All Eyes Are On Commerzbank

A takeover of Germany's No. 3 bank could bring far-reaching change in the industry

It took Frankfurt's tight-knit financial community totally by surprise. On Nov. 12, Commerzbank (CRZBY ), Germany's third-largest publicly quoted bank, announced it had written off the value of its holdings in a string of companies by $2.7 billion and planned to issue 53.3 million new shares that same day to buttress its core capital. These are radical moves for a German bank. What's going on? Chairman Klaus-Peter Müller's explanation was that Commerz was cleaning up its $460 billion balance sheet so the sickly bank would be in a position to return to profitability. But it was clear to analysts that Commerz -- which reported a net loss of $2.6 billion for the three months ended Sept. 30 and is likely to lose $2.3 billion for the year -- was putting itself on the auction block. Senior executives don't dispute that fact. "We're not in merger talks at present," says one Commerz director. "But we probably will be by the beginning of next year."

Swirling speculation about a deal in the making has kept Commerz' share price propped up at around $18.25 since Nov. 12 despite the new equity issue and a difficult market environment. The share issue, which raised $890 million, was more than four times oversubscribed. Analysts say a merger with another domestic bank could spark a wave of consolidation, while a deal to sell out to a foreign lender would be a milestone for cross-border mergers and acquisitions in Europe. Either would shake up Germany's cozy and overcrowded banking industry. Says Jan Pieter Krahnen, professor of corporate finance at Goethe University in Frankfurt: "Commerzbank could prove the catalyst for radical and far-reaching change. It could open a pandora's box."


Of course, Frankfurt-based Commerz has been the subject of takeover speculation for a decade or more, so news that the bank is in play is being greeted cautiously in some quarters. In recent years, Commerz has discussed possible deals with compatriot Dresdner Bank, which has since been bought by insurance giant Allianz (AZ ), and UniCredito Italiano, the Milan-based financial-services dynamo. Other prospective acquirers were all put off by the opaqueness of the bank's accounts, its poor performance, and management's reluctance to be the junior partner in any deal. Those are exactly the issues the bank is promising to set right in its latest restructuring. Yet it remains to be seen whether Germany can swallow its pride and accept the sale of a 133-year-old national institution such as Commerz. Skeptics note that former CEO (and current supervisory board chairman) Martin Kohlhaussen fought a long-running battle with dissident shareholders who wanted to force the bank into a merger in 2000.

But bank insiders say that Commerz' management -- Kohlhaus-sen included -- has finally accepted the inevitable. It has repaired its balance sheet partly because it wants to negotiate any deal from a position of strength, they say. On its own, the bank would find it tough to generate the 8% returns needed to cover the cost of its capital, let alone the 10%-plus that its shareholders, such as Munich Re, the world's biggest reinsurance company, and German investor group WCM, say they are looking for. That's largely because, with a market capitalization of just over $11 billion, it is neither big enough to compete with larger rivals such as Switzerland's UBS (UBS ), nor small enough to be a successful niche player, like Germany's Depfa Bank PLC. "Commerzbank is stuck in the middle," says Jörn Kissenkötter, a banking analyst at M.M. Warburg & Co., a private bank in Hamburg. "That's one reason it has been so unsuccessful."

For prospective suitors keen to expand in Europe's largest economy, however, Commerz is sized just about right. That's especially true now that the bank has tidied up its finances. With more than 700 branches and almost 6 million customers, Commerz would give a foreign bank a solid base from which to build up retail operations. It's also a major lender to the Mittelstand, which make up the backbone of the German economy. Because Mittelstand companies are turning increasingly to the capital markets for financing, Commerz' ties would be of immense value for banks with investment banking ambitions. "Anyone who wants to buy in Germany now has to think seriously about Commerz," says a London-based investment banker, who says he has been approached by U.S. and European banks. "It's the obvious partner."


One major off-putting factor: Public-sector banks, which can raise capital cheaply thanks to government guarantees, account for around 50% of lending. But some bankers see big opportunities over time, noting that the European Union is forcing the public-sector banks to give up their privileges by 2005.

So the predators are circling -- among them BNP Paribas, Royal Bank of Scotland, and Credit Suisse. Citigroup is also said to be interested. The word in Frankfurt is that Citi's Sanford I. Weill recently asked Roland Koch, the Prime Minister of Hesse, about German attitudes toward a foreign takeover of Commerz. Koch told him there would be no objection, his spokesperson said. Guido Hoymann, an analyst with Metzler Bank, a private bank in Frankfurt, thinks an American or British partner would be best: "They would build up credit cards and consumer credit, which is where the best opportunities are."

Still, plenty of observers in Frankfurt believe that a "German solution" -- probably a merger with HVB Group -- is most likely. HVB won't comment, but a merger with another German bank would generate cost savings for the two partners and spur the consolidation of the German financial-services sector. A decision to join forces with a foreign bank, on the other hand, could encourage a wave of other, long-awaited cross-border deals. Either way, Commerzbank's sudden makeover has Europe's bankers buzzing.

By David Fairlamb in Frankfurt

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