New York Private Equity Goes for the Jugular in Germany

(Bloomberg Opinion) -- Cerberus Capital Management LP has gone for the jugular. The New York private equity firm has been pushing Commerzbank AG to ramp up its cost cutting because of its dismal profit prospects and a share-price slump, and its campaign has prompted the departure of both the German lender's chairman and its chief executive officer.

However, a leadership vacuum in the midst of the worst recession in living memory isn't ideal. While a fresh management vision will deepen Commerzbank's restructuring plans, the search for suitable successors will delay the overhaul.

Other investors, including the German government, are also eager to put the bank on a track toward sustainable profitability. But there's a limit on how far cost reductions can help. Germany is a notoriously over-banked market, so there's too much competition, and the country's powerful labor unions were already opposed to the departing Commerzbank CEO's existing job-cutting plans. 

First, there's the succession to deal with. Cerberus — owner of a 5% stake in Commerzbank — wants to replace Chairman Stefan Schmittmann first, before finding a successor to CEO Martin Zielke. The bank wants to do the opposite, according to Bloomberg News, preferring the quick appointment of an internal candidate as CEO because it doesn't want to hold things up by waiting on a new chairman. Schmittmann leaves next month and a permanent chairman may need to come from outside the bank given the lack of options on the supervisory board.

That could draw out the management succession into late summer. But maybe this wouldn't be such a terrible thing. The next couple of months should make clearer just how painful the Covid-19 recession has been for Commerzbank's small and medium-sized company customers — the most prized part of its business. Pausing the restructuring until there's more visibility has some merit.

Letting a new chairman help choose the CEO would also allow the bank to cast a wider net. While there are several potential internal candidates to succeed Zielke, none appears to be a shoo-in. Roland Boekhout, the new head of corporate clients, is the leading internal candidate, according to Bloomberg News. His record at ING Groep NV's German unit was impressive but he's only been with Commerzbank since January. Another front runner, the finance director Bettina Orlopp, has been in her position since April.

Zielke was in the middle of an overhaul that would have seen 7,000 more job cuts, on top of the 4,000 lined up last year. The execution of any cost reduction plan remains critical after the outgoing CEO failed to deliver on his financial targets. Labor representatives — which pushed back on Commerzbank's merger attempt with Deutsche Bank AG last year and which control half the supervisory board — have vowed to fight the jobs plan.

Commerzbank shares rose on Monday, but they still value the lender at just 22% of its tangible book, a sign of its frailty. For Cerberus, the visible results of its pressure will help show its backers that it's not sitting idle. Zielke's target for a 4% return on tangible equity was so unambitious that it drew criticism even from German banking regulators, so there's no great sorrow about his departure. 

Worker representatives won't be able to ignore the sense of urgency that the tumult at the top has brought to light. But, as I've argued before, making money in Germany's commercial lending market while interest rates remain negative is a hard task. At some point, Commerzbank may draw fresh suitors. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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