"A Fight To The Finish" Over Commerzbank

The tussle may have big repercussions

It's high noon at Commerzbank, Germany's fourth-largest bank. Chief Executive Martin Kohlhaussen is facing off against corporate raider Hansgeorg Hofmann, who heads up a German holding company called Cobra that is now the bank's largest shareholder. Hofmann wants to push Commerz into a merger to boost its share price; Kohlhaussen is committed to keeping the bank independent. "This is going to be a fight to the finish," says a banker who is close to the action.

The battle for Commerz also pits Henri de Castries, the new chief executive of French insurance giant AXA, against archrival Gianfranco Gutty, head of Italian insurer Assicurazioni Generali. AXA needs a stronger distribution outlet in Germany and is eyeing Cobra's 17% stake in Commerz. Generali, which already owns 5.25% of the bank, sells nearly $1 billion worth of insurance policies a year through Commerz' branch network and is determined to protect its interest. "The implications for the distribution of insurance products are very significant," says Guide Hoymann, an analyst at B. Metzler, a private bank in Frankfurt. "Generali has a very strong interest in keeping Commerzbank out of its rivals' hands."

Whatever the outcome, the battle for Commerz could transform Germany's and Europe's financial landscape. If Hofmann finds a domestic partner for Commerz, he may trigger the long-awaited consolidation of Germany's fragmented banking system, still reeling after a proposed megamerger between Deutsche Bank and Dresdner Bank collapsed in April. If Hofmann lines up a foreign institution, even an insurer, he could encourage others to swoop down on vulnerable German players. Dresdner could be first. It is in talks with France's BNP-Paribas to deepen their longstanding relationship, which could eventually develop into a full-scale merger.

RAPTORS. Despite Kohlhaussen's conviction that Commerz can survive on its own, the bank has been a takeover target for years. With $360 billion in assets at the end of 1999 and a June 6 market capitalization of $18.6 billion, it is too small to compete as a major euro-zone bank but too large to prosper as a German niche player. Even the June 5 flotation of its online bank, comdirect, may not be enough for Commerz to fend off predators such as the Netherlands' ABN Amro. And its handling of Jupiter, the London fund management firm that Commerz bought in 1995, is drawing criticism. The bank just fired Jupiter's chairman and founder, John Duffield, after a row over the price Commerz will pay for the 25% of the firm owned by employees. Other senior staff at Jupiter, and their clients, are heading for the door.

To Hofmann this means just one thing: Commerz needs a partner, and fast. "Banks do not have too much time to reorient themselves," he says. If the bank were acquired, the share price could increase from $37, where it was on June 6, to at least $47, which Hofmann calculates is the bank's breakup value. "Shareholders would benefit significantly," he says. Cobra, with a direct 4.7% stake and options for a further 12.3%, is shareholder No. 1.

Cobra is the German offshoot of Rebon, a Netherlands Antilles-registered holding company controlled by Clemens Vedder and Klaus-Peter Schneidewind, two little-known German billionaires. Hofmann, who headed Dresdner's investment banking unit until he was forced to resign in 1997 after admitting to income tax evasion, was brought in two months ago to mastermind the assault on Commerz. Tall and imposing, he is widely regarded as one of Germany's finest investment bankers.

He certainly made an impression at Commerz's May 26 annual meeting. Hofmann told shareholders that several unnamed financial institutions were interested in Cobra's stake. Kohlhaussen accused Hofmann of making "dangerous" comments, of raising fears about a breakup, and of trying to undermine the bank's commercial strategy.

Unfazed, Hofmann says he has since had preliminary talks with several potential buyers. But he's not saying more than that. Among the institutions thought to be interested are ABN-Amro and Switzerland's Credit Suisse Group. AXA and Generali are said to be front-runners, though. None would comment.

The neatest solution would be for Generali to buy Cobra's 4.7% stake for a premium, leaving Hofmann to unwind his clients' options and exit the bank with a hefty profit. That seems to be what Kohlhaussen wants, too. "We know we have good friends in Italy," says a Commerz spokesman. "They support our strategy and they support the bank." But AXA's highly ambitious de Castries may have other ideas. The fight for Commerz is on.

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