Cablegate: Commerzbank Buys Dresdner, Fuelling Consolidation Debate

DE RUEHFT #2735/01 2471217
O 031217Z SEP 08




E.O. 12958: N/A

SUBJECT: Commerzbank Buys Dresdner, Fuelling Consolidation Debate

1. Summary: Commerzbank's acquisition of Dresdner Bank this week is
the third and largest bank takeover in Germany this year, as global
financial turmoil brings long-awaited consolidation to Germany's
notoriously over-banked financial sector. With the deal,
Commerzbank picks up a bank which has suffered greatly in the recent
downturn, but creates an entity large enough to rival Germany's
biggest bank, Deutsche Bank, in many spheres. The deal may spur
further consolidation among private banks, but does not represent a
significant change to Germany's three-pillar bank system. End

Let's Make a Deal

2. On August 31, Commerzbank finalized a deal to purchase Dresdner
Bank from the insurance company Allianz SE for 9.8 billion euros
($14.4 billion). The bank will use shares and cash to buy 60.2% of
Dresdner right away and acquire the rest by the end of 2009, pending
shareholder approval. Allianz will acquire a 30% stake in the merged
entity. Commerzbank also agreed to cover the first 275 million
euros ($404 million) of potential losses on Dresdner's asset-backed
securities, while Allianz will cover the next 975 million euros
($1.4 billion).

3. The deal ends months of speculation as potential bidders such
Banco Santander and Lloyds TSB dropped out and China Development
Bank lost the bidding. With 1.1 trillion euros ($1.6 trillion) in
assets, the new entity merges Germany's second and third largest
banks, but still lies well behind Deutsche Bank with its assets of
2.0 trillion euros ($2.94 trillion). Commerzbank will, however,
become one of Germany's biggest retail bank with 1,200 branches,
while the name Dresdner will eventually disappear from the market
130 years after the institution's founding.

What's in a Deal?

4. For Allianz, the deal ends seven unhappy years of ownership, as
it already cut more than 18,000 jobs at Dresdner, or 40% of the
workforce, and shed 32.6 billion euros ($48 billion) in assets.
Having bought Dresdner for 23.5 billion euros in 2001 ($22 billion
at the time), Allianz aimed to profit from cross-selling insurance
and banking products. Not only did the strategy never take off, but
Dresdner's investment bank branch, Dresdner Kleinwort, performed
poorly compared to rivals, investing heavily in asset-backed
securities which resulted in over 3 billion euros in write-downs and
four consecutive negative quarters for the bank starting in August

5. Going forward, Commerzbank faces challenges in merging the two
entities. A senior Deutsche Bank economist told Econ Off that he
did not see a merger as a natural fit, saying that Dresdner Bank's
focus on high-end clients and global investment banking did not mesh
well with Commerzbank's regional portfolio and focus on Germany's
small and medium-sized businesses. Commerzbank announced 9,000
potential lay-offs, both in Germany and abroad, to eliminate
redundancies in the two Frankfurt-based entities, and will possibly
wind down the unprofitable Kleinwort significantly. By tying up
funds, the deal also stretches Commerzbank's overall capitalization
during a time when banks have struggled to raise fresh capital.
Despite the challenges ahead, an analyst at the German Council of
Economic experts told Econ Off that the deal undoubtedly created "a
second national champion" that would strengthen competition in the

A Big Deal?

6. The Deutsche Bank economist dismissed the significance of the
acquisition joking that it was "no big deal" as Commerzbank would
only account for 6-8% of the assets held by German banks and is
still small enough to be at risk of a takeover by a foreign bank.
Germany's three-pillar banking system, wherein private banks only
make up around 28% of the overall market, remains firmly in place,
with the savings bank and cooperative bank pillars legally apart
from the private banks. Nevertheless, the takeover caps a wave of
deals within the private bank pillar in 2008 following Citigroup's
sale of its German business to Credit Mutuel and KfW's sale of its
stake in IKB to Lonestar, a U.S. private equity group.

7. The deal may also add impetus to Deutsche Bank's pursuit of
Postbank. With its 14 million private accounts, Postbank would
offer reliable income from retail banking to counterbalance Deutsche
Bank's focus on global investment banking as well as a steady supply
of funding when capital markets are not performing. No deal has
been finalized and the state postal service may not agree to sell
Postbank if it means large lay-offs.

FRANKFURT 00002735 002 OF 002

8. A curious footnote on the takeover is the failed bid of
state-owned China Development Bank (CDB). While it remains unclear
whether CDB outbid Commerzbank and whether its offer was serious,
such a takeover would likely have unleashed a firestorm of debate
over the role of state-owned foreign companies in the German
economy. The Deutsche Bank analyst said there was no "one view" in
the political spectrum on the issue, but such a deal would have
nonetheless provoked unease. The deal with Commerzbank keeps
Dresdner "in the family" and creates a larger German entity capable
of building a more global profile.

9. Comment: The merger of Germany's second and third largest banks
was no doubt fuelled by the global financial turmoil which exposed
the weaknesses of already troubled banks. Commerzbank will clearly
be tied up absorbing Dresdner for the near future, while rivals such
as Deutsche Bank eye other potential assets. Consolidation will
continue within the three pillars of the system, but few foresee
drastic changes to Germany's banking landscape on the horizon. End

10. This cable was coordinated with Embassy Berlin.

© Scoop Media

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