Commerzbank benefits from Müller’s surprise medicine
Commerzbank would later be described by some sections of the press as the party that was rebuffed during the negotiations. Others say that Commerzbank proposed that more time was needed for HVB to restructure its loan book, and that merger negotiations should be put on hold for a year.
Commerzbank’s CEO, Klaus-Peter Müller, rejects the suggestion that the subsequent breakdown of those negotiations and HVB’s purchase by UniCredit of Italy exerted any pressure on Commerzbank to look for an alternative acquisition. Indeed, when the opportunity arose in 2005 for Commerzbank to increase its one-third share in Eurohypo to 98%, Commerzbank was as surprised as everybody else. By then, Eurohypo was expected to push ahead with an IPO, which was scuppered when Allianz accepted an offer from Hypo Real Estate for its stake in the real estate specialist. “We didn’t provide the trigger for the Eurohypo acquisition,” says Müller. “We were taken by surprise when Hypo RE announced that its offer for Allianz’s stake had been accepted. We had been looking at the possibility of buying Eurohypo but we certainly did not expect to do so in 2005.”
A transaction that was negotiated and completed in very quick order and later described by Eurohypo’s CEO, Bernd Knobloch, as “a surprise decision for everyone” was generally hailed as a shrewd coup by Commerzbank, financially as well as strategically. Matthew Clark, banking analyst at Keefe, Bruyette & Woods in London, says: “Commerzbank bought the asset very cheaply at 1.1 times book value, which it was able to do because the other shareholders were keen to secure a quick sale.”
As far as equity investors were concerned, as well as giving Commerz access to a growing real estate market, the bank was probably better positioned than any other in Germany to benefit from a recovery in the local economy in general, and more specifically from a resurgence in loan demand from the corporate sector.
In the event, things did not map out quite as well in 2006 as many analysts had expected. The expected explosion in loan demand remained conspicuous by its absence, while Eurohypo started to make comments about its earnings outlook that contrasted with some of its more bullish earlier prognoses. The result, for some analysts, was that Eurohypo was suddenly starting to look a much less attractive bedfellow for Commerzbank. A note published in November by Credit Suisse, for example, listed one of the negative influences on Commerzbank’s share price performance as “falling revenues at Eurohypo, which will now miss its 15% to 20% operating profit growth for the year”.
The result, says one analyst, is that while Eurohypo accounted for much of the outperformance of Commerzbank’s share price in 2005, it was also the main contributor to its underperformance in 2006. Last year’s underperformance is perhaps one reason why Commerzbank began this year featuring very prominently on analysts’ buy lists for 2007. ABN Amro called a recent report on Commerzbank Falling in love again, and JPMorgan also has the stock on its shortlists of top picks for this year.
Commerzbank was one of three banks that appeared on a recent list of EU large-cap takeover candidates published by Citi. The latest suitor, according to hyperactive market rumour, was Merrill Lynch – an improbable development, perhaps, but one that was enough to push the Commerzbank share price up by more than 4% in a single session in January. “Commerzbank is now probably more of a predator than a prey,” says one analyst. “But there will always be an element of speculative appeal associated with it, which is why the stock is so dangerous to short.”
Müller says he accepts that the volatility in the Commerzbank share price in the past 12 to 18 months has had much to do with investors’ interpretation of the Eurohypo acquisition. “That is absolutely fair,” he says. “There was probably too much euphoria in the stock price immediately after the announcement, and if there is now a more analytical approach to its valuation I’m not complaining. I am certain that the analyst community will start to see the full benefits of Eurohypo starting this year. In 2007, our stock price will be based by the progress we make in our profitability and nothing else. That’s fine with me. Let’s take out the emotion, get back to the figures and prove to our shareholders what a good job we can do.”
