Berlin in shock and dilemma after Unicredit offer

Last night, the telephone lines between Berlin and Frankfurt were literally on fire. Suddenly, it was clear to everyone involved that the announced sale of a block of shares in Commerzbank by the federal government was heading in an unexpected and, above all, undesirable direction. But by then it was already too late.

The German government was duped by Italian investment bankers during the sale, say several observers who do not wish to be quoted. Now Unicredit is going after Commerzbank – this is likely to annoy the Commerzbank board immensely and plunge Berlin into a dilemma.

Interest in Commerzbank has been known for years

International interest in Commerzbank has been known for many years on the financial market and far beyond. The names mentioned included Unicredit and the French BNP Paribas. It is said that Unicredit CEO Andrea Orcel even spoke to the Chancellor’s Office and the Finance Ministry last year to acquire the entire 16.49 percent federal stake that stems from the partial nationalization of Commerzbank during the financial crisis. However, he was turned down.

One year later, Orcel has now used the sale of a first package of 4.49 percent, widely announced by the federal government, to create facts. Unicredit outbid all other bidders in an open and neutral process and secured the entire package for a paltry premium of just under 5 percent on Tuesday evening’s closing price.

Since the Italians have been quietly buying Commerzbank shares on the market since the summer, they now own 9.2 percent of the shares (7.3 percent directly and 1.9 percent via derivatives), making them the second largest shareholder after the federal government (still 12 percent).

This result could have been easily prevented if the federal government had ruled out a block sale and only sold packages of 0.5 or 1 percent. That would not have been a problem from a legal perspective. But no one expected Italy or France to take action. “That was naive,” say observers. The action may not be perceived as hostile in Berlin and Frankfurt, but it is definitely seen as an unfriendly act, although Orcel immediately tried to calm things down.

From Orcel’s point of view, takeover is the best option

The Italian, who is also well known in Switzerland due to his past at UBS, chose the Handelsblatt newspaper for an interview to speak to the German audience at the beginning of the week. Unicredit paid 1.5 billion euros for the approximately 9 percent, wanted to make a good investment and create significant added value for stakeholders, i.e. shareholders, customers and employees. Orcel left little doubt that he sees a takeover as the best option, but left the back door of a cooperation open.

Unicredit is already present in the German market with Hypovereinsbank (HVB), which the Italian bank acquired almost twenty years ago. This means that the transaction initiated by Unicredit has a national and international character.

At the same time, Orcel also set the direction: he sees great potential and many development opportunities for the Commerzbank business, and the Polish Commerzbank subsidiary mBank needs more capital for its growth. In his opinion, management can do a lot more to ensure that Commerzbank grows, becomes more profitable and the balance sheet is more robust. The return on equity of the Munich-based HVB is twice as high as that of the Frankfurt bank.

On paper, Commerzbank and HVB are a good fit. While Commerzbank is represented throughout Germany, HVB is focused on southern Germany and Hamburg, where it took over Vereins- and Westbank in 2005. In this respect, there is significantly less overlap in the branch network than, for example, between Commerzbank and Deutsche Bank. This German merger was also played out years ago without success.

In addition, Commerzbank concentrates on private and corporate customers, whereas HVB is even more active in investment banking. Orcel also emphasizes the small overlap between the two institutions. Synergies exist primarily in the central functions, in IT and, in some cases, in the branches. The Verdi union and employee representatives warn of a clear-cut and therefore want to prevent the takeover at all costs.

Shareholders apparently view the transaction positively

On the stock market, however, Unicredit’s move was welcomed. While the shares of the takeover target Commerzbank have risen by 23 percent since the announcement, Unicredit’s shares have also risen by 3 percent. Shareholders apparently also see an advantage for the Italian bank in the planned takeover.

Financial analysts at the investment bank Keefe, Bruyette & Woods write that since the takeover, Unicredit has ensured a significant reduction in costs and an optimization of risk-weighted assets at HVB, and has achieved profitability that is better than that of Commerzbank despite lower net interest margins. It seems as if Unicredit has found a recipe for success that could also work for other German banks.

The deal is almost done, says a former ECB banking supervisor in a background discussion. The shareholders are behind the idea and from the perspective of the banking supervisor there is probably no reason to reject it. Unicredit has made a clever move. In addition, the bank has gained a lot of experience in the German market and with integration with the takeover of HVB.

Other observers of the transaction believe that the ball is now in Berlin’s court. Unicredit cannot take over Commerzbank in a hostile manner against the will of the government.

If Berlin agrees, the Commerzbank board would have to bow to it, although chairman Manfred Knof would prefer to continue pursuing his own strategy, as he said this week on the sidelines of an event in the German capital.

The supervisory board, headed by former Bundesbank President Jens Weidmann, is obliged to remain neutral towards all shareholders, which now includes Unicredit. The supervisors, who also include many employee representatives due to the equal representation in Germany, are in just as much of a dilemma as Berlin.

A signal for the future of the banking union

The German government is in a dilemma because for years it has been calling for progress in the banking and capital markets union in the EU in order to improve the efficiency of the European financial market. If a previously widely desired cross-border takeover were to be torpedoed just because the second-largest German private bank fell into the hands of the second-largest Italian bank, the Chancellery and the Finance Ministry would lose a lot of credibility.

In terms of total assets, Commerzbank is number four in the German banking market after Deutsche Bank, the cooperative DZ Bank and the state-owned KfW. Together with Hypovereinsbank, it would be number two (see graphic).

 

For years, Europe has had a chronically excessive number of inefficient banks because every institution, no matter how unimportant, is rescued in a crisis and cross-border transactions by large banks appeared to be politically unpopular and operationally difficult to implement.

In addition, there are legal obstacles to the free flow of capital and other national laws that counteract pan-European rules and reinforce the fragmentation of the market. This leads to a competitive disadvantage compared to American banks. While the ten largest institutions in the United States of America have a market value of over 6 trillion euros, the ten largest European ones only have around 0.5 trillion.

If Berlin were to actively hinder the purchase of Commerzbank by Unicredit, while Lufthansa recently took over Alitalia’s successor ITA, that would probably be a telling signal – for equal conditions in Europe and for the completion of the banking and capital markets union.

When the first package was sold, the federal government imposed a 90-day freeze on further transactions. This gives Berlin some time to assess the situation. However, the need for discussion between the protagonists in the capital and the financial metropolis of Frankfurt remains very high – and the telephone lines are likely to continue to run hot.

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