The union of Deutsche Bank and Bankers Trust would thrust the combined entity to rank as the world's fourth largest money manager and fourth largest global custodian.
But the proposed $9.7 billion deal, which was to be approved Nov. 29, left pension fund executives, consultants and analysts wondering how the two banks' investment management and custodial operations would fit together.
In particular, experts questioned whether BT Asset Management would be fully integrated with Deutsche Bank's London-based Morgan Grenfell Asset Management.
The combined entity would rank as the fourth-largest money manager in the world, with $548.4 billion in assets under management, based on year-end 1997 data. Separately, Bankers Trust ranked fifth, and Deutsche Bank, seventh.
While integration of BT's active equity unit, based in Sydney, is expected, it is much less clear whether BT's huge New York-based passive operation would remain separate.
On the custody front, the deal generally is seen as a big plus for Frankfurt-based Deutsche Bank AG, which long has aspired to become one of the world's leading global custodians. Its purchase of New York-based Bankers Trust Co. would create the fourth-largest global custodian, with some $3.9 trillion, based on current figures.
"It's the hidden value in the deal," said Richard Morris, managing director of Putnam, Lovell, De Guardiola & Thornton Inc., London.
Even on the custody side, though, questions remain on how to combine both banks' operations, whether some U.S. pension fund clients might be barred from using a foreign-owned custodian and what would happen to The WM Co. (WM is an Edinburgh-based performance measurement firm owned by Bankers Trust.)
Officials at Deutsche Bank and Bankers Trust declined to comment while purchase talks were pending.
WM officials referred queries to Bankers Trust.
While the deal was driven by investment banking, experts say it's important that bank officials don't disrupt the successful money management operations.
Before the deal announcement, tension existed between Deutsche Bank and its London-based Morgan Grenfell subsidiary over internal scandals. The addition of Bankers Trust would give Deutsche an excuse to address the issues afresh.
A trading scandal involving former portfolio manager Peter Young, which led to the departures of money management chief Keith Percy and managing director Nicola Horlick, has irked the Germans, many sources have said.
What's more, some wonder whether Bankers' $144 billion passive business would remain separate or be integrated into some kind of single, global money management arm. If the passive operation is integrated, some observers predict personnel and clients could flee.
"Bankers Trust in the U.S. never had a strong direction and strategy," said Mr. Morris of Putnam, Lovell.
Pension fund executives were not surprised by the deal, as a sale of Bankers Trust had been rumored for the past few weeks.
Bankers Trust tried to assuage the fears of some during recent meetings. "We raised (the rumor) with them two weeks ago," said Richard Halverson, deputy comptroller for pension, New York City Employees' Retirement System.
He said BT executives stressed a sale would not affect investment operations.
BT passively manages $18.9 billion in domestic equities for the $36.1 billion fund, Mr. Halverson said.
WHAT ABOUT AUSTRALIA?
The greatest overlap is in Australia, where both BT and Morgan Grenfell have active management arms.
The deal "presents a very interesting opportunity in Australia," said James Goulding, head of the U.K./Europe division of Morgan Grenfell Asset Management, London. He said BT's Australian unit has a strong presence in the institutional and retail markets and in administration, and is "very advanced" in the growing defined contribution market.
He declined, however, to speculate further.
All of BT's active equity money management is in Sydney, responsible for some U.S. $52 billion in assets - A$42 billion for Australian clients and U.S. $28 billion for American and Japanese ones.
Morgan Grenfell, which acquired Australian money manager Axiom Fund Management Corp. in spring 1997, has U.S. $24 billion under management, mostly for a few large Australian public funds.
Before the deal was announced, BT Asset Management had been looking to expand in Europe, planning to add "about half a dozen" investment professionals in London in 1999 and a couple more in Tokyo, said Ian Martin, chief executive of BT Fund Management in Sydney. The fate of those plans now is in doubt.
Some consultants worry about the future for Morgan Grenfell Investment Management Ltd., the unit servicing U.K. pension funds.
Still, Morgan Grenfell Investment, with $164.6 billion in assets under management worldwide as of June 30, remains a great success story. (Morgan Grenfell currently manages about $21.5 billion for tax-exempt clients in North America.)
"My main concern is that they don't mess up the Morgan Grenfell culture," said one consultant, who asked not to be named.
On the custody side, the combination gives Deutsche Bank an opportunity to attain its long-stated goal of becoming a global player.
Bank executives have proclaimed publicly their desire for Deutsche to become the third-largest custodian, measured by assets under custody. Bankers alone is ranked fifth; Deutsche, seventh.
Bankers Trust has a huge U.S. pension client base and has been expanding into Europe, picking up such major U.K. pension clients as the British Airways Pension Scheme and British Petroleum Co.
A key issue is whether Bankers' U.S. public pension client base will stay with the new company. Because Deutsche is buying Bankers, some public funds are investigating whether they are allowed to use a foreign-owned bank as custodian.
The New York State Teachers' Retirement System, Albany, will "watch for how the bank is structured," said Candice Ronesi, spokeswoman. If Bankers Trust becomes "a branch of a foreign bank, that would be a problem" for the system, she said. "Law requires the pension funds' custodian to be a U.S. bank."
Bankers Trust is global custodian for the $71.1 billion teachers' system.
Meanwhile, if the deal goes through, the Oklahoma Teachers' Retirement System, Oklahoma City, will check whether its lawyers whether it can have a foreign custodian, said Jo Witt, CIO for the $5.2 billion fund. She added she did not know of a section in the fund's charter that prohibited a foreign custodian.
Oklahoma Teachers has Bankers Trust as its master custodian as well as its global custodian.
Other pension fund executives wondered whether Deutsche Bank will remain committed to custody or will sell it to a competitor. Yet others believe the deal will scotch earlier rumors that Bankers was going to put the business on the block.
"With any luck, it should kill off rumors about what Bankers was going to do with its custody business," said Brian Hill, a senior investment consultant with Watson Wyatt Worldwide, Reigate, England.
The combined bank faces a host of questions on the custody side. Simon Murray, a partner in the consulting firm Thomas Murray Ltd., London, said: "Will the U.S. clients stay on? Who's going to handle the systems work? Which platforms will be used? What's going to happen to WM?"
Not only does the bank's role as a major money manager exacerbate a potential conflict with performance measurer WM, but some experts said the growth of independent custodianship in Europe is eroding WM's traditional performance measurement services.
As custodians continue to assume investment accounting and performance measurement duties, the only remaining role for firms such as WM is to create performance universes.
"Is there still going to be a market for that?," Mr. Hill asked.
Mr. Morris, however, believes Bankers Trust would do well by packaging its custody, cash management, passive management and consulting services. The WM Co. "fits beautifully in that business," he said.