Meetings of the Munich financial press club are normally sleepy affairs, involving a handful of local journalists meeting local businessmen. But on April 11, this parochial forum has become an international media inquisition. Around 70 reporters and editors cram into a long, narrow room at Munich’s City Hilton hotel to grill one of the key protagonists in the abandoned Deutsche-Dresdner merger.
Paul Achleitner, the 43-year-old Austrian who became finance director of Allianz in January, sits on the end of a panel of Allianz representatives and tries to exude relaxed affability. Two of his fellow board members give worthy speeches on the evening’s ostensible topics for debate: pensions, asset management and equity culture in Germany. While impatience grows among the press corps, Gerhard Rupprecht, head of the Allianz life insurance business, drones on about demographics. Achleitner then gives his own speech, on Allianz’s conversion to shareholder-value. He ends it with an ironic twist: “Now I’m intrigued to see whether we will manage to discuss old-age provision for 30 minutes.”
No such luck. The German press, uncomprehending about the shambolic failure of the attempted bank merger, are out for blood. Is this a personal disaster for Achleitner, whose quest to shake off Allianz’s underperforming equity holdings included offering its 22% stake in Dresdner Bank to Deutsche Bank? Not at all, he replies: the strategic concept behind the Deutsche-Dresdner deal was fine, the breakdown in talks between the two banks was due to human factors beyond his control.
Allianz’s role was confined to the future of Deutsche and Dresdner’s retail operations, says Achleitner: Allianz was interested in creating a consolidated distribution network through which it could sell services including fund management. The problems with the merger arose on the wholesale side: specifically, Deutsche’s resistance and Dresdner insistence on integrating the two sides’ investment-banking operations.
The press corps is having none of it. Achleitner was until recently a high-flying investment banker, head of Goldman Sachs’ business in Germany: he of all people should have foreseen the issue. And since the wholesale schism brought down the retail accord, the former was, whatever Achleitner might now say, Allianz’s concern.
Joachim Faber, head of asset management at Allianz, jumps to his colleague’s defence: “Allianz can’t sit at the table [with the bosses of Deutsche and Dresdner] 24 hours a day and hold their hands.”
Discussions with everyone
Questioning turns to what Allianz will do with its large holding in Dresdner Bank. Is it true Allianz has had expressions of interest from major international banks? Achleitner tells of discussions of the sort “that everyone holds with everyone,” but he is aware of no concrete offer for Dresdner. He also explains that although talks are still being held on retail cooperation between Allianz and Deutsche Bank, the chances of an alliance between the insurer and Deutsche’s mutual-fund company DWS are “extremely low”.
The beleaguered finance director insists that while losing the Deutsche-Dresdner tie-up is a disappointment for Allianz, “happily we live in an environment rich in options.” What the other options are remains vague, but none can possibly be as good as putting together the two famous old banks.
The Munich insurer needed this particular merger badly. To understand why, you have to attend more closely to the parts of the Hilton press conference that no one listened to: those worthy speeches about asset management.
An emerging market
Germany has long been a sleepy market for retail financial services. In 1998, a relatively high 39% of household financial assets were in the form of bank deposits. That compares to 18% in the US and 19% in the UK. With much of the remainder of their savings Germans bought staid products such as with-profits insurance policies that were more about protecting the value of their assets than growing them.
| Paul Achleitner | ||||||
But Germans have recently noticed, in a big way, that there are more exciting things to do with their money. Faber observes that the stock market has suddenly joined traditional obsessions with cars and soccer as the staple of conversation in Germany’s pubs.
Claire Gouzouli, director of First Consulting and an authority on financial services in Germany, says that Allianz’s conservative image leaves it inadequately positioned to cope with this changing retail culture. “Germany is an emerging market for financial services, but countries that have slept for long enough often perform a leapfrog. Germans have gone from bank deposits to far-eastern equity funds. Allianz is afraid of being leapfrogged out.”
The insurer’s traditional businesses, like insuring property and life, have mediocre growth prospects. The two financial products that are taking off in Germany are equities and mutual funds. Allianz knows it has to expand on its slender 2% market share in German fund management if the country’s conversion to equity culture is not to pass it by.
In its attempt to become a mutual-fund power, Allianz faces two awkward problems: its brand, and its distribution system. Germans view insurers as people who do conservative things with your money. For their increasingly equity-oriented savings habits, they prefer well-known fund managers like DWS or Dresdner Bank’s Deutscher Investment-Trust (dit). Anglo-Saxon fund managers like Fidelity, Pioneer, Barings, Flemings, Templeton and Mercury have also attracted many German clients: mutual funds are arguably foreigners’ best retail-finance business in Germany.
Faber tells Euromoney that Allianz has no image problem. Market research shows that Germans know the Munich group is more than just an insurer. But Allianz’s thwarted desire to get its hands on the powerful DWS suggests it thinks its fund management franchise needs beefing up.
Worse, Allianz sells its products in the wrong places to tap the growth of mutual funds. It has limited and non-exclusive bancassurance relationships, including ones with Dresdner Bank, HypoVereinsbank and Bavaria’s cooperative Volksbanken. But it predominantly relies on self-employed agents.
These intermediaries can be found in any typical small German town. They are often family businesses, led by a member who knows the town’s inhabitants by their first names and is trusted by clients who go to them for unsophisticated products like household insurance. Some sell a small number of competing insurers’ policies, but most bother only to distribute products made in Munich by Allianz.
Such local agents can work with little in the way of qualifications, compared with the strictures imposed on independent financial advisers (IFAs) in the UK. In Germany, as opposed to Britain, the product rather than the salesperson has been tightly regulated. As one analyst of the German insurance industry says: “Any monkey can be a financial adviser.”
This makes Allianz’s vast network of agents ill-suited to selling sophisticated financial services such as equity funds. For that, Germans trust their banks. In 1998, 74% of mutual funds sold in Germany were distributed through bank branches, and only 15% through financial advisers. (In the UK, advisers accounted for 46% of funds sold, and banks for only 12%.)
Over the years, Allianz’s agents have consistently fought changes imposed by their giant partner in Munich. Most recently, they scowled at the introduction of unit-linked insurance policies where, in contrast to the traditional with-profits arrangement, the policyholder gets the actual return on investment, rather than a discretionary dividend. In Germany, this is considered adventurous, like a quasi-mutual fund; but the product has taken off recently. The main beneficiary has been Deutsche Herold, owned by Deutsche Bank. Allianz has only distributed unit-linked policies of its own since March 2000, thanks to the intermediaries’ conservatism. Unsurprisingly, Allianz demanded the acquisition of Herold from Deutsche Bank as part of the terms for the failed bank mega-merger.
Faber defends Allianz’s distribution agents against the charge that they are backward-looking and financially uneducated. “We are extraordinarily glad to have this network of representatives,” he says, noting that Citibank and Deutsche Bank 24 (Deutsche’s retail brand) are hiring mobile advisers to win more market share. Faber says that today’s generation of agents are less conservative than their predecessors of five or 10 years ago, thanks partly to Allianz’s efforts to retrain them. This training programme, however, turns out to be a provision of centres of expertise which the agents can turn to for advice if they feel so inclined.
Escape from the agents
The planned merger between Deutsche Bank and Dresdner Bank spoke volumes about what Allianz truly thinks about its reliance on self-employed salespeople and its existing product range. As the condition for granting Deutsche the hand of Dresdner, Achleitner and his chairman Henning Schulte-Noelle extracted three prize assets. The two banks’ retail networks would have been fused and spun off to create a franchise under the strong Bank 24 brand, with a sensible market share amid Germany’s anachronistically fragmented bank market. Allianz would have had effective control of Bank 24 via a 32% stake.
On top of Bank 24, Allianz would have won leading fund manager DWS and the thriving niche insurance products of Deutscher Herold. In short, Allianz would have gained an enormous, tame bank network, and a stronger set of products with growth prospects to sell through branches. It would have leapfrogged beyond its dependence on small-time sales agents and simultaneously become the biggest fund manager in Germany.
Now that Deutsche and Dresdner have cancelled their wedding, no other available deal promises Allianz the same jump from its shortcomings into an ideal strategic positioning. Intriguingly, a source familiar with the thinking of Allianz’s executive board believes the key figures at the insurer are refusing to consider the Deutsche-Dresdner deal as buried forever. Within a few months, Dresdner Kleinwort Benson – the investment bank whose fate caused its parent to fall out with Deutsche Bank – may have imploded through staff resignations and clients’ loss of confidence. The main obstacle to the deal may therefore have eliminated itself.
Meanwhile, several of the faces on the executive board of Dresdner Bank at the time of the aborted merger will have been replaced, including chairman Bernhard Walter. It occasionally happens that merger deals motivated by perceived industrial logic are undone by personality clashes; it also happens occasionally that the latter conflicts are overcome and the deal resurrected. The on-again merger between pharmaceuticals groups Glaxo Wellcome and SmithKline Beecham is such a case. And today’s merger intentions between the London and Frankfurt stock exchanges follow a failure to reach agreement on a joint venture in the summer of 1998, when comments by a certain Rolf Breuer, now chairman of Deutsche Bank, on which settlement system would win out contributed to alienating the London side.
It should thus surprise no one if, when the dust has settled, Allianz tries to put together Deutsche and Dresdner once again. The question is whether Deutsche could stomach a second attempt. Even if the investment-banking issue had shrunk to manageable proportions, many analysts and investors felt that Deutsche was giving away too much value under the merger proposal. A falling share price reflected the belief that Deutsche was overpaying for Dresdner Bank and receiving too little recompense for the loss of DWS and Herold.
Paying a premium to get a deal done is all very well, but Deutsche appeared to be paying a double premium, while Allianz had negotiated a strategic and financial humdinger.
With Dresdner Bank reduced in value, Allianz would struggle to extract such good terms from Deutsche Bank. On the other hand, Deutsche still needs a solution to its main strategic problem: the pathetic returns and low market share of its retail branch network.
Hypo says no
Allianz’s other main bank shareholding, besides its 22% in Dresdner and 5% in Deutsche, is an 18% stake in Bavaria’s HypoVereinsbank. Putting together Dresdner and Hypo would meet Allianz’s needs in some ways: it would create a consolidated and captive bank network to improve distribution; and it would add to the insurer’s fund-management business through Dresdner’s dit and HypoVereinsbank’s HVB Asset Management.
But HypoVereinsbank chairman Albrecht Schmidt has in the past rejected a merger with Dresdner. He objects to its pretentions at international corporate and investment banking. Instead, Schmidt’s bank focuses on retail banking and a large commercial and residential mortgage business. This real-estate focus is as strategically irrelevant to Allianz as investment-banking is to HypoVereinsbank. Allianz appears reluctant to use its large shareholding and potential power to engineer a change of direction at Hypo.
Achleitner defers to Schmidt’s managerial independence and expresses respect for the clarity of his business focus. “Strategy is also about what you don’t do. I personally find [HypoVereinsbank’s] strategy convincing and logical. As an investor it is not our place to bring about something that the management doesn’t want.”
If Allianz abstains from bullying HypoVereinsbank into a merger, there remains only Commerzbank among the leading power of German banking. A Commerzbank-Dresdner deal would not achieve as much for Allianz as the scrapped Deutsche-Dresdner formula. The revenue synergies from mutual funds and online banking would be more limited. Commerzbank’s fund management business Adig and its e-bank Comdirect are smaller and less formidable than DWS and the internet platform of Bank 24. But the cost synergies from fusing branch networks would be roughly the same in both deals.
Could this inferior deal for Allianz appeal to the banks involved?
A neat U-turn
On April 16, Commerzbank chairman Martin Kohlhaussen, long attached to his institute’s independence, smoothly performed a big U-turn. Kohlhaussen expressed the desire to settle the destiny of his bank before he retires in May 2001; his preference was for a “convincing” merger with another German bank, he said, describing Dresdner as a potentially good match.
Early signals from Dresdner under new chairman Bernd Fahrholz suggest that the bank wants to rebuild its tattered reputation and market value before making any further M&A moves. Three days after Commerzbank’s come-on, Dresdner said it just wanted to focus on serving its clients.
However, that very day, a group of experienced German corporate raiders revealed a stake of 9.9% in Commerzbank, with the intention of buying a further 10%. Their front man was former Dresdner board member Hansgeorg Hofmann well-regarded by Dresdner’s Fahrholz and investment banking board member Leonhard Fischer. It seemed unlikely that Commerzbank’s new major shareholder would just sit and wait.
This took the initiative away from Allianz. The holder of so many influential stakes in corporate Germany is finding it harder than expected to unravel its complex set of alliances and replace them with an updated business strategy.
Achleitner is finding that the pursuit of shareholder value from inside Deutschland AG is laborious work.
