Deutsche Bank, Dresdner to Unveil $29.74 Billion Merger --- Combination Would Create Giant on the Continent, Alter German Economy; WSJ 3/8/2000

A Deutsche-Dresdner Deal Means Duplication in Investment Banking

The Wall Street Journal - 03/08/2000

By Wall Street Journal staff reporters Paul Beckett in New York and Erik Portanger in London

(Copyright (c) 2000, Dow Jones & Company, Inc.)

The anticipated megamerger of Germany's Deutsche Bank AG and Dresdner Bank AG will include the combination of two operations that have each been trying hard to break into the top echelons of European and U.S. investment banking.

But the fact that the two operations have focused on similar areas, such as stock and bond trading and research in London, may create broad overlaps. Those overlaps already have employees at Dresdner, which has the smaller investment-banking operation, bracing for possible layoffs. Dresdner declined to comment.

"If this goes ahead, there's going to be months and months of uncertainty," said a London trader at Dresdner Kleinwort Benson, Dresdner's investment-banking unit.

Yet Dresdner's U.S. operations could also give Deutsche Bank a small boost to its ambition of becoming a "bulge bracket" firm, alongside Wall Street giants such as Merrill Lynch&Co. and Goldman Sachs Group Inc. In particular, Dresdner Kleinwort Benson has an attractive cross-border business selling U.S. stocks to large European institutional investors, an area Deutsche Bank itself has been trying to build.

Deutsche Bank took a big step toward its U.S. goals with last year's roughly $10 billion acquisition of Bankers Trust Corp., one of the most venerable names in American finance. And although many of Bankers Trust's most senior executives, including Chairman Frank Newman, left the combined firm amid widespread expectations that culture clashes between U.S. and German bankers would hobble the deal, Deutsche Bank has translated the acquisition into a more powerful U.S. presence.

It has done so principally through Alex. Brown, the Baltimore investment bank that Bankers Trust acquired in 1997, now named Deutsche Banc Alex. Brown, which specializes in underwriting technology companies' stock issues. Recent initial public offerings that Deutsche Banc Alex. Brown has lead-managed include Foundry Networks Inc., a computer-networking company, and Extensity Inc., a provider of Internet-based office software.

For the employees of Deutsche Banc Alex. Brown in the U.S., a merger of the two German giants could once again mean more integration headaches and further layers of bureaucracy that have traditionally been anathema to the entrepreneurial atmosphere the old Alex. Brown cultivated.

Still, there is also a chance that Deutsche Banc Alex. Brown will find itself in the catbird's seat of the merged companies' investment-banking operations.

Although several senior Bankers Trust executives left at the time of the acquisition by Deutsche Bank, senior Alex. Brown officials now hold lofty positions in Deutsche Bank's investment-banking business and may do the same if Deutsche Bank and Dresdner merge. Mayo Shattuck, for instance, a longtime Alex. Brown executive and co-head of Alex. Brown under Bankers Trust, is now co-head of global investment banking at Deutsche Bank's Global Corporates and Institutions, the bank's trading and investment-banking arm.

Deutsche Bank, Dresdner to Unveil $29.74 Billion Merger --- Combination Would Create Giant on the Continent, Alter German Economy

The Wall Street Journal - 03/08/2000

By Wall Street Journal staff reporters Christopher Rhoads in Berlin, Vanessa Fuhrmans in Frankfurt and Anita Raghavan in London

(Copyright (c) 2000, Dow Jones & Company, Inc.)

Deutsche Bank AG and Dresdner Bank AG are close to announcing a 31 billion euro ($29.74 billion) merger, a deal that not only would create a European giant with more than $1.2 trillion in assets, but one that could also transform Germany's economy, Europe's largest.

The combination of Deutsche Bank, already the world's largest financial institution in terms of assets, and Dresdner, Germany's third-largest bank, would give the German financial-services sector a huge boost in its efforts to catch up with the rapid consolidation that has swept other European nations and the U.S.

The new bank, to be called Deutsche Bank Worldwide, would have a market capitalization of about 85 billion euros, making it one of Europe's largest. It would be eclipsed, as measured by assets, once a three-way Japanese bank merger announced last year is completed.

A deal, which could be announced as early as tomorrow, would be structured as a stock-for-stock deal and was described as a merger of equals. Deutsche Bank, though, would wind up paying a nearly 20% premium over Dresdner's stock price on Monday, people familiar with the situation say, and end up controlling between 60% and 65% of the combined company.

Deutsche Bank and Dresdner confirmed that talks between them "aiming at a closer cooperation" are at an "advanced stage." Their supervisory boards are scheduled to meet today to approve the merger.

The German banks' shares surged on the news. In Frankfurt trading, Deutsche Bank's stock rose 9.2% to 94.90 euros, while Dresdner's shares leaped 20% to 57 euros, in a generally strong market.

Part of the market's enthusiasm stems from what the deal signals about the pace of change in Germany. The transaction would reshape the business and identity not just of the two longtime rivals, but also of Germany's heavily institutional economy. A recent tax-reform plan makes it possible for German companies to streamline what long have been intricate cross-shareholdings in each other. Deutsche Bank and Dresdner are among the country's biggest shareholders.

The deal would reshape the business and identity not just of the two banking rivals, but also of Allianz AG, an insurer that holds stakes in both banks and reportedly pushed the Deutsche-Dresdner deal. The two banks' retail businesses, including the banking, asset-management and insurance operations, will be split and taken public as early as this year, people familiar with the proposed merger say.

Allianz, which holds 21.7% of Dresdner and roughly 5% of Deutsche Bank, would hold a minority stake in the newly separated retail bank, which would comprise 3,800 branches servicing about 10 million customers, and would be called Bank 24. The rest of the shares would be held by Deutsche Bank and Dresdner Bank, though their position is expected to decrease with Allianz having the right to gain a stake of more than 50% in three years, according to people close to the deal.

That could turn Allianz into a major player in "bancassurance," the term for a common European practice of combining banking and insurance business. ING Group of the Netherlands is a leader in this field. "This would be a U-turn in strategy for Allianz," said Olaf Conrad, banking analyst at Credit Suisse First Boston in London. "That's the big surprise here."

Under the planned merger, Deutsche Bank Chairman Rolf-Ernst Breuer, 62 years old, and Dresdner Bank Chairman Bernhard Walter, 58, would be co-chief executives of the combined bank, these people say. Both banks would have equal representation on the combined companies' supervisory board. The merger would leave other German banks, notably Commerzbank AG and Bayerische Hypo-& Vereinsbank AG scrambling to respond.

Deutsche has more branches than any other German bank. If Deutsche indeed unloads its branch network, it would mark the most radical restructuring in the German banking industry since the Allies split Deutsche Bank, only to put it back together again, after World War II.

Until now, Deutsche has chosen to beef up its commercial and investment-banking presence by throwing money at the problem. A few years ago, it paid top dollar to lure superstar investment bankers, only to see some of them leave as soon as their contracts expired. Last year, it paid $10 billion to buy Bankers Trust Corp. of New York, which shocked many analysts because other U.S. investment banks seemed better choices.

Deutsche has long believed that investment and commercial banking offer a more profitable future than retail banking, but has been unable to aggressively tackle the high costs of its retailing divisions because of union resistance, as well as disagreement within its own ranks.

Now, Deutsche Bank and Dresdner would combine their investment-banking and corporate divisions, and are expected to expand their efforts in electronic banking. Wells Fargo&Co. of San Francisco emphasizes electronic banking, but most banks continue to serve customers both with traditional brick-and-mortar branches and with new Internet technology. "If they are selling their retail business and moving to an e-platform, that's a fairly bold move," said Matthew Czepliewicz, banking analyst at Salomon Smith Barney Citibank in London.

Hilmar Kopper, chairman of the supervisory board of Deutsche Bank, said in an interview that the traditional retail business has been a drag on the bank's profitability. "We are leading in Internet banking, but we have too much bricks and mortar," he said. "We are unable to realize retail [profit] margins."

Mr. Kopper didn't comment specifically on the merger plan, but pointed to the fragmented German banking market to show the need for consolidation. The four largest private-sector banks have just 17% of the retail market in Germany. About one-third is held by the Sparkassen, or public-sector savings banks. German unions promised strong opposition to the merger plan.

As part of the merger, the two companies are expected to unveil more than two billion euros in annual cost savings, according to people familiar with the situation. The deal is also expected to lead to massive layoffs. Analysts estimated that as many as 15,000 jobs, or 20%, of the combined work force could be eliminated. Most of the cuts would be in London and in Germany, analysts said.

"We're against these megamergers and we'll make that very clear when the supervisory board meets to approve this," said Uwe Foullong, banking adviser to the board of Germany's HBV banking and insurer employees union, who said the plans caught labor representatives by surprise. "We just don't see how any of this makes economic sense. No one's shown us the concept for this plan."

The merger was largely driven by Allianz, people familiar with the situation said. Dresdner and Deutsche had talked last year about combining their retail banking businesses, but those talks didn't get far, these people say. The talks heated up again at the beginning of this year and gained momentum after Hans Eichel, Germany's finance minister, unveiled the taxreform measures.

One of the reasons this particular deal was more attractive than a long-rumored merger between Dresdner and less-wellknown Bayerische Hypo-& Vereinsbank is that a Dresdner-Deutsche combination gives Allianz a cleaner distribution network for its insurance products, people familiar with the situation say. A Dresdner-Vereinsbank merger would have been complicated by the role of Munich Re, which owns just over 5% in Vereinsbank and 25% of Allianz. Allianz, in turn, owns 25% of Munich Re.

The Deutsche-Dresdner merger would allow Allianz to greatly expand its distribution by giving it access to Deutsche's 3,800 branches and one of Europe's largest direct and Internet banking businesses. Analysts estimate the arrangement would allow Allianz to pitch its non-life and life insurance products to more than 10 million more retail customers.

At the same time, Allianz would gain DWS, Deutsche Bank's retail asset-management arm, in a swap with some or all of its 5% stake in Deutsche Bank. Unless DWS were spun off, a combination between DWS and DIT, Dresdner's assetmanagement arm, would likely draw heavy scrutiny from antitrust authorities. DWS alone has more than 25% of the German mutual-fund market.

By turning DWS over to Allianz, Deutsche Bank and Allianz would also further disentangle their crossholdings, plus give Allianz a firmly established third-party asset-management business to add to its own fledgling operations.

Until now, German banks have been on the sidelines of the consolidation sweeping the industry in the rest of Europe. Last year, for example, domestic banking deals in Germany amounted to $583 million, compared with $23.6 billion in France, $22.8 billion in Italy and $22.7 billion in Spain, according to Thomson Financial Securities Data.

One of the reasons for this is the lock on the domestic German banking market held by the public-sector banks, which are largely owned by state governments. Plus, due to the high capital-gains tax on selling corporate stakes, banks and insurance companies were unwilling to use their cross-shareholdings in any deals.

Ultimately, the banks likely realized they have to act, or risk falling further behind in the race for size, analysts said. "We need consolidation in the banking market," Mr. Walter said in a speech last year. "The only option we don't have is to go on like we have."


  1. If there is such an overlap between the operations of Deutsche Bank and Dresdner Bank, a merger would certainly make sense.  Explain why the merger is taking place, only now, and not before.
  2. If the merger is one between equals as the second article describes it, why would Deutsche Bank pay a premium of 20% for shares of Dresdner Bank?
  3. "The two banks' retail businesses, including the banking, asset-management and insurance operations, will be split and taken public as early as this year, people familiar with the proposed merger say."  What would be the point of merging, if the combined firm is going to be split up almost immediately?
  4. What is the impact of the system of cross-shareholdings on corporate governance in Germany?  How will the current merger affect corporate governance?
  5. Does it surprise you that the unions are against the mega-merger?  Explain.
  6. What is the role of Allianz in the merger?