Allianz Makes Deal to Purchase Dresdner Bank for $20.5 Billion
After a week of intensive negotiations, Allianz AG and Dresdner Bank, Germany’s third largest, announced on April 1 that they have agreed to join forces to create Germany’s biggest financial institution. With capitalization of $87.55 billion, it would be roughly equivalent to American International Group (AIG).
Allianz will acquire the remaining 78.6 percent of Dresdner shares it doesn’t already own for a base price of $46.50 per share, valuing the deal at around $20.5 billion. Dresdner shareholders will be offered one Allianz share and $175 in cash for every 10 Dresdner shares.
The move signals the end of an ongoing saga which saw Dresdner twice seek other partners. It came close to making a deal with Deutsche Bank, Germany’s largest, last year, but that fell through when it became clear that DB intended to sell off the investment banking division Kleinwort Benson (the name has since been changed to Kleinwort Wasserstein following Dresdner’s acquisition of Wasserstein Perella last year).
Dresdner’s lagging performance was the main reason Allianz wanted to sell off its interest, but as Allianz Board Member Paul Achleitner stated: “The market environment has significantly changed.” Allianz’ plans changed too.
The link-up with Dresdner recognizes the increasing importance of the “future-oriented markets of ‘asset management’ and ‘old-age provision.'” Germany’s retirement system, recently reformed along U.S. lines, is projected to generate “sustained momentum in these areas and annual growth rates in excess of 15 percent.” Dr. Henning Scholte-Noelle, Allianz CEO, saw the move as “our joint response to the challenges of the market.” He stated that: “Anyone who wants to succeed as a financial services provider in this fiercely competitive market needs strong brands, a comprehensive range of products and services, and access to all available sales channels,” which includes being able to provide insurance, pensions and asset management.
Allianz-Dresdner will combine 17 million clients in Germany through its network of 12,000 agencies, with Dresdner’s 6.5 million clients through its 1,200 branches. This gives the group access to half the households in Germany, and positions it to compete on a global basis with giants like Citicorp, UBS and Credit Suisse. Its total assets under management—which include fund managers Nicholas Applegate of San Diego, and PIMCO of Newport Beach, both of which Allianz purchased last year—will be close to $1 trillion.
The deal also needed the approval of another German insurance giant, Munich Re, which owns 25 percent of Allianz (and vice-versa), 6.4 percent of Dresdner and 40 percent of Germany’s largest life insurer Allianz Leben. In exchange for ceding these interests, Munich Re will receive Allianz’ 17.4-percent share holding in Hypovereinsbank (HVB), Germany’s second largest bank, which would raise its stake to more than 25 percent, enough to propose deals and block others. If it then follows through on its plan to purchase the outstanding shares of retail insurer Ergo Versicherungsgruppe, ranked second behind Allianz, it will own 95 percent and would have a formidable network of its own through its 17,500 agents and HVB’s branch network. Often called “the sleeping giant” of German finance, Munich Re is waking up.
Although it may not turn out to be quite the equivalent of Alexander the Great severing the Gordian Knot, the four-part transaction is key to dismantling the cross-holding arrangements formed in Germany after the Second World War. Everyone recognizes that they’ve become obsolete, as they hinder competition and tie up valuable capital that could be used more productively elsewhere. Until this year, a 55-percent capital gains tax on corporate investments inhibited companies from selling under-performing assets and placing their capital where it would achieve greater growth. Under Chancellor Gerhard Schroeder, the tax has been repealed, effective next year, and this could significantly alter the German corporate scene.
Allianz and Munich Re have already announced plans to unwind their cross-shareholdings, which will free up additional capital for investment and expansion. Munich Re already derives more than 50 percent of its premium income from primary insurance, and wants to expand in that area and in asset management. Most analysts expect other big German companies to follow suit.
The Allianz-Dresdner deal and Munich Re’s expected tie-up with HVB puts a lot of pressure on Deutsche Bank and fourth-ranked Commerzbank. The two giant insurers have effectively no internal competition in the sale of primary insurance, but there are a number of other insurers lurking just across the border who would just love to have greater access to Europe’s largest and most lucrative financial and insurance market.
France’s AXA has confirmed that it held talks with Deutsche Bank (before the Allianz-Dresdner merger was announced). According to Reuters News Agency, DB CEO Rolf Breuer said that the talks with AXA are “far from any concrete result.” He added, however, “AXA is a highly significant negotiating partner and in any European-wide cooperation, AXA would be a partner of considerable weight.”
AXA CEO Henri de Castries has reiterated his position that AXA is not interested in buying a bank; therefore, any deal the two may make would probably take the form of a cross-selling alliance along the lines of the recently announced cooperation agreement between Zurich Financial and Bank of America.
Commerzbank’s position is even more tenuous. Negotiations with Dresdner Bank
last year produced no agreement, and that’s now off the table. If AXA and DB team up, it would face three fierce competitors in the financial products market. It has an alliance with Italy’s largest insurer, Generali, who also holds a 9.9-percent stake and is well established in the German market, but it may still need a real heavyweight partner, as it appears to be increasingly vulnerable to a takeover attempt.