A few weeks ago the American private equity firm Cerberus Capital Management seemed to be on the cusp of provoking a major shake-up in German banking after it pressured the two top executives of the country’s second-largest lender to quit.
But the interloper’s victory didn’t last long.
Now the German establishment is pushing back in a battle for control that may determine whether the country’s banks can arrest their slide into irrelevance.
Cerberus is the largest private-sector shareholder in Commerzbank, Germany’s second-largest bank. The firm has been lobbying hard for drastic cost cuts and other painful changes to reverse the bank’s chronically mediocre profits.
The need to fix German banks has become even more urgent after the pandemic caused a surge in delinquent loans. On Wednesday, Commerzbank reported a quarterly profit that was above analysts’ expectations but warned it would record a loss for the year.
Cerberus is coexisting uneasily with Commerzbank’s largest shareholder, the government, which has three times as many shares.
In June, the government stood by as Cerberus hounded the chairman and chief executive of Commerzbank from their jobs, criticizing them for incompetence in letters to the board that were leaked to the press. That seemed to set the stage for bringing in new management more to the firm’s liking.
But on Monday, the government backed a new chairman over the vehement objections of Cerberus, which said the nominee, Hans-Jörg Vetter, was not “the right person for this job.”
The nomination of Mr. Vetter, who has spent his career at publicly owned banks, is a setback for Cerberus as it tries to salvage some of the big investment it made in German banks in 2017. It was also a reprieve for political leaders fearful of severe job cuts.
Still unanswered is the question of how Commerzbank will arrest a long-term slide that mirrors the decline of the banking industry in Europe’s largest economy. Weakened by the last financial crisis, Commerzbank has struggled to compete in the overcrowded German banking market. And Deutsche Bank, Germany’s largest bank, in which Cerberus also owns a stake, has fallen far behind American rivals like Goldman Sachs and JPMorgan Chase.
Germany has long had a complicated relationship with private equity. Sometimes politicians have vilified buyout firms as “locusts” stripping the German economy; other times, private equity money has been a welcome lifeline for troubled companies. That was the case in July when private equity firms Advent International and Cinven bought Thyssenkrupp’s elevator business for 17.2 billion euros, or $20.2 billion.
Cerberus bought 5 percent of Commerzbank and 3 percent of Deutsche Bank in 2017, wagering that the worst of their problems were over and they were ripe for turnaround. Commerzbank was crawling out from under a pile of bad loans to the shipping industry, and digesting an ill-advised merger with rival Dresdner Bank. Deutsche Bank was whittling down its holdings of high-risk derivatives.
The optimism was premature. The banks’ shares have since lost half their value, wiping out hundreds of millions of euros of Cerberus’s investment. An attempt to merge the two banks failed last year.
Cerberus’s attempt to wring some profit out of the two banks pits it against a German banking system structured to provide cheap credit to industry, not returns for investors.
Germany has more banks than it needs, and lending is dominated by quasi-public savings institutions and cooperative banks driven as much by political imperatives as commercial interests. Strict labor laws and powerful unions make it difficult to lay off workers and cut costs. Change does not happen quickly.
This year, Commerzbank and Deutsche Bank, like most European and American banks, have had to set aside hundreds of millions of euros to cover losses from problem loans. Low interest rates have made it difficult for them to make money issuing loans. On top of that, Deutsche Bank is still recovering from past wrongdoing, including rigging interest rates, laundering money and violating United States sanctions against countries like Iran.
On Wednesday Commerzbank reported a net profit of 220 million euros ($260 million) for the second quarter, down 20 percent from a year earlier. The bank said it would end the year in the red because of restructuring measures that it did not specify, but are likely to include job cuts and closing of branch offices.
Deutsche Bank, Germany’s largest bank, reported last week that it eked out a net profit of 61 million euros, or $72 million, in the quarter.
Cerberus has also pushed for change at Deutsche Bank. Under pressure from the firm, the bank has sped up efforts to cut costs and taken Cerberus’s advice on how to run operations like cash management. The bank hired a unit of Cerberus to provide advice on how to make its operations more efficient, though it ended the relationship last year after other investors complained about potential conflicts of interest. Any friction between Deutsche Bank and the firm has been kept out of public view.
Commerzbank was not so cooperative. By Cerberus’s count, its banking specialists met with top executives of Commerzbank 70 times to offer suggestions for improving operations and profit, but was ignored.
“Unfortunately, it is a matter of fact that Commerzbank has not yet embraced or executed on any of our suggested actions,” Cerberus wrote to management in June.
Typically Cerberus works behind the scenes. But its frustration with Commerzbank broke into public view after it savaged the two highest-ranking managers in letters that were leaked to the press.
“Management’s ill-conceived and poorly executed attempts to prevent Commerzbank’s demise display a level of negligence and arrogance we are no longer willing to tolerate,” Cerberus wrote in June to Stefan Schmittmann, chairman of the bank’s supervisory board.
That letter and a second a week later were signed “Cerberus Capital Management” rather than by any employee of the firm, which was founded by billionaire Stephen Feinberg. Cerberus declined to comment.
Cerberus’s sharp tone was a shock to Frankfurt’s insular banking community, as was its cheeky demand to be able to name two members of the Commerzbank supervisory board. That would give the firm as much clout on the 20-member board as the German government.
Mr. Schmittmann and Martin Zielke, the chief executive, announced their resignations weeks later. Both men insisted that Cerberus had not driven them out, but acknowledged they had lost the support of shareholders.
Commerzbank’s strategy “was perceived as not being ambitious enough,” Mr. Schmittmann said in a statement to bank employees. “Martin Zielke and I take responsibility for this.”
Score one for Cerberus. But then, on Monday, the supervisory board nominated Mr. Schmittmann’s replacement: Mr. Vetter, former chief executive of Landesbank Baden-Württemberg, which is owned by state and local governments in southwestern Germany. Cerberus did not regard him as having the experience to fix Commerzbank.
Mr. Vetter will oversee selection of a new chief executive for Commerzbank, reducing the chances that the person will meet the approval of Cerberus.
The government holds two seats on the Commerzbank board, and one of its representatives, Jutta Dönges, led the search for a new chairman. The federal government “exerts no influence over Commerzbank decisions on business policy,” the German Ministry of Finance said in a statement.
Cerberus’s investment in Commerzbank and Deutsche Bank was a departure for the firm. Like most private equity companies, it typically buys controlling stakes in troubled companies and installs its own management team. A mere 5 percent stake would not normally give Cerberus the clout it is used to.
Cerberus’s losses on Commerzbank forced it to copy the hardball tactics used by activist investors. Firms like Elliott Management typically buy enough shares in a company to make trouble, then agitate unrelentingly for changes. Attacks on the competence of top executives are part of the playbook.
Cerberus is one of several private equity companies that have increasingly been adopting such methods, according to a report 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, a managing partner at Lazard who is head of a team in Europe that advises companies on how to deal with activist investors. He is not advising Commerzbank.
Activist investors, including private equity firms, Mr. Thomas said, “are highly engaged and have to be taken seriously when they voice concerns.”