Deutsche-Scudder deal means compromise in Asia

"Let's face it," says Brian Scullin, regional CEO at Deutsche Asset Management in Sydney, "this is a transaction driven out of the United States."

The transaction in question: Deutsche Bank's $2.5 billion acquisition of American fund manager Zurich Scudder Investments from Zurich Financial Services. The impact: right now Asia-Pacific operations are not the focus of the strategists in either camp. Scudder is an investment powerhouse, with $278 billion of assets under management worldwide and about 4,000 employees. But in Asia-Pacific, Scudder has a mere 149 people. Most of them (76) are in Japan, where the firm manages $3.65 billion and advises its New York office on an additional $7.3 billion.

Nonetheless both are major players in the region's institutional market, and already the outlines of where Deutsche Asset Management and Scudder are complementary and where they are redundant is clear.

First, the bad news. There is an obvious overlap in Japan, where Deutsche Asset Management has 283 people and manages Eu58 billion, making it already the largest foreign fund manager in that market, according to Scullin. For both firms the focus is the institutional business. Scullin acknowledges some hard decisions will have to be made.

But he also says the similarities end there. Even in Japan, the client base differs: Scudder's forte is with corporate pension plans, while most of Deutsche's assets come from government pensions and public institutions.

Also, notes Anthony Moody, Scudder's regional managing director in Hong Kong, Scudder is strictly an active fund manager, whereas many of Deutsche Asset Management's mandates are passive, a legacy of its acquisition of Bankers Trust.

Both firms manage locally sourced money directly in Hong Kong and Singapore, and manage global mandates covering those markets from London (Deutsche) and New York (Scudder). Both the local and global management operations must be rationalized, but those decisions will be made outside of Asia-Pacific, so Scullin has no idea which way it will go.

Regional overlap becomes less serious elsewhere. The neatest match is Korea, where Scudder has a long history, as the first foreign manager to offer American investors a Korea fund, and also as one of the few foreign players to hold a domestic investment advisory license. Deutsche Asset Management had been in the process of building a domestic business from scratch; now it can leverage off Scudder's existing business to win an investment trust management company license.

In other markets, Deutsche's existing strategy has been ahead of Scudder, notably in Taiwan, where the money manager has a three-way venture with China Securities and China Trust Group, and in China, where it has a technical partnership with Beijing's Dacheng Fund Management.

He adds Deutsche has no intention of buying its way into a local distributor, but is keen to expand its partnerships with them, whether by alliance or a minority equity stake.

Both Moody and Scullin say the priority is a swift but well-thought integration strategy. Scullin says he hopes to have a blue print finished in 60 days. "In these situations," says Moody, "uncertainty is the only problem. We want it to be business as usual so our investment professionals can stay focused on managing their portfolios."

Scullin is expected to broaden his regional CEO role over the integrated entity. Moody declined to speculate about his future role, but says he is committed over the coming months to ensure a smooth merger and retain Scudder's talent.

Both executives point to Deutsche Bank's acquisitions of Bankers Trust as well as of Morgan Grenfell as success stories. "I'm from BT, so I can say that being acquired by Deutsche is not all that bad," Scullin quips.

The acquisition must still clear regulatory hurdles in the US and Europe, expected to be finalized by February 2002. But to quell uncertainty, integration is being mapped out now. Michael Monaghan, regional COO in Tokyo, is heading an integration committee, with Moody as his deputy.

Although branding issues have yet to be finalized, Scullin imagines the Deutsche Asset Management name will prevail for the institutional business. He notes that although BT and Morgan Grenfell had strong names, it became a burden to keep them. But Scudder's American retail business may well retain the Scudder name (perhaps not the Zurich name), while in Europe the retail name of VHDB, Europe's largest mutual fund provider, will also continue.

One question mark is Korea, however, where the two firms must decide how valuable the Scudder name remains among domestic institutions.

In Asia, Deutsche will become the preferred supplier to Zurich Financial Services in the management of its own institutional asset management services, and Deutsche Bank will be its preferred investment bank globally.

The Scudder acquisition will make Deutsche Asset Management the fourth largest fund management company in the world with around $1 trillion in assets.