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Dresdner Kleinwort Wasserstein (DrKW) operates as the investment banking arm of Germany's Dresdner Bank AG. The company offers its corporate, government, and institutional clients a variety of capital markets products and services, including short-term products and treasury, equity products, rates, credit products, foreign exchange debt origination, sales and marketing, research, risk management, and tax services. The firm was formerly known as Kleinwort Benson until Dresdner Bank acquired it in 1995. In 2001, Dresdner Bank acquired Wasserstein Perella & Co. and folded it into Dresdner Kleinwort's operations. DrKW became a member of the world's fourth-largest financial institution later that year when Dresdner Bank merged with the Allianz Group.
Kleinwort Benson was formed in 1961 when the firm of Kleinwort, Sons & Company merged with Robert Benson, Lonsdale & Company Limited. Both houses were British merchant banks of long standing. Kleinwort could trace its roots to 1838, when a Hamburg shipping clerk named Alexander Kleinwort immigrated to Cuba and joined a Havana trading company run by James Drake. Kleinwort relocated to London in 1855. He quickly became the dominant partner, and by 1883 he and his sons were in sole control of the company and had given it their family name. Kleinwort also shifted its focus from trade to merchant banking during these years.
World War I caused trouble for British merchant banks by disrupting foreign trade, and Kleinwort, which relied considerably on business in Germany, was among the hardest hit. Nonetheless, the firm suffered no permanent damage from the war, and even had slightly more capital in 1918 than it did in 1913. However, the merchant banks' traditional business of raising money for foreign ventures never fully recovered after the armistice, due to informal restrictions on foreign trade and increased competition from banks in New York and other up-and-coming financial centers.
In response, Kleinwort joined the industry-wide trend toward raising money for domestic industry in the 1920s. It did so under the guidance of Herman Andrae, Alexander Kleinwort's grand-nephew, who had become a partner in 1907 and whose influence in the firm waxed as that of his aging uncles waned. Kleinwort took on more domestic underwriting business than it had in the past, but it also embarked on unsuccessful forays into shipbuilding, cotton manufacturing, and fire insurance. In the first two cases, the firm found itself with unprofitable investments in failing companies that it was also forced to manage; in the third, it loaned money to insurance entrepreneur Clarence Hatry, only to lose all of it when Hatry was convicted of fraud in 1929. Kleinwort's profitable activities in precious metals and foreign currency trading during this decade helped offset these fiascos.
The Depression proved disastrous for many British merchant banks, slowing foreign trade to a virtual standstill. Even worse for Kleinwort, the German government declared a moratorium on the repayment of foreign loans in the wake of that nation's bank crisis of 1931. In response, foreign bankers with loans outstanding in Germany declared that they would grant no more credit to German interests. Because of its traditional reliance on trade with Germany, Kleinwort was hit harder than most of its competitors by the crisis. Nevertheless, Kleinwort survived the Depression, while other merchant banks either folded or needed a handout from the Bank of England.
The German debt problem continued to dog Kleinwort after the outbreak of war in 1939. At the time, it had £4.4 million in German, Austrian, and Hungarian bills outstanding. It tried to recover its money through foreign courts but without success. After 1945, the destruction of the German economy, the loss of prewar loan records, and the fact that Soviet Union did not want to see money repaid to Western bankers from its zone of occupation complicated the matter of settling the debts. In 1951, the West German government and the banks reached an accord whereby the banks would end the credit freeze, and German companies would repay their debts, figured at a 4 percent annual rate from 1939 to 1953. By 1959, Kleinwort had recovered £2 million.
The Benson family came from the Lake District and were of Quaker stock. By the 1780s, they had gone into business in Liverpool as cotton merchants. The firm moved to London in 1852 and gradually began to specialize in investment banking. By the end of the century, the Bensons had scored a major prestige coup by providing capital for the railroad construction boom in the American West. In 1948, Robert Benson & Company Limited merged with Lonsdale Investment Trust, whom it had served as bankers, to form Robert Benson Lonsdale.
In 1958, Robert Benson Lonsdale became embroiled in what became known as Britain's Great Aluminum War. The fracas started when Reynolds Metals, in cooperation with the relatively new British investment firm Tube Investments, made an unfriendly bid to take over British Aluminum, which was then considering a friendly offer from Alcoa. A syndicate of 14 old-line merchant banks, which was led by Hambros and Lazard Brothers and included Robert Benson Lonsdale, came to the aid of British Aluminum. However, S.A. Warburg, another London banking house of long standing, sided with Reynolds, producing a bitter and divisive rupture in London's merchant-banking fraternity. Reynolds finally won, acquiring 80 percent of British Aluminum stock by early 1959. The Great Aluminum War altered merchant banking by turning mergers and acquisitions into a high-profile, high-profit business.
Diversification after the Merger
When Kleinwort and Robert Benson Lonsdale merged in 1961, The Economist described it as "a marriage of essentially complementary partners." Kleinwort had strong overseas connections thanks to its history of involvement in foreign trade but was weak in corporate finance and investment banking. Robert Benson Lonsdale's strengths lay in corporate finance and underwriting, but it had done little business in more traditional areas of merchant banking. The resulting Kleinwort Benson Lonsdale held assets of £60 million. Its new-found size and strength stood it in good stead for the hectic times to come.
The 1960s and 1970s were years of fierce activity for merchant banks, marked by increased competition both from foreign firms and from domestic rivals spurred on by a 1971 Bank of England policy statement encouraging looser regulation of British financial institutions. As a result, merchant banks had to diversify and shuck their traditional specialist status. By 1977, Kleinwort Benson had become involved in unit and investment trusts, factoring, leasing, insurance brokering, venture capital, tax planning, executor and trustee services, property development, commodity dealing, and bullion brokering and dealing, among other services.
In 1965, Kleinwort Benson entered the oil and gas business when its subsidiary Kleinwort Benson Energy began drilling on the continental shelf. Two years later, Kleinwort Benson entered a consortium with 17 other partners, including Barclays and the Bank of Scotland, to form Airlease International, a company specializing in aircraft leasing. In 1986, it entered the domestic life insurance business by buying Transinternational Life from Transamerica Corporation and, even more importantly, prepared itself for the impending deregulation of the British financial markets known as the Big Bang by acquiring the securities brokerage Grieveson Grant.
Kleinwort Benson's 1984 annual report spoke of the firm forming a "global chain." In fact, its international expansion had actually been underway for over a decade. In 1967, it opened an investment bank in New York, using its strong reputation in the Eurobond market to get underwriting business. In 1970, it opened an office in Tokyo which, combined with its subsidiaries in Thailand and Hong Kong, gave it a stronger presence in Asia than any other British merchant bank.
In 1984, anticipating the new opportunities that the 1986 deregulation of the financial markets would bring and aware of the increasing interdependence of the world's financial markets, Kleinwort Benson redoubled its efforts, making several major acquisitions in the United States. In New York, it bought ACLI Government Securities Incorporated, a U.S. government securities dealer, from the investment bank Donaldson, Lufkin & Jenrette, renaming it Kleinwort Benson Government Securities (KBGS). The deal made Kleinwort Benson the first foreign bank to own a government securities firm that dealt directly with the Federal Reserve Bank of New York. In Chicago, it acquired the institutional and funds operations of Virginia Trading Corporation, a futures brokerage. In Los Angeles, it purchased the services of a group of brokers specializing in interest-rate swaps and renamed it Kleinwort Benson Cross Financing. Also in 1984, Kleinwort Benson Australia acquired a 50 percent interest in Australia Gilt Company Group, a dealer in Australian government securities.
Some of these moves worked well; others did not. Kleinwort Benson Cross Financing proved to be a consistent moneymaker, while KBGS disappointed its parent's expectations. Kleinwort Benson had made the acquisition in order to acquaint itself with price trends and auction techniques in the American treasuries market. However, KBGS seldom participated in auctions, nor was its familiarity with the demand for treasury securities as strong as had been hoped. In 1988, Kleinwort Benson sold a 25 percent interest in KBGS to Fuji Bank. In addition, Kleinwort Benson's Australian banking and securities operations were sold to Security Pacific in October 1989.
Overcoming Problems in the Late 1980s
In 1986, The Economist called Kleinwort Benson the "great white hope of British merchant banking," stating that Kleinwort Benson and S.A. Warburg were the only British merchant banks poised to become world-class financial institutions. As it turned out, however, the year of the Big Bang was not entirely kind to Kleinwort Benson. The worldwide slump in bond prices, a decrease in mergers and acquisitions activity in Britain, and problems with Kleinwort Benson's settlement system all hurt its financial performance and left it in need of capital. Before the year was out, the house had sold a 4.9 percent interest to American Can, which sold its shares to Morgan Stanley International several months later. Late in 1987, Kleinwort Benson sold a 1.5 percent stake to Sumitomo Life Insurance, and Consolidated Gold Fields bought a 50 percent interest in Kleinwort Benson Energy. In 1988, American International Group acquired a 5.3 percent interest in Kleinwort Benson.
Thanks to the integration of the world's financial markets, the American stock market crash of 1987 was felt around the world. Nonetheless, Kleinwort Benson survived the crisis in better shape than its competitors. It was one of the few British securities firms that made a profit on equities dealing in late 1987 and early 1988. It also disclosed in its 1987 annual report that its treasury division chalked up "record operating income" due to volatility in the dollar and interest rates.
Kleinwort Benson did not fare as well in the second half of 1988. Its securities business lost more than £45 million, reducing the bank's overall pre-tax profits to £17.7 million that year as compared to £51.6 million in 1987. Thanks to this poor performance, its stock price neared a four-year low in the spring of 1989. Kleinwort Benson nevertheless remained committed to securities. Jonathan Agnew, who succeeded Michael Hawkes as chief executive of the Kleinwort Benson Group in 1989, staked the firm to the prospect of becoming an integrated investment bank based on the conviction that a strong securities business would help market the products generated by the bank's other activities. Such an attitude was not surprising, coming from a man who was elevated to chairman of Kleinwort Grieveson Securities in 1987, following the acquisition of Grieveson, Grant and Company, in an effort to give the former Grieveson Grant younger and more aggressive leadership.
Nonetheless, Kleinwort Benson's share of the British equities market remained at 5 percent in 1989, not enough to put it in the front ranks of Britain's securities firms. Corporate finance continued to account for a large share of its revenues and, according to The Economist, it also had "the biggest banking book of any British merchant bank, with some £3 billion of loans outstanding."
With its place in the securities industry somewhat uncertain, the future of Agnew's vision of Kleinwort Benson as a fully integrated investment bank appeared equally up in the air. Traditionally, merchant bankers had to live with uncertainty as an inherent fact of business life. No matter what its future held, Kleinwort Benson deserved credit for its ambitious program of expansion and diversification in the 1970s and 1980s, which recalled the golden age of the British merchant banks. Back then, the influence of the merchant bankers extended to the far corners of the world as they provided the money that built the empire. Kleinwort Benson recognized early on that the future of merchant banking also lay over the seas. By 1989, it boasted of offices and subsidiaries in ten countries and four continents--a small empire of its own.
Changes in the 1990s and Beyond
The company's fortunes took a tumble once again in the early 1990s due in part to its attempts to diversify its holdings. The strategy proved to be both costly and damaging to its reputation in the industry. Rumors began to fly that the once mighty and prestigious merchant bank would be forced to dissolve. By 1995, however, the firm had rebounded through the implementation of a new management plan that focused company efforts on corporate finance and origination and distribution of domestic and international equities.
Despite its turnaround, Kleinwort Benson continued to face increased competition from its larger U.S. and European counterparts. As such, the company agreed to be acquired by Dresdner Bank AG, Germany's second-largest bank at the time. Both parties eyed the $1.6 billion purchase as being highly beneficial. Through Kleinwort Benson, Dresdner would gain a foothold in international investment banking. At the same time, Kleinwort Benson expected to expand under the leadership of a strong bank, giving it solid footing for a secure future.
The company operated as Dresdner Kleinwort Benson (DKB) after the 1995 acquisition. Its amalgamation into Dresdner proved to be the first of many changes for the firm in the upcoming years. The European banking sector as a whole began to experience a wave of merger activity in the late 1990s and into the 2000s. Dresdner followed suit, engineering an enormous $30 billion deal with Deutsche Bank. The merger fell through, however, after it became apparent that DKB would be carved up as a result of the deal.
Undeterred, Dresdner continued to look for opportunities to bolster its holdings, especially for its investment banking arm. In 2000, the company began courting Wasserstein Perella & Co., an American investment bank founded in the late 1980s by the infamous dealmaker Bruce Wasserstein in conjunction with Joseph Perella. The two companies ironed out the terms of the agreement, completing the $1.4 billion transaction in January 2001. The combination created Dresdner Kleinwort Wasserstein (DrKW), the seventh-largest corporate merger advisor in the world.
Dresdner became involved in yet another deal later that year. Allianz AG, a large German insurance group, made a $22 billion play for Dresdner, adding it to its arsenal in late 2001. The union created the world's fourth-largest financial group, leaving Dresdner in an enviable position. On the other hand, the merger left the future of DrKW in question. Its recent financial performance had been faltering and, to top it off, Dresdner did not appear as adamant as it had in the past for keeping its investment unit intact now that it had a rich parent. The Economist summed up the company's problems in an August 2002 article, stating, "In the past year almost one-fifth of Dresdner's revenues have crumbled away. The trouble lies in Dresdner's 'corporates and markets' division, which includes Dresdner Kleinwort Wasserstein." The article went on to report, "As equity markets have weakened and mergers-and-acquisitions business has dried up, trading revenues have fallen by more than half, and fees and commissions have dropped by more than one-eighth."
In response to the challenging business environment, DrKW implemented a series of cost-cutting strategies in order to shore up its bottom line. Its internal restructuring efforts appeared to pay off, and by September 2003 DrKW had reported three consecutive quarters of growth. Its ability to overcome hardships and the market downturn had secured it a short-term future with Allianz. The financial giant pledged to hold onto the unit for two years before considering a sale, giving DrKW and its employees some breathing room for the next 24 months.
Principal Competitors: Allen & Company Inc.; Credit Suisse First Boston Corp.; Lazard LLC.
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