Global Economics

Commerzbank, Dresdner Close to Merger?


Overdue consolidation may finally be at hand, as media reports suggest a deal in the works between Germany's second and third largest banks

It would be a breakthrough after years of hesitation—Germany's second-largest bank Commerzbank (CBKG.DE) is about to take over its rival Dresdner Bank (AZ), the third-largest, according to media reports. The basics of the transaction have already been ironed out and a decision is expected before the end of August, insiders say.

The deal could trigger a much-needed reorganization of Germany's entire banking sector. It would create a second national banking champion alongside market leader Deutsche Bank and put other players under pressure to follow suit. Analysts say that in the medium term, Dresdner and Commerzbank could join up with Postbank (DPBGN.DE), a major retail bank owned by Deutsche Post, provided that Deutsche Bank doesn't snap up Postbank first in a pre-emptive strike.

A merger would kick-start long-overdue consolidation in the German banking sector, say banking analysts. Germany's banks are dwarfs in comparison with giants such as China's ICBC with a market capitalisation of $248 billion or Britain's HSBC (HBC) with $189.9 billion. In terms of its market value, Deutsche Bank ranks 32nd in the world, with Commerzbank in 84th place.

In a global comparison Commerzbank's small size makes it vulnerable to a takeover. And banks like Spain's Santander, Italy's Intesa Sanpaolo or Dutch group ING are keenly eyeing the German market for possible acquisitions. So Commerzbank's purchase of Dresdner Bank would partly be an act of self defense.

Big Synergy Benefits

But the merger would also offer ample potential for savings and synergies. In IT alone, an all-important area of modern banking, billions of euros could be saved. Average costs per customer would fall significantly and the merged bank would be more competitive internationally.

Domestic mergers also give banks the necessary capital and size to expand abroad. "Banks from all over Europe are pushing into the German market, but many German banks aren't seizing their opportunities to grow in foreign markets," Wolfgang Gerke, president of Bayerisches Finanz Zentrum, a regional banking association, told SPIEGEL ONLINE. That was a major strategic error, he said.

Given the potential for earnings and business growth arising from mergers in the banking sector it seems absurd that Germany's major banks have repeatedly let opportunities for tie-ups slip in recent years. A merger between Deutsche Bank and Dresdner foundered in 2000 shortly before its completion due to last-minute internal opposition. But HypoVereinsbank was swallowed up by Italy's UniCredit in 2005 without anyone putting up much of a fight.

And recently Deutsche Bank surprisingly lost out to France's Credit Mutuel in a bidding war for the lucrative German retail banking operation of American giant Citigroup.

Takeover Obstacles

Such setbacks are pushing German banks further behind foreign competitors in one of the country's most important industries. Indeed, it is one of the few which is continuing to generate earnings growth. But there are a number of reasons why German banks are reluctant to join forces with each other:

Money. Many planned takeovers fail because investors are unwilling to pay high prices to secure a strategic advantage in their home market. At present the sale of Postbank is at risk of failing for just this reason.

Rivalry for top jobs. When two banks merge, the boss of one of them has to go, which always complicates talks.

Employee resistance. Mergers can only produce synergy benefits if they lead to surplus jobs being shed and unnecessary branches being closed. As a result, rumors of mergers and acquisitions cause an atmosphere of fear and prompt trade unions to threaten management with industrial action.

These hurdles are playing a central role in the takeover of Dresdner Bank. The purchase price in particular is proving a sticky issue. Commerzbank is reported to be offering slightly more than €9 billion. But analyst Dieter Hein of Fair Research said he was skeptical "whether that's a realistic price." He said he doubted that Allianz, Dresdner Bank's owner, would accept it.

Another central issue has yet to be resolved. In the wake of the sub-prime crisis, who is going to cover Dresdner's possible financial risks? One newspaper reported that Allianz was ready to cover potential losses of up to €1 billion that may still be lurking in Dresdner's balance sheet. "That's a major burden which is weighing heavily on the negotiations," said banking expert Gerke.

But overall, analysts say the chances of the merger going ahead are better than in previous attempts. "Commerzbank is financially well positioned at the moment, and Allianz has so far failed to earn profits with Dresdner Bank. So the pressure for a sale is intense," said Hein.

Gerke too is optimistic that the merger will happen. But there's only a brief window of time for it to happen. "They have to reach an agreement quickly or the deal could fail once again."

However, Allianz appears to have made provisions for that eventuality: media reports said it is also negotiating with China Development Bank.

Provided by Spiegel Online—Read the latest from Europe's largest newsmagazine

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