When Deutsche Bank CEO JoseF AckermanN promoted Thomas Gahan to run the firm’s U.S. corporate finance unit in 2002, there were few bright spots for the money-losing franchise. Three years earlier Deutsche had spent $9 billion acquiring Bankers Trust Co. to gain a foothold in U.S. investment banking, but the combined business was soon thrown into disarray. First, Edson Mitchell, Deutsche’s charismatic head of global markets, perished in a December 2000 plane crash. Then came the 9/11 attacks and a two-year deal drought that hit Deutsche and its rivals hard.
But Deutsche excelled in one area that was about to take off — leveraged finance. BT had been an active lender to private equity firms, and Mitchell had hired his former Merrill Lynch & Co. colleague Gahan in 1999 to expand that business. Even during the credit crunch that followed the collapse of companies like Enron Corp. and WorldCom in 2001 and 2002, Gahan and his team stepped up to finance big acquisitions.
Five years later leveraged-buyout firms have emerged as the biggest payers of investment banking fees to Wall Street. Last year they bought and sold companies worth $756 billion and generated fees in excess of $14 billion, according to Dealogic. And Gahan, whom Ackermann promoted again, in 2004, to run U.S. investment banking, has been with them every step of the way. Deutsche has helped finance an array of recent megabuyouts, including March’s $13.7 billion takeover of Spanish-language broadcaster Univision Communications, as well as the pending buyouts of radio network operator Clear Channel Communications and First Data Corp., for $19.4 billion and $29 billion, respectively. The bank has collected $1.16 billion from LBO firms in the past 12 months, ranking fourth globally, according to research firm Dealogic.
“Coming out of the more difficult times early in this decade, sponsors grew larger and became responsible for a higher percentage of the fee pool,” says Gahan. “We latched onto that early versus our competitors.”
But for all its success as an LBO financier, Deutsche still lags in the critical business of providing M&A advice to buyout firms and corporations. In 2006 the firm ranked ninth among M&A advisers globally, according to Thomson Financial. In the U.S. it was 16th, behind such specialized firms as Evercore Partners and Blackstone Group in terms of the value of the deals it advised on.
Gahan wants to change that. His aim is to make Deutsche a top-five global M&A adviser. He’s been busy shoring up his ranks of rainmakers and senior bankers, most recently hiring Gordon Paterson from Citigroup to be head of M&A for Asia and Lehman Brothers telecom banker Anthony Odgers to be chief operating officer for the advisory business in Europe. The pair joined Deutsche in May. The month before, Gahan poached 18-year Goldman, Sachs & Co. veteran retailing banker Bruce Evans.
Gahan also has restructured the investment bank with an eye toward boosting the advisory function. Last year he created a dedicated M&A division, replacing a structure in which merger bankers also worked on underwriting and capital markets assignments in their industry sectors. And in February he appointed James Stynes and Anthony Burgess, previously heads of U.S. and European M&A, respectively, to be global co-heads of M&A, to unify management of the group as more cross-border deals take place.
Having an elite M&A advisory presence brings benefits far beyond the fees, which average about 0.5 percent of the value of a transaction. Advisory work deepens relationships with the CEOs of major corporations and the heads of big private equity firms. That can help generate repeat M&A business, as well as equity underwriting mandates, which typically also involve CEO decisions. For every dollar collected through an M&A assignment, Gahan says, an investment bank can generate two to four dollars in revenue from related transactions, such as selling derivatives or underwriting securities.
“M&A is the ultimate mind-share product,” says Gahan. “You need to be viewed as a truly trusted adviser in order to be at the market-share levels where we’d like to be as we continue to grow our business.”
