Coming Soon: Europe's First $1 Trillion Bank?

A Dresdner-Hypo union would create a global player

Get ready for Europe's first $1 trillion bank. If discussions between Bayerische Hypotheken-und Vereinsbank and Dresdner Bank, Germany's second- and third-largest lenders, come to fruition, that will be the result. Neither bank has acknowledged publicly that any serious negotiations are taking place, but many analysts in Frankfurt think it's a done deal.

If they're right, Deutsche Bank, Germany's biggest, would likely retaliate with another merger, or maybe even a hostile bid for Dresdner. And if they aren't, the frenzy could spur other banks to look for partners. Europe's long-awaited orgy of banking mergers is under way.

Consider the deals that are already reshaping Europe's banking landscape. On Oct. 19, Spain's Banco Bilbao Vizcaya confirmed that it would acquire Argentaria Caja Postal y Banco Hipotecario; the new bank will be one of Europe's top five. Earlier, Bank of Scotland PLC launched a $35 billion hostile bid for National Westminster Bank, and Banca Intesa in Italy unveiled plans to take over compatriot Banca Commerciale Italiana. Even HVB itself is the product of a two-year-old merger.

The introduction of the euro currency and creation of a single capital market are driving consolidation. Banks need bigger balance sheets to compete effectively. Also, European investors want better shareholder value--forcing banks to cut costs and boost meager profits. Merging is the easiest way for banks to do that.

Indeed, a merged Dresdner-HVB could be a global player as well as a top-flight European bank. The two could take advantage of cross-selling opportunities: HVB is big in the lucrative mortgage business. And HVB's Internet banking subsidiary is one of Europe's most successful. Dresdner, by contrast, has had a major presence in European investment banking since acquiring Britain's Kleinwort Benson in 1995. And it also possesses a world-class asset-management franchise.

There is another important factor favoring a union: Allianz, the giant Munich insurer, owns 22% of Dresdner and 17% of HVB. Allianz CEO Henning Schulte-Noelle wants to improve the company's returns on its stock portfolio. Bringing together Dresdner and HVB would be one way to do that. "Whatever happens, Allianz will have the final say," says Dieter Hein, a banking analyst with Credit Lyonnais in Frankfurt. "My instinct is they will go for it."

Still, big hurdles stand in the way. HVB's CEO Albrecht Schmidt won't finish restructuring following the bank's own merger until early next year, which is why Hein believes an alliance isn't likely before then. Meanwhile, Dresdner CEO Bernhard Walter could have trouble selling the deal to his top managers in Frankfurt. Several would prefer to expand Dresdner's international and investment banking.

Then, there is the question of how Deutsche would react. Though he is still digesting last year's acquisition of Bankers Trust, CEO Rolf-Ernst Breuer opened discussions with Dresdner in September about merging retail operations. The talks got nowhere then. Still, some bankers think Breuer may bid for Dresdner. "A merger between HVB and Dresdner would pose a significant competitive threat to Deutsche. Breuer would probably pull out all the stops to prevent it," says Bryan Crossley, a banking analyst at ABN Amro Hoare Govett in London.

At the very least, say analysts, Breuer might try to negotiate a merger with Commerzbank, Germany's fourth-largest private-sector bank. But Commerz CEO Martin Kohlhaussen has said he wants to keep his bank independent. Which may bring Breuer back to Dresdner. An alliance between Deutsche and Dresdner would create a global behemoth and yield vast savings. The power to make or break a deal is in the hands of Allianz's Schulte-Noelle. He might just like the idea. After all, Allianz not only owns a significant chunk of HVB, it also has a 5% stake in Deutsche.

But whether Dresdner ends up with HVB or Deutsche, things will never again be the same in the German banking industry. Consolidation has begun with a vengeance. And in phase one, Allianz has a big say in how it unfolds.

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