The merger of Commerzbank and Dresdner Bank, the biggest banking deal in Germany in a decade, was met with anything but a show of confidence by investors.
After months of behind-the-scenes negotiations, a last-minute interference run by a state-owned Chinese bank, and a minor rebellion among Dresdner executives certain to get axed in the wake of a deal, Commerzbank overcame the odds and agreed to acquire Dresdner for $14.5 billion from its owner, insurance giant Allianz.
The combination of Germany's second- and third-largest banks creates the country's No. 2 bank with $1.46 trillion in assets, half the size of the nation's market leader, Deutsche Bank. In terms of retail customers in Germany, the newly enlarged Commerzbank is now the leader in German retail customers, with 11 million compared to Deutsche's 9.7 million.
Commerzbank said it could achieve savings of some $7.27 billion, largely by cutting 9,000 jobs from the combined staff of 67,000, and by closing about 22% of the new bank's branches. Still, when the dust settles Commerzbank will have 1,200 branches in Germany, compared to Deutsche's 1,000.
"We are underpinning our claim to become the leading bank in Germany," a beaming Martin Blessing, 45, told reporters at a news conference in Frankfurt on Monday.
But while Blessing and Allianz chief executive Michael Dieckmann, 54, celebrated the deal, investors thrashed Commerzbank for paying too much and analysts questioned whether Blessing and his team were up to the task of successfully completing the merger. In light of the ongoing financial crisis, analysts were surprised to learn that Commerzbank values the struggling Dresdner bank at a premium of 1.1 times its current book value. Commerzbank shares fell as much as 12.1% in trading Monday, the biggest decline in the company's stock since October 2002, according to the news agency Bloomberg.
"Investors think that Commerzbank did not get as good a deal as Allianz," said Konrad Becker, a financial industry analyst at Merck Finck.
The financing of the deal is complicated and takes place in two steps. First, Commerzbank will pay Allianz $2.33 billion in cash, $4.94 billion in stock, and give the German insurer its asset management business Cominvest, which has a value of roughly $1 billion. Then, in a second step to take place by the middle of next year, Commerzbank will give Allianz another $4.58 billion in stock. In the end, Allianz will hold a 30% stake in Commerzbank, giving the insurance giant the opportunity to sell its insurance products over Commerzbank bank counters. And with Allianz as a major shareholder, Commerzbank is protected from a hostile takeover.
Only a few years ago, it was Commerzbank that looked like a takeover target. But Blessing, who became head of the bank just three months ago, helped engineer a turnaround of the bank's retail business and lending to mid-sized businesses, Germany's famous Mittelstand that forms the backbone of its economy. Blessing, a hobby marathon runner who had hoped he would be able to rebuild Commerzbank at a less hectic pace, realized that in the current financial crisis the opportunity to take over rival Dresdner may not come again.
"We are taking advantage of a unique opportunity," said Blessing in a statement issued on Sunday, after Commerzbank and Allianz had shook hands on the deal.
Talks had been ongoing for months, but were hampered by Dresdner executives who knew that the merger could cost them their jobs. On the Dresdner management board, only CEO Herbert Walter backed the deal, and he will take a new job on the board of the new Commerzbank.
As Commerzbank and Allianz appeared to be moving closer to a deal, another obstacle emerged. The state-owned Chinese Development Bank signaled its interest buying Dresdner at a premium. Some Allianz shareholders, and Dresdner's insurgent executives, appear to have been pushing for a deal with CDB. But, according to German press reports, Allianz CEO Michael Dieckmann put out feelers in the German chancellery and found little sympathy for a deal with the Chinese.
Concerned that cash-rich sovereign wealth funds from Asia or the Middle East could buy their way into the German financial industry, the German government has long wanted to see a second national champion created that together with the Deutsche Bank would dominate the German market.
"Commerzbank's purchase of Dresdner is the best solution for (Germany's) financial industry," said Otto Bernhard, a Christian Democratic parliamentary deputy and finance policy expert.
The German banking sector has long been ripe for consolidation. Germany has three banking industries — commercial banks, public Landesbanken, and cooperative savings banks. All but the commercial banks are controlled by public authorities. The five biggest commercial banks control just 11% of savings deposits, while the public savings banks control 51% and the cooperative banks 30%.
It now seems that the only remaining piece in the consolidation of the German commercial banking sector is Deutsche Postbank, the former banking arm of the government post and telecommunications monopoly. Its owner, Deutsche Post, itself still controlled by a large government shareholding, wants to sell. Until now, a sale to Commerzbank was considered prudent, but the newly enlarged bank is unlikely to be interested, analysts say.
Now that Germany has safeguarded its core commercial banks from foreign raiders, the Postbank, a large retail bank with no corporate lending or investment banking activities, could end up in foreign hands. "Postbank is the last chance for anyone who wants get into the German commercial banking market," said Becker, the Merck Finck analyst.
But with Germany's commercial banks among the least profitable in the world and the power of state-owned banks still unbroken, it's unlikely that the barbarians will be crashing the gates for Postbank.
6 months ago