Henning Schulte-Noelle has long been adamant about one thing: Insurers shouldn't own banks. For many years when the idea came up, Schulte-Noelle, chief executive of Allianz (AZ
), Germany's biggest insurer, would explain that banks and insurers serve different markets, have different cultures, and need different management styles. Yet on Apr. 2, Schulte-Noelle held a press conference to proudly broadcast that Allianz had made a bid for the 78% of Dresdner Bank that it doesn't already own, and that Dresdner had accepted it.
Quite a volte-face. As Schulte-Noelle matter-of-factly explained, "I was forced to reverse strategy because of changes in the financial-market environment." What changes? Increasingly affluent Europeans, who know that their state pension systems are shaky, are pouring money into long-term savings products such as annuities and mutual funds. And Allianz wants "access to all available sales channels" to sell to them, Schulte-Noelle said. That's why he invited Dresdner (DRSDY
) CEO Bernd Fahrholz to a schloss outside Munich last August to tell him he had had a $20.5 billion change of heart.
Schulte-Noelle got it only half right, though. His grasp of the forces reshaping European finance is on target. But spending $20 billion to reach that market? You could argue that the money would be better invested in those annuities Allianz sells.
BIG NUMBERS. It's not hard to understand why Allianz wants to extend its reach in Europe. Private retirement savings have the potential to be a bonanza for insurers, the principal sponsors of savings plans everywhere but Britain. The middle-aged Europeans whose impending retirement will break Europe's state pension systems want better returns than the paltry yields on savings accounts, even those with tax advantages.
The numbers are hugely tempting. Steve M. Lipper, global-marketing director of Lipper, the mutual-fund researcher, says the European mutual-fund market will be worth $10 trillion by 2010, vs. $3 trillion now. Even Germany's cautious pension-reform bill, expected to become law this year, should stimulate 15%-a-year growth in private retirement savings for the foreseeable future. "We're talking hundreds of billions of dollars," says Lipper.
Financial groups across the Continent want a share of this rich pie. To improve their money-management expertise, insurers--Switzerland's Zurich Financial Services Group, Holland's Aegon, and Allianz--have bought fund groups in Europe and the U.S. Germany's Deutsche Bank (DTBKY
), Spain's Banco Bilbao Vizcaya Argentaria (BBV
), and Italy's Unicredito have mutual-fund arms. Banks such as Dresdner and its rival Commerzbank distribute products for insurers. U.S. money managers such as Fidelity Investments and Merrill Lynch (MER
) have moved into the market, too.
OLD-FASHIONED. But Schulte-Noelle may not have picked the best way to gather Europe's nest eggs. Merging with Dresdner is a huge bet on Allfinanz, the German equivalent of a financial supermarket. And so far the market doesn't care for the bet: It greeted Allianz-Dresdner with a sneer. The companies' shares fell 2.5% and 1.5%, respectively, within hours of the official unveiling. "Many investors aren't convinced an insurance company can manage a bank," says Trudbert Merkel, a fund manager at Deka Investment Management in Frankfurt.
Where's the problem? Allfinanz is an old-fashioned approach to a fast-changing financial universe. Plenty of rivals argue that buying a bank just to team up is a poor use of assets. French insurer Axa Group, for example, is talking to Deutsche Bank--but just about a joint venture to sell Axa products.
Schulte-Noelle insists that's not enough. He argues that only giants that offer all services and control the distribution channels--from insurance agencies to bank branches to the Internet--can compete. "In the past, the divide between banks and insurers was clear," he says. "Now the borders are disappearing." He wants as much of Europe's private asset-management market as he can get.
That's the ironclad logic driving Schulte-Noelle's epic deal. It creates a powerhouse in the mold of Citigroup (C
) by marrying Allianz' core businesses--old-age provision and fund management--with Dresdner's securities and investment-banking expertise. Allianz-Dresdner, as the merged group will be called, will have $900 billion under management and more than 20 million clients in Germany alone. Dresdner brings $440 billion in assets, 1,200 branches, and 6.5 million customers. Dresdner's DIT unit is one of Germany's biggest mutual-fund groups, with more than $45 billion on its books.
Yet it is nightmarishly hard to cross-sell banking and insurance. Life insurance, for example, is more complicated than loans and requires a more sophisticated sales staff. Moreover, competitors say, owning a bank forces the insurer to be immense not only in asset management but also in banking, where size is also considered to be the key to maximizing profits. That's a weak point for Dresdner, whose pretax profit was down 24% in 2000. "If bankers can't fix that," points out an executive at a rival insurer, "why should insurers be able to?"
A big banking expansion would also bring Allianz into head-on competition with Europe's most predatory retail banking groups--Banco Bilbao Vizcaya Argentaria, Banco Santander Central Hispano (STD
), Unicredito Italiano, and Lloyds-TSB. Banks bring a host of other problems, points out Axa boss Henri de Castries. "The reason we at Axa don't buy big banks," he says, "is that we don't want big structures taking market risks, managing credit cards, loans, etc." Axa, in fact, has sold two investment banks--Donaldson, Lufkin & Jenrette Inc. (DLJ-A
) and Banque Worms--since last summer.
TRICKY. A number of European institutions have tried to pull off the Allfinanz model, but few successfully. Europe's largest Allfinanz operation, Holland's ING Group, makes a dismal net return on equity of 12%, vs. 29.1%, for Lloyds-TSB, for example. It was National Westminster Bank's attempt to move into Allfinanz by buying insurer Legal & General in 1999 that left the bank vulnerable to a hostile takeover by the Royal Bank of Scotland last year. Skeptical shareholders drove down the price, and RBS moved in. Ironically, the institutions that have done best at marrying insurance and banking--Britain's Lloyds-TSB and Credit Suisse Group, for example--have been banks that acquired insurers rather than the other way round.
All this suggests that Allianz-Dresdner isn't likely to launch the restructuring of European finance, as many have speculated. "This deal clarifies the relationship between Allianz and Dresdner and unravels some of the cross-shareholdings that make German finance inefficient," says a board member at a rival insurer. "But it won't persuade us to go out and buy a bank."
Schulte-Noelle has his backers. Ken Costa, vice-chairman at UBS Warburg, which advised Allianz on the deal, argues that Allianz will now be able to train Dresdner staff to sell a full range of products more effectively. "The secret to success is controlling the distribution channels and using them to maximum advantage," Costas says.
Costas may be right. But the evidence is tipped against him. And his client Schulte-Noelle may yet wish he had heeded his initial instinct to leave banking to someone else.
With Stanley Reed in London, Gail Edmondson in Rome, and Julia Lichtblau in New York
Fairlamb covers European finance from Frankfurt.
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