Even Hansgeorg Hofmann, larger-than-life, engagingly jovial, and one of Germany’s few “real” investment bankers, finds it hard to conceal his disappointment. The German establishment has closed ranks and he – let’s for the moment call him the embodiment of Anglo-Saxon-style corporate finance – is left beating vainly on their Teutonic shields.
Taking a break from shield-bashing, in his home town of Augsburg, at coffee on the terrace of the Drei Mohren hotel in the September sun, Hofmann reflects on the duplicity of Germany Inc. He explains the schizophrenia: it wants financial reform – in fact major tax reforms are under way – but when it comes to bank consolidation these “overpaid workers” who run the banks will do anything to feed their egos and save their jobs.
Thus Martin Kohlhaussen, head of Commerzbank, brought in a pair of white knights, Assicurazioni Generali of Italy and Banco Santander Central Hispano (BSCH) of Spain, in an old-fashioned cross-shareholding deal to shut out Cobra, a private club of corporate raiders and speculators. Even Kohlhaussen’s friends feared he had robbed the bank of flexibility.
Hofmann is Cobra’s managing director, although Cobra wasn’t his idea. He came in, recommended by another of Germany’s “real” investment bankers and a top corporate lawyer, to give the group some gravitas.
Hofmann rose to prominence in the 1980s at Merrill Lynch then Lehman Brothers as one of the top Eurobond syndicate chiefs, trading favours among the world’s top borrowers, investors and investment banks. He reappeared at Dresdner Bank in the 1990s, rising to the managing board and handling its relationship with newly-acquired London subsidiary, Kleinwort Benson. Then in 1997 he ran foul of the German tax authorities, voluntarily put the matter right, but nevertheless had to resign. His personal wealth absolves him from the need to work, but Cobra’s mission appears to coincide with his own eagerness to see a market-driven pan-European consolidation of financial institutions.
The duo who are the driving force behind Cobra are property and asset speculator Clemens Vedder and Düsseldorf-based retail chain king Klaus-Peter Schneidewind. This is their first sortie into the banking sector, although another suspected Cobra participant, Hamburg entrepreneur Karl Ehlerding, made a 235% turn on insurance company Württembergische Versicherung between its purchase in 1995 and its sale to HypoVereinsbank in 1998. Vedder is a highly respected player who always has an exit strategy and a grasp “like the speed of sound”, Düsseldorf’s Wirtschaftswoche has written. But Vedder, who suffers from asthma, has stayed in the background. Other Cobra partners, thought to include about two dozen investors, including two institutions, have also remained publicity-shy.
On April 19, Hofmann and Schneidewind called on Kohlhaussen to inform him that they had a 9.9% stake in his bank, and intended to take it to 20%. They were a friendly investor with no ambitions for a seat on the board, they said.
Kohlhaussen pretended to be pleased. It would give the bank’s loose ownership structure some stability, he said. Commerzbank’s share price rose to e43.60 on speculation that Cobra had a secret foreign buyer. But it seems Cobra didn’t have one lined up – it was simply waiting for a bidder to emerge.
Dresdner Bank, still recovering from the fiasco of a failed merger attempt with giant Deutsche had just announced a new independent strategy and was trying to rebuild morale at its battered investment bank, Dresdner Kleinwort Benson. Its humiliated speaker, Bernhard Walter, was about to be replaced by the more businesslike, legal-trained Bernd Fahrholz.
Commerzbank approached Walter, who passed the inquiry on to Fahrholz. Fahrholz thought the combination of Dresdner and Commerzbank was at least worth examining – it would give the banks a critical mass in Europe that neither could build by itself. The banks had initially talked about this in January, before Dresdner’s abortive merger attempt with Deutsche.
But before the two banks had even started talking seriously this time around, the Wall Street Journal broke the story. In a replay of the Deutsche/Dresdner merger talks, market reaction and the relative share price strongly affected the course of the dialogue.
In May, when the talks began, both banks’ share price was around the e42 to e45 mark, making it easy to discuss a “merger of equals” and a pooling of the two enterprises without the need for goodwill payments. But the share prices weren’t destined to stay equal.
Dresdner’s had been depressed by the failed merger with Deutsche; Commerzbank’s was riding on speculative euphoria and the hope that Cobra had other suitors in the background.
But there is a major difference between Dresdner and Commerzbank: hidden reserves.
Dresdner has around e16 billion worth of industrial holdings, Commerzbank only around e3 billion. “Commerzbank is profitable but not rich; Dresdner is rich but not profitable,” is the popular saying. Because of Germany’s new corporate tax laws, announced in December, and passed rather unexpectedly through parliament by July 14, Dresdner began to look even richer. The new law allows companies to sell their non-core holdings and pay no tax on the capital gain – the tax used to be around 56%.
In theory that adds e9 billion to the realizable value of Dresdner’s hidden reserves, but only another e1.7 billion to Commerzbank’s.
As the market absorbed this new information and the Cobra euphoria grew stale, the banks’ share prices diverged. Dresdner soared towards e48 and Commerzbank languished at around e37.
Kohlhaussen nevertheless was insisting on a 53:47 valuation ratio while Dresdner and Allianz favoured a more topical 60:40.
More than once, during this time, Kohlhaussen had been stung by Cobra. On May 16, Cobra announced it had raised its stake in Commerzbank to 17%. On May 26, at Commerzbank’s annual shareholder meeting, Hofmann, representing 17% of shareholders’ voting rights, announced that Cobra would “help the bank to find a strong European partner”.
“We are seeking alliances of our own,” retorted Kohlhaussen from the rostrum, “so there is a certain conflict with what you are saying.”
Kohlhaussen was looking for ways to get Cobra off his back. He found an unlikely ally among the banking supervisors in Berlin, the Bundesaufsichtsamt für das Kreditwesen (BAKred). Jochen Sanio, long-serving vice-president of BAKred, had just risen to the position of president. The Bundesbank had been rumbling on about taking over the functions of bank supervision. It was a good time to make a bit of a splash and show what BAKred could do.
Sanio is happy to talk about the latest proposals on capital adequacy from the Basel Committee on Banking Supervision but he won’t talk about BAKred’s action on July 14 to block Cobra’s rights to vote with or sell Commerzbank shares. This may never have been made public, but Cobra’s outcry forced BAKred to break its secrecy rules and respond. The finance ministry, technically responsible for BAKred, was privately surprised by the BAKred action. “It shows how independent BAKred is,” shrugs one ministry official.
In a press release on July 21, BAKred said that it had received details about Cobra’s contractual relationship with individual Commerzbank shareholders “after numerous requests, only as late as July 5”. It went on: “BAKred is currently examining whether such a screening of individual [Cobra] shareholders is necessary.”
Cobra had been constructed so that it had voting rights but didn’t itself own a single share. Individual shareholders provided a certificate from their bank assigning voting rights and a call on the shares to Cobra. “We have no shares, no financing costs, no options,” explains Hofmann. Some of the shareholders have financed their purchase with loans, some of them in Swiss francs, with interest serviced to some extent by the dividend payments. The arrangement expires towards the end of December when it is renewable for another year. “We’re not under as much pressure as some people think,” says Hofmann.
But BAKred’s blocking of Cobra’s voting rights was a blow. From July 5 it could take a statutory three months to examine the documents presented by Cobra. And then it gave a further reason for blocking Cobra: the “unreliability” of Hofmann himself: “BAKred has exercised only its legal authority to forbid the use of voting rights to the owner of a significant shareholding, whose legal representative is viewed as unreliable, and to take further necessary supervisory measures,” the press release thundered delphically. The “unreliable” is taken to refer to Hofmann’s brush with the German tax authorities, which in fact was resolved “without any concept of guilt”, says Hofmann, since it involved a Selbstanzeige (self-denunciation). Hofmann is also on record as saying that the UK Financial Services Authority (FSA) consulted BAKred before deciding that Hofmann’s tax history would not be an issue in deciding whether he was “fit and proper” to manage a UK financial entity. “The UK and German laws on this subject may diverge,” says the BAKred spokesperson.
Hofmann’s Köln-based lawyers applied to the administrative court in Berlin on July 27 for an immediate lifting of the ban. But the summer recess and the slowness of the court system means that even a preliminary judgment is likely to take six months. BAKred moves to Bonn in November and the case will be passed to the Bonn administrative court, adding more scope for delay.
BAKred is understood to be relying on clauses in two EU banking directives aimed at thwarting money-launderers (the second banking directive and the BCCI directive, prompted by the 1991 liquidation of Bank of Credit&Commerce International.) But despite rumours in the press that Russian money may be involved in Cobra, such money would have to have evaded the scrutiny of the banks holding the certificates – all supervised Swiss and German banks that are legally bound to declare any suspicions about the origin of a client’s wealth.
Interested parties may have thought that BAKred’s action had blocked a last obstacle to the Dresdner/Commerzbank merger. But Kohlhaussen had also been gathering his friends around him as the value advantage of Commerzbank shares slipped away. Commerzbank had cross-shareholding relationships with Generali and BSCH, a hangover from the 1980s and early 1990s when small stakes of around 5% were seen as a way of cementing common business interests. Most European banks later came to the conclusion that such token cross-shareholdings lead nowhere unless they are the prelude to a takeover.
As well as talking to Dresdner Bank and its major shareholder, Allianz, Kohlhaussen was talking to Generali’s chairman, Alfonso Desiata, and vice-chairman, Gianfranco Gutty.
On Friday July 21, Kohlhaussen and his most likely successor when he retires next year, Klaus-Peter Müller, flew to Munich with Dresdner’s Fahrholz to see Allianz boss Henning Schulte-Noelle and his chief financial officer Paul Achleitner.
Allianz, with its major German equity holdings totalling nearly e60 billion, is a major player in almost every German corporate restructuring. It owns 22.7% of Dresdner Bank, 17% of HypoVereinsbank, and around 5% of Deutsche Bank. It had been directly involved in the Deutsche/Dresdner merger, since the plan was to exchange its Dresdner stake for Deutsche’s fund management arm DWS and a 49% stake in Deutsche’s retail operation Deutsche Bank24 (which would then be merged with Dresdner’s), with an option to buy the majority.
Achleitner, former head of Goldman Sachs in Germany and a veteran of many German mergers and acquisitions, had seen that merger as the best possible reshuffling of German private banking assets, giving Allianz the retail distribution that it craves.
In the Dresdner/Commerzbank restructuring there were plans to create a holding company under which asset management would be run jointly with Allianz.
The Friday meeting was to reassure Allianz that they were going for the merger, and to ask for its agreement. Achleitner and Schulte-Noelle may have given their agreement, but they also gave the bankers a list of questions on the detail, which was far from being hammered out. The bankers went off for the weekend “to do their homework”, says a source close to the action.
On Monday, Schulte-Noelle and Achleitner had a visit from Generali’s Gutty and Desiata. They wanted to know whether Allianz was going for the merger, in which case they would support it. They were told it was. That evening the board members in charge of asset management – Joachim Faber of Allianz, Joachim Mädler of Dresdner, and Heinz Hockmann of Commerzbank – discussed the joint asset management plan.
Kohlhaussen was hedging his bets, however. He had been talking to Generali and BSCH about another way of getting Cobra off his back and surviving as chairman. But he was close to having to commit himself at least to serious negotiation of the Dresdner deal. According to a reliable source he took a call from Gutty and Desiata on Monday evening. They told him he had an easy exit route, simply by disagreeing with Dresdner and Allianz’s equity valuation. That day, Dresdner’s shares closed at e47.50, while Commerzbank’s closed at e37.45.
On Tuesday the Dresdner/Commerzbank team again flew to Munich to see Schulte-Noelle and Achleitner. Kohlhaussen expressed his doubts about the valuation. The next day back in Frankfurt, Kohlhaussen called Fahrholz and told him the deal was off. Fahrholz relayed the news to Schulte-Noelle. Dresdner’s second attempt to merge had bitten the dust.
Meanwhile Cobra had been talking to BSCH and Generali, also Société Générale, and one other bank not yet named, about ways of unloading its stake.
Cobra also had conversations with Fahrholz about directly buying into Commerzbank. But Fahrholz hesitated, perhaps because that would have turned a friendly merger into a costly and perhaps hostile takeover.
That was in late July. By late August Commerzbank had a plan whereby its friendly shareholders, Generali and BSCH, would increase their stakes to around 10% each, making use of a e2.2 billion capital increase voted at the 1999 annual general meeting, and diluting Cobra to around 15%.
But the plan was announced in a half-developed state. Generali would buy into the e2.2 billion capital increase, so would Italian investment bank Mediobanca, holding nearly 10% and 2% respectively of Commerzbank shares. A press release said that BSCH and Commerzbank were “in advanced negotiations regarding another tranche of the capital increase”. That deal included the sale of BSCH’s German subsidiary, CC-Bank, a consumer-credit business in Mönchengladbach. The cross-shareholding would involve “close co-operation” with Generali and its German subsidiary AMB Aachener und Münchener Beteiligungs-AG.
The deal seemed vague and old-fashioned – and there were soon reports that negotiations with BSCH were faltering – but it did reduce the threat from Cobra. Hofmann decided to hire US investment bank Donaldson, Lufkin&Jenrette (DLJ) as advisers to help Cobra find a foreign buyer for its Commerzbank stake. It seemed Cobra was floundering: it had lost its voting rights, although the individual shareholders could still in theory vote individually. Most of them, however, according to Hofmann, are rich individuals “who don’t want to see their name in the papers”. So they are unlikely to act as a group of named shareholders, either to block decisions or to call an extraordinary general meeting.
But many shareholders apparently agree that an EGM is needed to force Kohlhaussen and other Commerzbank managers to justify the defence they have put in place. Several shareholder action groups in September were expressing this view. “We would like a general meeting to hear from management why this action is so favourable for their business and why, for example, they want CC-Bank,” says Ulrich Hocker, managing director of the securities holders’ association Deutsche Schutzvereinigung für Wertpapierbesitz. So far these small shareholders have been unable to amass enough votes to call a meeting. But some of Commerzbank’s main institutional shareholders were threatening to sell the stock, further depressing the price. On September 13 a private investor, Köln-based Pengetank Asset Management, applied to the Landgericht (state court) in Frankfurt to stop the capital increase until the Commerzbank board provided an explanation why ordinary shareholders had been denied pre-emptive rights. Karl-Walter Freitag, chief executive of Metropol Vermögensverwaltungs- und Grundstücks GmbH, which owns Pengetank, says he has no links to Cobra. “They’re too big to need me,” he says, since his Commerzbank holding is only a few tens of thousands of shares. “But since Vedder is also in Köln I’ll send him a copy of the filing,” says Freitag.
The configuration of the big private banks has hardly changed despite about nine months of frantic activity. Now Achleitner at Allianz is expected to produce another solution for Dresdner Bank. Sources in Munich say he is under great pressure as the former Goldman rainmaker, but inside the Allianz building, itself undergoing radical restructuring, this is strongly denied: “Achleitner is very relaxed, so is Schulte-Noelle; insurance is a long-term business.”
But in Frankfurt almost everyone in the financial sector has his own theory about how the building blocks will be swapped and re-cemented.
One view: that Dresdner has “twice danced on Allianz’s nose” and will now be punished.
To the question “what would you do if you were Achleitner?” a senior investment banker replies with relish: “I would take Dresdner Bank apart, sell Dresdner Kleinwort Benson, take retail – and Deutsche Bank24 (Deutsche Bank’s retail arm), and the asset management.
Why do they need a DKB?” Another replies in the same vein: “I personally don’t believe that a large-scale bank merger in Germany is possible. The only logical conclusion is a break-up scenario.” That includes Commerzbank.
“Investment bankers would say that, wouldn’t they?” is the likely retort from Munich – they want their transaction fees. As for selling Dresdner Kleinwort Benson, there isn’t a buyer: one was sought in vain when the Deutsche/Dresdner merger went bad. “There isn’t an asset to sell,” says one source close to the action.
Fahrholz, yet another little-known figure at the head of Dresdner Bank, has done his best to draw up a coherent stand alone strategy for Dresdner. “He is the first to concentrate on shareholder value,” comments one admirer. But he has a serious morale problem. Scores of investment bankers left during the fiasco with Deutsche. Two failed merger attempts have left Dresdner employees with the feeling that their heads are on the block. Confesses one insider: “When we talked integration with Deutsche I was impressed by how quickly they identified our good people. Since then there’s been a cooling-off period, and the Commerzbank talks, but now I expect more will get the Deutsche call.”
Insiders say the culture gap between the bank and the investment bank is widening. Part of that is deliberate, since Dresdner Kleinwort Benson is being groomed as a stand alone legal entity. But it relies heavily on Dresdner’s corporate and institutional clients. The move in September to buy US M&A boutique Wasserstein Perella was seen mostly as a morale-boosting exercise: “It’s expensive, but if it works it will be worth it,” says an investment banker – to show the DKB troops that things are moving forward.
That may be so, but Dresdner’s managing board seems horribly parochial, complain the investment bankers. Only Leonhard Fischer, responsible for investment banking, ex-JP Morgan, stands out as an international figure with some kind of pan-European vision. All the recent gaps in the board were filled internally.
That shortfall was graphically illustrated at a recent offsite meeting at Königstein, Dresdner’s retreat in the Taunus hills above Frankfurt. It was for Dresdner’s international managers. The entire Dresdner board appeared on the first morning to hear their leader Fahrholz speak. But as soon as his speech was over they skulked out with him, leaving only Fischer to host the rest of the two days. The opportunity for board members to mix with managers from London, Istanbul and South Korea was sadly missed, says a disappointed insider.
Fahrholz wants Dresdner to become the European advisory bank of choice. The Wasserstein part of the future Dresdner Kleinwort Wasserstein is expected to bring US-style takeover and junk bond techniques to Europe.
Commerzbank, having failed to buy London securities house Smith New Court in 1995, decided to grow its own international equities operation under former Deutsche alumnus Mehmet Dalman. In the buoyant equity markets of the past few years that has more or less paid for itself, although Commerzbank won’t break down the figures. But that may not be enough to save the bank from slaughter. Commerzbank has two small jewels – Comdirect, its online broker, which is a market leader in Germany and has now spread its operations to France and the UK, and asset management. Analysts are sceptical whether Commerzbank’s new big shareholders will be content for long to tie up that much equity without a strategic reward.
The German private banks’ retail networks need to be combined to achieve economies of scale, although Commerzbank’s is one of the most successful. Possibly in that context, on September 15 Deutsche Bank’s crown prince, Josef Ackermann, and its supervisory board chairman, Hilmar Kopper, flew to Trieste to see Generali’s Gutty.
It is ironic that Germany’s recent attempts at bank mergers have been so public and so abortive, while the world’s biggest mergers – Citigroup/Travelers and JP Morgan/Chase – were debated smoothly out of the public eye. The positive development in Germany, says an investment banker, is that market and shareholder reaction have for the first time played a role.
JP Morgan chairman Sandy Warner was asked why he had accepted Chase’s offer and replied: “It really starts with acknowledging that Bill Harrison [Chase chairman] and I have been friends for approximately 25 years.” In Germany the tribalism of the blue (Deutsche), green (Dresdner) and the yellow (Commerzbank) is so intense that such a friendship would hardly be possible. Although the thought may be disturbing that one of the biggest deals in banking history went ahead on the basis of a chance friendship between chieftains, the opposite is equally worrying: that no giant German bank merger has gone ahead, apart from one in Bavaria, because the chieftains aren’t friends, or worse, despise each other. Even in the Bavarian case the two chiefs, Albrecht Schmidt (Bayerische Vereinsbank) and Eberhard Martini (Bayerische Hypo), ended up hurling public insults at each other.
Schmidt’s HypoVereinsbank has almost clinched a merger with Bank Austria, having got the green light on September 14 from Vienna’s takeover commission. Westdeutsche Landesbank, a key shareholder with a stake of around 10%, was thought to be in favour of the merger. The beleaguered WestLB has bigger fish to fry, being in dispute with the European Commission over allegations that it is paying below the market cost of capital for a housing loan subsidiary, a de facto subsidy from the Land of North-Rhine Westphalia. This is a first assault on Germany’s public banking sector, which Brussels believes breaks European competition rules: the public guarantee gives these banks a rating higher, and a cost of funds lower, than their capital-to-risk-asset ratio should allow, yet they are competing with private banks in many parts of the domestic and foreign arena. Germany’s private banks are vociferous on this point, but have been reluctant to pursue it in Brussels.
HypoVereinsbank has reason to be quiet about its merger: Bank Austria is covered by a guarantee from the city of Vienna – Anteilsverwaltung Zentralsparkasse owns 25% of the bank. Although that stake will be diluted to 7% in the merged German-Austrian giant, Bank Austria’s balance sheet will continue to be guaranteed until AVZ turns itself into a foundation. When it does, no new assets will be covered.
Allianz’s 17% shareholding in HVB will be reduced to a more manageable 14% in the new entity. Why is it that Allianz has appeared to let Schmidt go his own way, while seeming more closely concerned with the fate of Dresdner?
One answer is that Schmidt for several years has identified a clear goal, to be the “bank of the regions”, resisting the ambition, unlike Dresdner, to become a global investment bank. It remains to be seen whether Fahrholz’s reduced goal, to be the “European adviser bank”, will keep Allianz off its back.
Deutsche in the meantime has modified its strategy only slightly since the aborted merger – it no longer seems willing to give up majority control of retail arm Bank24. But Allianz is expected to have another attempt to access Deutsche’s retail network, if not to revisit the Deutsche/Dresdner merger in another more people-friendly form.
Achleitner’s cryptic comment on the previous failure was the untranslatable “es hat halt gemenschelt” – roughly “people got in the way” – or “too many people thought it wasn’t their deal”.
Caio Koch-Weser, deputy minister of finance with oversight of the German banking system, sees a “log jam” that will ultimately ease only when the Landesbanks and the savings bank begin to change their status. Decentralized regional politics is the enemy of change. The prime minister of each Land fights for his Landesbank and for the local tributary of the Bundesbank, the Landeszentralbank. Only so much impetus can come from Brussels: the rest must come from within Germany itself and from private initiatives, perhaps like Cobra.
Dramatic change has been predicted in the German market for tediously long. There has been drama, but no radical change. For some, Hofmann is the hero who joined forces with Cobra to precipitate change. Unfortunately Hofmann may have backed the wrong horse – or serpent: “I expected Cobra to have more of a game plan,” he confesses. And Hofmann, like all heroes in Greek tragedy, has his own Achilles heel: the tax history. “I’ve always been an outsider in my own country,” he muses.
But he’s buoyant enough as he leaves the Drei Mohren in his silver S500 Mercedes, with its appropriate Bad Homburg number-plate.
