On March 9, the German financial world quaked with the announcement that Deutsche Bank (DB), Germany’s largest bank, planned to merge with cross-town rival Dresdner Bank. Insurance giant Allianz AG was a driving force behind the deal and stands to benefit greatly from it.
The merger represents more than further consolidation in the banking industry, and the aftershocks will be felt, not only in Germany, but also throughout Europe and the U.S. It portends the opening of Germany’s “closed shop” which has been in place since the end of WWII, and signals a sea change in the country’s business structures.
The merger will form the world’s largest bank with $1.2 trillion in assets, well ahead of Switzerland’s UBS ($683 billion), but perhaps somewhat less than the combined total assets of Fuji Bank, Dai Ichi Kangyo Bank and the Industrial Bank of Japan, which have also announced plans to merge. No U.S. Bank is currently in the top 10, although Bankers Trust is a DB subsidiary.
Deutsche Bank Worldwide (DBW), the tentative new name, will be a very large bank. It’s expected to take three years before the merger is finalized.
The proposed changes in German capital gains tax law, aimed at eliminating the current 50 percent tax now levied on gains from sales of assets, will not become effective until next year at the earliest. This now keeps German companies from disposing of otherwise unprofitable or under-performing holdings, and investing their capital more efficiently. The left-of-center Schroeder government is supporting the elimination of the tax in the hope that the effects will stimulate the German economy and create employment.
In the near term, however, the merger will have the opposite effect, as many duplicate branch facilities will be closed, resulting in the estimated loss of 14,000 jobs in Germany alone. The new co-chairmen of DBWÐDB’s Rolf Breuer and Dresdner’s Bernhard WalterÐhave confirmed that eventually 16,000 employees will leave the group between 2001 and 2004, mostly in retail banking.
Deutsche Bank 24, a subsidiary originally set up to handle 24-hour banking, now handles all of DB’s retail (branch) operations. As part of the merger plan, Allianz will initially acquire a 49 percent stake. After Dresdner’s retail operations are merged with DB 24 and the cost-cutting consolidation of the branches is complete, Allianz’s holding percentage will be reduced to around 32 percent. The name of the new retail operation will become simply Bank 24, and will be spun off into a separate public company offering a full range of services to retail customers.
Allianz was an integral party to the merger agreement, one of its strongest proponents, and was seen by most analysts as the biggest winner. Under the direction of its dynamic CEO Henning Schulte-Noelle, Allianz has sought to expand in a number of fields, notably bancassurance and asset management. It has achieved both goals with the mergerÐhow and why says a lot about the German financial structure in general and Allianz in particular.
German industry, particularly its financial institutions, has long been interconnected through a complex pattern of cross-holdings. This arrangement ensured that capital stayed in Germany to rebuild the country. It also protected financial and industrial companies, and in many cases their single-family owners, against hostile takeover attempts.
Now, family-dominated companies are rare and the funds locked in cross-holdings could be more profitably invested elsewhere; but, due primarily to the adverse tax consequences, they are more or less locked in.
The DB/Dresdner merger will unblock some of these cross-shareholdings. Allianz will use its stake in Dresdner to pay for the acquisitions from DB, and the banks have in turn agreed to divest their holdings of Allianz. This is scheduled to occur in 2001, after the proposed change in the tax code takes effect.
The acquisition of DWS, combined with the 70 percent interest Allianz recently acquired in PIMCO, the U.S. largest fixed income fund manager, gives Allianz $725.7 billion under management, making it one of the top five asset managers in the world, slightly behind France’s AXA. The stake in Bank 24 will give Allianz exclusive rights to sell its insurance products through retail banking outlets to more than 10 million customers of DB and Dresdner.
“The future stake in Bank 24 will broaden our existing and successful multi-distribution system based on tied agents sales force network and our banking cooperations in Germany,” Schulte-Noelle stated in the merger announcement. He emphasized the benefits the merger would provide Allianz, stating, “In the context of active portfolio management, we are reshuffling our assets and investing in the expansion of our core businesses.” The plural was undoubtedly intentional, as asset management has become just as important to insurers as writing life and p/c coverage.
The size of the change, and the companies involved, indicate that the merger is a good deal more than “portfolio management,” a fact which Schulte-Noelle readily admitted. “With the reduction of their cross-shareholdings, Allianz, Deutsche Bank and Dresdner Bank will provide the basis for more transparency in the German financial services sector. This is an important signal for Europe and the international capital markets,” he stated.
In an interview with the New York Times, Schulte-Noelle went even further, acknowledging that the post-war German structures would and should be dismantled. If German companies are to be able to compete successfully, they must be more innovative and flexible; therefore, he wasn’t kidding when he said in the announcement, “These transactions represent an increase in value for the shareholders of Allianz.” That’s the bottom line, and it will definitely mean something to U.S. investors and analysts when Allianz realizes its intentions of listing its shares on the New York Stock Exchange within the next two years.
Allianz spokesman Hubertus Kuelps confirmed the company’s interest in expanding in the U.S. “One of our strategic goals is to be among the top five players in each of the world’s major markets,” he said. “We’ve achieved this in Europe, with the exception of the U.K., and we’ve been successful in other areas. We also want to grow in the U.S., especially in the life and health areas, if we find appropriate opportunities.”
The changes initiated by Allianz with the merger of DB and Dresdner could help the company do just that.
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