percent and has little appetite for expensive investment banking activities abroad. Commerzbank’s London presence is being cut back to what is needed to support the international activities of German companies.

One consequence of Kleinwort having explored the options so exhaustively over a number of years is that almost everything except dismantlement had been ruled out.

Prior to its merger with Commerzbank, Dresdner frantically looked for a buyer for the Kleinwort operation, and a Chinese or Russian solution was talked about. When the merger took place, Kleinwort boss Stefan Jentzsch set aside 400 million euros ($544 million) in retention bonuses to keep the business together.

When Commerzbank cancelled most of these in February, the die was cast.

Little is likely to survive of the original Kleinwort operation. Most of the senior management team has left, including Jentzsch, and the most able employees are likely to desert. There are still takers around. Nomura and Evolution, a mid-sized UK securities firm, have just hired teams from Kleinwort.

The London operations are likely to focus on fixed income, foreign exchange and derivatives. If the name lives on at all, it will only be through the private banking business, which may be sold either to a trade buyer or to management.

Commerzbank is finally doing the right thing for Kleinwort Benson. After all, the alternatives have all been exhausted.

— At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. —
(Editing by David Evans)

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