Henning Schulte Noelle: Europe's Player
Henning Schulte-Noelle looks and acts like a money man from Europe's old school, preferring anonymity to notoriety and efficiency over buzz. He runs the giant insurer Allianz from unassuming buildings behind Munich University. Allianz has made no hostile takeovers, no splashy deals to grab headlines--just an inexorable expansion to markets as diverse as France and Vietnam. Today Allianz is a financial powerhouse, yet one that has managed to remain nearly invisible. "It's what insurance clients expect," confides Schulte-Noelle over Kaffee und Kuchen in the muffled calm of his office.
The mounting tumult in Corporate Europe is about to change all that. The Continent is remaking itself. Last year, a record $1.3 trillion in deals kicked off a huge restructuring of companies in industries as diverse as oil and telecom. But whole swaths of corporate Europe remain untouched, and a variety of factors--from politicians' growing acceptance of cross-border deals to the rise of a euro bond market--are making reform easier than ever. A New Europe is emerging. And Schulte-Noelle will be a singular force in its creation.
The Allianz chief has the tools at hand to shake everything up. First, Schulte-Noelle, 57, is a member of the German Establishment. If he presses for a restructuring of corporate Germany, people will listen--especially since Allianz has major stakes in German companies from chemicals giant BASF to Dresdner Bank, stakes Schulte-Noelle can use to influence the next wave of mergers and deals. That's not counting the big holdings Allianz has accumulated over the years in banks and companies in the rest of Europe as well.
IN THE CENTER. On top of that, Allianz has $370 billion of assets under management. With such vast resources at hand, and a market capitalization of over $80 billion, Schulte-Noelle's clout in Europe Inc. is unrivaled. "Allianz is like the spider at the center of the web," says Ralf Dibbern, an insurance analyst with M.M. Warburg, a private bank in Hamburg. "It can pull financial strings across the Continent if it wants."
And the unassuming Schulte-Noelle wants to. He is not some reluctant actor in Europe's unfolding corporate drama. On the contrary, he wants to be a player, maybe even the player. He knows that Allianz, powerful as it is, cannot afford to stand still while competitors as diverse as Citigroup, GE Capital, and AIG of the U.S. or France's AXA pursue their ambitions to be global superpowers. He wants to build Allianz up to surpass his rivals in insurance and fund management. And he needs to deliver stellar returns to his shareholders.
That means jacking up Allianz' return on equity by two-and-a-half percentage points, to 15%, a huge stretch for a mainline insurer. To get there, Allianz must buy companies that will strengthen its core operations, and learn to wheel and deal with its huge stock holdings to get the kind of hot capital gains that delight shareholders.
No wonder market watchers figure this is the year that Schulte-Noelle will pull Allianz out of the shadows. He could launch the long-awaited consolidation of German and European banks. One scenario: Schulte-Noelle could force a merger between Germany's second- and third-biggest banks, Bayerische Hypotheken und Vereinsbank and Dresdner Bank, in which Allianz has strategic stakes of 17.4% and 21.7%, respectively and which it is very unlikely to sell. Such a combination would threaten the hegemony of Deutsche Bank over Europe's richest market.
Another possibility is even bolder. Schulte-Noelle could fold both BHV and Dresdner into Allianz itself. That would create a Citigroup Inc.-style colossus--and by far the biggest financial services outfit in Europe.
At all events, market-moving deals won't be confined to Germany. Allianz could put banks in Spain, France, and Italy into play, and decide who gets to own and run key parts of European industry. Schulte-Noelle could even supercharge the $2 trillion euro capital markets by channeling more Allianz funds into the Continent's burgeoning corporate bond market. "When an investor with our appetite demands a new product [like corporate bonds], investment banks are usually very keen to supply it," says Joachim Faber, the Allianz board member in charge of asset management.
Europe Inc.'s acceptance, even appetite, for restructuring will make it easier for Allianz to exercise its clout. But so will an unexpected tax break from Germany's Social Democratic Party-led government. Since the 1960s, Allianz has built up big stakes in German companies, mostly blue chips. Selling them off was never really an option since stiff capital gains taxes of 50%-plus threatened to wipe out most of the profits. But on Dec. 23, Chancellor Gerhard Schroder suddenly changed the game by promising to abolish the tax.
If the repeal comes into force next Jan. 1, as expected, Allianz will be sitting on a potential tax-free windfall of more than $40 billion. Simply selling off some of its German portfolio would raise a storm of cash. Just three of its major holdings--pharmaceuticals company Schering, chemicals giant BASF, and energy conglomerate RWE--are worth $6.1 billion.
NO MORE CAUTION. The ensuing sale could be huge. Schulte-Noelle will definitely want to get rid of Allianz' remaining 5% stake in Deutsche Bank, say analysts. The two companies were once close. But the relationship soured in the early 1990s when Deutsche muscled into insurance underwriting. It died completely in 1996 when Deutsche moved to bid for Bayerische Vereinsbank. Allianz' shares in department store chain Karstadt and tiremaker Continental should go pretty quickly, too.
Armed with a huge war chest, Schulte-Noelle could buy just about any insurance or fund management company that's up for sale anywhere in the world. And he will certainly be on the prowl. Though Allianz is already a formidable presence in the insurance industry (table, page 45), Schulte-Noelle wants to turn Allianz into a truly global business. He'd like to make it a major player in third-party fund management. He wants to list Allianz on Wall Street. In short, he wants to build a new Allianz for the New Europe. "If you're not one of the leaders shaping the environment, then you could end up being a victim," says Schulte-Noelle.
He has already transformed Allianz, a quintessentially cautious German institution, into an international force. He even started up a private equity operation that invested $100 million in America's Fairchild Aerospace Corp. in late December. But much remains to be done. Allianz still depends for an alarming two-thirds of its annual gross revenues on property and casualty underwriting, a traditionally volatile business that is growing much slower than the more lucrative life and medical insurance sector. In November, Allianz was challenged for its top position in world insurance rankings when France's AXA bought control of Japanese insurer Nippon Dantai. It is nowhere near the top five in big markets such as Britain and the U.S.
Worst of all, in a major strategic flub, Allianz allowed archrivals AXA and Zurich Financial Services in Switzerland to steal a march in asset management--a business widely forecast to boom if Europeans and Asians rush to invest in private pensions and switch their savings from bank deposits to equity and bond markets. Until Schulte-Noelle decided to shell out $3.3 billion for 70% of PIMCO Advisors LP in Newport Beach, Calif., in September, Allianz managed just $45 billion of assets for third parties such as pension funds and foundations. The PIMCO deal multiplied those assets sevenfold to over $300 billion.
Luckily for Allianz, Schulte-Noelle seems to have a knack for making big moves at the right psychological moment. Since the former lawyer and 25-year company veteran became CEO in 1991, he has pushed through 11 major deals and 50 mergers among Allianz subsidiaries. "Allianz may have been a sleeping giant before Schulte-Noelle took over," says the chief financial officer at a rival. "But now it's wide awake and has plenty of weight to throw around." The $4.6 billion acquisition of a 51.6% stake in French insurer Assurances Generales de France in 1998 was a vintage play. Schulte-Noelle first approached AGF after it was privatized in 1996. But the French insurer said it wanted to remain independent; Schulte-Noelle said he didn't want to make a hostile bid. Italy's Generali did, though. Then AGF turned to Schulte-Noelle to rescue it. He bought off Generali with an Allianz stake in another insurer and took AGF for himself.
Schulte-Noelle has been active elsewhere. He brokered Germany's first megabanking alliance, between Bayerische Hypotheken und Wechsel Bank and Bayersiche Vereinsbank, in 1997. Last year he brought together VIAG and VEBA, two of Germany's leading utilities. Such maneuvers persuade analysts and rivals alike that he may get what he wants. "Allianz will probably be the only German financial company that will successfully go global," says a senior investment banker in Frankfurt.
"DRAMATIC." Certainly, Schulte-Noelle isn't leaving that to chance. He hired Paul Achleitner, 42, the mergers and acquisitions specialist from Goldman, Sachs & Co.'s German offices, to become Allianz' CFO on Jan. 1. Achleitner, an Austrian with a Harvard MBA, made his--and Goldman's--name in Europe by privatizing large tracts of East German industry after communism's collapse in 1989. More recently, he was behind the privatization of Deutsche Telekom, and a key fixer in the $36 billion merger between Daimler Benz and Chrysler Corp. Putting the Continent's premier investment banker in charge of Europe's largest portfolio of industrial and financial holdings has set pulses racing already. "[They must be] planning something pretty dramatic" says Tom Bennett, an analyst in the London office of Banque Paribas.
You can bet your last euro on that. Achleitner wouldn't have given up one of Europe's best-paid power jobs just to keep watch over Allianz' books. Confidants say he defected because he thinks the insurer will play a pivotal role in restructuring Corporate Europe. He knows he has to make better use of Allianz' resources very quickly. Which means selling off some of those industrial stakes and putting the money raised to more productive use. "That's why the group's shares rose almost 3% on the day Achleitner was appointed," says Paribas' Bennett. They've gone up another 30% since then.
Allianz began building its portfolio in the 1960s because the company was required by law to invest the bulk of its premium income in German mark assets. These days, though, Allianz' nest egg is not only unwieldy, it is far too concentrated in Germany--a risky proposition now that the euro is in place. In the past three years, Allianz has sold stakes in a number of companies, including chemical producer Goldschmidt and Frankfurt's BHF-Bank. It has also swapped a number of shares with Munich Re, in which Allianz has a 25% strategic stake, and pushed printing-press manufacturer Heidelberger Druckmaschinen to go public. "We already are actively managing our investments," says Schulte-Noelle. "We ask lots of questions behind the scenes. But we don't talk about it."
Indeed, the new Allianz is beginning to take shape in other ways, too. A 17-strong international executive committee of top managers, half from outside Germany, now act as a kind of brain trust for Schulte-Noelle. He abandoned opaque German accounting rules in favor of international standards. Last year, he introduced stock options for Allianz' 350 top executives. And he published details of Allianz accounts, such as the value of hidden reserves which German banks and insurers are allowed to maintain, long before he was required to.
As Schulte-Noelle unfurls his strategy, his dealmaking will surely grab attention in Europe. But his real focus will be the nitty-gritty of building up his insurance business. He has to plug some significant gaps to make Allianz the dominant global player. Allianz is a leading underwriter in most euro zone and Central European countries. But it is weak in the important British and American markets: Its Cornhill Insurance unit doesn't rank in Britain's top five, while in the U.S., Allianz is not even among the top 10 insurers--and way behind market leaders such as Prudential Insurance Co. and Allstate.
The Munich giant's business mix needs attention, too. Less than 40% of Allianz' premiums come from the lucrative life and health business; at AXA, 72% do, and at Generali, 65%. That's why Schulte-Noelle laid out $540 million to buy USA Life in Minneapolis and $270 million for First Life of South Korea last year. Then, in November, Allianz set up in Dublin an underwriter of global health-care coverage for expatriates--which it claims is the first truly global health-insurance company.
Meantime, Schulte-Noelle is well on his way toward achieving other goals, such as making Allianz No. 1 in the global industrial-risk insurance business, and a leading foreign insurer in emerging markets. Last year, Allianz set up shop in China, launched a subsidiary in Vietnam, acquired First Life of South Korea, and established a joint venture with President, a Taiwan conglomerate. Some Allianz President policies are now marketed through 7-Eleven stores in Taipei.
SCAVENGER HUNT. If Allianz is to have any hope of hitting his 15% return-on-equity target, Schulte-Noelle needs to build up fee income from third-party asset management fast. Before Schulte-Noelle had even opened negotiations to buy PIMCO, archrival Zurich had acquired three major asset management companies in four years and was managing more than $240 billion for third parties. The PIMCO deal propelled Allianz ahead of Zurich and close to AXA--for now. But that could change again. All three companies are still on the lookout for acquisitions. Zurich, in fact, may well snare London-based asset manager Gartmore Asset Management, that National Westminster Bank has put up for sale.
Schulte-Noelle, of course, will soon have plenty of cash to snap up just about whatever asset management or life insurance firm he wants. And he'll certainly be looking closely at such businesses in the U.S. and Britain. The real drama will begin when he starts to take apart Allianz' huge investment portfolio with Achleitner. As they sell or swap shares in companies across the Continent, they could do more than anyone else to shape the New Europe. Allianz' power, not to mention its purse, will be unmatched. Schulte-Noelle is about to lose that conservative image that he's so carefully cultivated for good.