Group's Investment Banking Division Dresdner Kleinwort Wasserstein example essay topic

1. Introduction In our days mergers and acquisitions are a predominant feature of the international business system as companies attempt to exploit new market opportunities and to strengthen their market positions. Each year sets a new record for the total value of mergers and acquisitions and nearly every day new announcements are made in the business newspapers. In the literature one finds a large number of explanations for the occurrence of mergers and acquisitions.

Sometimes, these exp lana-t ions are also applicable to related forms of inter industrial links such as joint ventures or strategic alliances. Therefore it is necessary to define the term merger and acquisition as it will be used throughout this seminar paper. 1.1 Definition of the Term Merger and Acquisition Two different phenomena are described by the term merger and acquisition. A merger is a combination of two corporations in which only one survives and the merged corporation goes out of existence. It is a unification of two or more firms into a new one and thus character i-zed by the fact that after unification there are fewer firms than before. On the contrary can the target firm after an acquisition either remain autonomous or be partially and / or wholly integrated into the new parent company.

However, from a legal point of view the firms remain independent entities. In most of the cases, one company acquires the majority or minority equity stake in another which is not a true merger in the legal sense. The two companies are not legally united, but form an economic unit where both remain legally independent, a so-called quasi-merger. The term acquisition mainly is used when more than 50% of a company's equity are purchased, i.e. the buyer gains complete control over its target. Equity stakes of lesser percentages are referred to as minority holdings.

In spite of the legal difference between mergers and acquis i-t ions, both terms are often used together. In international business the expression merger and acquisition, abbreviated M & A, or only merger, has become a general term referring to all kind of activities which are related to the selling and buying of a company. It includes classical mergers and acquisitions as well as management-buy-outs and management-buy-ins, minority equity purchases, joint-ventures, spin-offs and divestitures. Nevertheless, strategic alliances generally are not included under this expression, because often they are only of temporal character and not manifested by equity exchanges. From a strategic point of view they can be considered as an alternative to mergers. 1.2 The Different Types of Mergers The merger boom in the early nineties was different from pre-vio us waves, not only in terms of its geographical spread and increased scale, but also in terms of the type of organizational combinations it has produced.

Usually mergers and acquisitions are considered in terms of the extent to which the business activities of the acquired company are related to the acquirer. There are four main types of mergers: Horizon-talk, conglomerate, vertical and concentric mergers. A horizontal merger combines two similar companies in the same industry. A conglomerate merger refers to the situation where the acquired organization works in a completely unrelated field of business activity.

A vertical merger unites two companies from successive pro-ceases within the same industry. Very often it is subdivided into vertical backwards or vertical forwards mergers, e.g. a manufacturer acquires retail outlets. In a concentric merger the acquired company works in an unfamiliar but related field into which the acquiring company wishes to expand. 1.3. An Overview of the Various Motives for A Merger The oldest explanation for a merger goes back to the concept of monopoly power which is reflected in a companies market share and the barriers to entry its market.

In the monopoly theory mergers, esp e-ci ally horizontal ones, represent an easy and quick way to increase market shares of a firm and to limit the competition in a particular market. Conglomerate and vertical mergers help to strengthen the market power by discouraging potential entrants. The monopoly theory played a dominant role in the past, especially in the first great merger wave in the U.S. between 1887 and 1904. Today most of the horizontal mergers are too small to confer monopoly power, because larger acquit-sit ions fall under intense antitrust scrutiny.

In the industrial strategy and organization literature mergers are often explained in terms of synergies and / or efficiencies. The efficiency theory is based on the assumption that the combined firms are more profitable than the companies operating separately because of the operational, managerial and financial synergies. Operational synergies include economies of scale, economies of scope and economies of experience. The valuation or information theory explains a merger from a financial instead of a strategic perspective and assumes that the current market price of a company does not reflect the true value. The company which buys an undervalued firm believes it can manage the target company better than the current management. Corporate buying and selling activities are traced back to the conditions of financial markets.

Presently globalization is the key feature of the new competitive landscape within which mergers are taking place. However, it is imp or-tant to keep in mind that globalization is a trend and not an already ex is-ting condition. Globalization is not spreading evenly across the world and it is more frequent in certain areas of activity than in others. None-the less, it can be defined in terms of different levels of focus. At a world-wide level it refers to a growing economic interdependence among countries and is reflected by increasing cross-border flows of goods, services, capital and know-how. At the second level it shows the interlink ages a specific country has with the rest of the world or the competitive position of a company within a specific industry with comp a-niles of other countries.

On the third level globalization refers to the extent to which a firm has expanded its revenue and asset base across countries and engages in cross-border flows of capital, goods and know-how across subsidiaries. Consequently international mergers and acquisitions are seen to be the inevitable in order to respond to the increasingly powerful drivers of globalization. 2. Allianz Group and Dresdner Bank 2.1 Allianz Group Allianz was founded in 1890 in Berlin and is today one of the world's leading insurers and financial services providers. Present in over 70 countries worldwide, the Allianz Group has almost 174,000 employees and more than 60 million customers. At the top of the international group is the holding company, Allianz AG, with the head office in Munich.

The total premium income of Allianz in 2003 amounted to EUR 85 billion. The Allianz Group offers a comprehensive range of services in the following areas: property and casualty insurance, life and health insurance and asset management and banking. Property and casualty insurance offers a wide range of all kind of insurance to the private customer such as automobile, liability, personal accident, legal expenses etc. and to the industrial customers its indus-trial risk insurance. Allianz says it is number one in the German market with property and casualty insurance and one of the world leading global industrial risk insurers. In addition, Allianz states to be the number one in life insurance in the German market and the number three in German health insurance.

In Europe they are among the top companies in both areas. Additional growth is expected in the private and corporate retirement provisions sector over the coming years. In the field of asset management and banking Allianz and Dresdner Bank have developed an unique business model for the German market, the financial services provider with simple products for every stage of life. The division ADAM (Allianz Dresdner Asset Mana-gem ent) is under the top five asset managers of the world and assets under management amounted to EUR 996 billion by the end of 2003. Since the end of the 19th century Allianz has developed into one of the leading insurers and financial services providers worldwide. The mergers and acquisitions in Germany, Europe, Asia and the U.S. have consequently strengthened the company.

2.2 Dresdner Bank The Dresdner Bank was founded in 1872 in Dresden. Today the Dresdner Bank Group has about 990 branches in 60 countries around the world and 31,300 full-time staff. In terms of total assets and num-bears of customers it is one of the largest banks in Europe. Since 2001, Dresdner Bank has been a wholly-owned subsidiary of the Allianz Group. This combination offers customers considerable added value by providing them with a wide range of insurance and finance products, a variety of sales channels and expanded advisory capacity and expertise.

The Dresdner Bank Group draws a clear distinction between strategic and non-strategic business. The strategic business lines are driven by the Personal Banking, Private & Business Banking, Corpo-rate Banking and Dresdner Kleinwort Wasserstein divisions. The non-strategic business is bundled in its Institutional Restructuring Unit (IRU) with the target to reduce permanently the need for risk capital of the group. Personal banking offers personalized financial solutions to the clients which are created to build up the bank-customer relationship. Private & Business banking offers individualized and comprehensive financial solutions to the high-net worth clients and wealth management clients.

Corporate banking is aligned for approximately 9,000 corporate and large customers providing them capital market finance solutions and finance skills for corporate finance. Dresdner Kleinwort Wasserstein offers its investment banking and capital market products and advisory services to governments, multinational enterprises, financial institutions and investors. 3. A Critical Look at the Situation in the Banking and Finance Sector in Europe and Germany In the last few years the banking sector is undergoing rapid restructuring through mergers and acquisitions on a global level. This has led to a wave of consolidations in this sector and the European banks are emulating the global trend. Financial firms must try to follow the trend and position themselves in the intermediation channels that their customers are likely to be using in the future - not necessarily those they have used in the past.

This usually requires strategic repositioning and restructuring and one of the tools available are mergers and acquisitions. The moves for mergers are continuing and already have expanded to the insurance sector. In 1999 some of the large European Banks were in a frenzy of deal making. France's Banque Nationale de Paris acquired Paribas after a long takeover battle in the summer. In October Spain's Banco Bilbao Vizcaya snapped up Argent aria Bank whereas Italy's Banca In tesa and Banca Comercial e Italiana merged in December. In March 2000 Britain's Royal Bank of Scotland bought National Westminster Bank after a fierce takeover battle.

Conversely the German banks have been wallflowers at this frenetic mating dance during this period. One reason was the German tax system which worked as a major damper on deal-making (50% taxes on sales profit for joint-stock companies) but finally was changed by January 1, 2001. The other reason are the protected and subsidized public-sector banks which still control over half of the banking market in Germany. 3.1 Reasons for the Mergers in the European and German Banking and Finance Section Various environmental developments have made existing inst i-tuitional configurations obsolete in terms of financial firms' competitive-ness, growth prospects and prospective returns to shareholders.

The regulatory and public policy changes allow firms broader access to their customers, functional lines of activity, or geographic markets may trigger corporate actions in form of mergers. A major factor are techno-logical changes that alter the characteristics of financial services or their distribution. So are the customers who often change their views on the relative value of specific financial services or distribution interfaces with vendors and their willingness to deal with multiple vendors. Furthermore the evolution and structure of financial markets make it necessary to adopt broader and even global execution capabilities as well as the capability of booking larger transactions for the institutional, corporate or individual clients.

Size does matter and by consolidating their activities with others, banks hope to gain economies of scale and scope. Economies of scale become particularly important for investments in information technology (IT) systems. These systems will enable banks to offer better products to their customers - especially because of the increased globalization in today's financial markets. Increased size and the associated economies of scale enable financial firms to offer more products. The increased competition in the banking sector has put pressure on the margins and has forced the banks to price loans with such small margins that the risk is not adequately covered. Although the banks want to increase their size they do not want to add capacity to the industry.

Consequently the best option for them is a merger or an alliance. Another traditional reason in any industry and as well in the financial sector is the creation of shareholder value, especially if the management has failed to deliver value. Finally banks are merging because everyone else is doing it, the so-called domino effect. 3.2 The first attempt - Dresdner Bank and Deutsche Bank Perhaps the most dramatic merger and acquisition deal that did not take place in recent years was the one of Dresdner Bank and Deutsche Bank.

The $30 billion merger of the third-largest and largest German bank was announced on March 7, 2000 and the German response to increasingly tough competition for domination of the world financial markets. It would have created the most powerful bank in the world with $1.2 trillion in assets and a stock market value of around EUR 75 billion. The idea was to merge the two banks' troubled retail business into a single entity taking the name of Deutsche Bank / Bank 24 but adopt the green corporate color of Dresdner Bank. This entity would be the product of a three-way exchange of shares: Allianz Group would swap its 5% holding in Deutsche Bank and its 21.7% holding in Dresdner Bank for a 49% stake in the new Bank 24. The retail business was to be run by Deutsche Bank but also would provide Allianz Group with a plat-form for the sale of insurance policies, investments trusts and portfolios through the bank's structures.

Furthermore the retail business would undergo far-reaching cost savings through branch closings and job cuts, estimated to be worth about $2.5 billion. The asset management business of the two banks would create one of the world's largest fund managers at a time when managed asset pools - especially in the pension sector - were expected to grow rapidly in Europe. The heads of the two banks, Rolf-Ernst Breuer and Bernhard Walther, would become co-heads of the combined company. Finally Dresdner Bank called off the talks with Deutsche Bank just over a month after they started, saying their differences over stra- were too great.

The collapse of the plan was a blow to the Allianz Group. Although the reason for the failure of the talks was not im media-tell known, analysts pointed to the fact that what was supposed to be a merger of equals had become effectively a takeover of Dresdner Bank by Deutsche Bank. The bigger bank was to have held 60-64% of the new entity with Dresdner Bank share holders owning the other 36-40%. Besides Dresdner's investment banking operation, Dresdner Kleinwort Wasserstein, was seen as the sticking point as their future was not clear at all. One day after this announcement the chairman of Dresdner Bank, Bernhard Walter, quitted his job because he was so closely identified with the merger talks.

The deal was off with plenty of bruised egos left in its wake. 3.3 The Second Attempt - Dresdner Bank and Commerzbank Less than three months later Dresdner Bank and Commer z-bank started their merger talk. The EUR 40 billion amalgamation of Dresdner Bank and Commerzbank would have created Germany's second largest bank. Another time Allianz Group was closely involved in the deal and even had sent the banks away to come up with another proposal after reviewing it. But six weeks after they started their discus-sons the merger collapsed as the two banks failed to agree on how to value the deal.

The relative valuations of the two firms became a stumbling block. One reason was an argument over how the spoils should be split. Certainly the two chairman could not agree whether it would be a 50-50%, a 60-40% merger, or some combination in bet-ween. Commerzbank executives were holding out for an equal share of the enlarged company while the Dresdner Bank wanted 60%. Share-holder value was a main factor in the equation and the failure to agree on an option that was sell able to the market. Another reason for the collapse of this merger was that there was nothing obvious the two banks together were going to achieve.

However, the failure left a bad taste with the European bankers. Germany was and still is notoriously over-banked and this merger was another attempt to do something about it. 3.4 The Merger of Dresdner Bank and Allianz Group On April 1, 2001 the supervisory board of the Dresdner Bank gave green light to the $20.65 billion deal, one day after the board of the Allianz Group. The merger of the two companies created the world's fourth largest financial group with a market value of EUR 109.6 billion, a market capitalization of $98 billion and combined revenues of about $90 billion. In terms of asset size they ranked at the time as Germany's largest and the world fourth largest financial services firm with over $900 billion in assets. The merged banking-to-insurance giant em-played 182,000 people and spanned business from insurance to asset management and from mass-market retail financial services to whole-sale commercial and investment banking.

Allianz already owned 21.7% of Dresdner Bank before the acquisition so the outstanding 79% interest was valued at $24 billion including a 25% premium of $5.8 billion. The terms for the $30 billion transaction were one Allianz share for every ten Dresdner Bank shares plus $185 (EUR 200) in cash. The deal as well unraveled the complex of cross-shareholdings of Allianz and some of Germany's biggest financial institutions. Allianz sold its 13.5% stake in HypoVereinsbank to rein-surer M" R" (Munich Re. ).

For its part, Munich Re., which owned 5.4% of HypoVereinsbank sold its 40% stake in life insurer Allianz Leben to Allianz. In structuring the deal in such a way Allianz unwind ed its cross-shareholdings in a tax-efficient way, minim i-zed new debt, and avoided the thinning effects of net capital increases. Allianz also planned to restructure its joint holdings in their German in-su rance enterprises. This step allowed Allianz to redeploy the released capital in its core business. At the financial press conference of the Allianz Group the formal takeover bid valid from May 31 to July 13, 2001 was presented to the Dresdner Bank shareholders. The bid was accepted by more than 92% of the shareholders which allowed Allianz to secure over 96% of the Dresdner Bank shares.

On July 19, 2001 the EU commission gave officially green light to the merger. Four days later the Dresdner Bank board members Bernd Fahrholz, Leonhard H. Fischer and Horst M"ulcer became members of the Allianz Holding board. By August 7, 2001 the merger of both companies was concluded and the operative cooper a-ti on in the agencies of the Allianz Group and the branches of Dresdner Bank started. The deal was seen throughout the finance sector as a smart move of Allianz and experts of the magazine Acquisitions Monthly highly commended it as domestic deal of the year. As a proof Allianz received the award for the German Merger & Acquisition Deal of the Year 2001 at the Financial News European Awards for Corporate Excellence in London in March 2002.4. Conclusion 4.1 The Justification for the Merger of Allianz Group and Dresdner Bank The key justification for the merger of Allianz Group and Dresdner Bank was to position the combined company for the expected explosion in private pension provisions with an estimated growth of 15% per year.

The borders between banks and insures had begun to di sap-pear, mainly in the areas of retirement savings and private investment. Success was dependent on developing strong distribution capabilities as well as having an asset management platform with sufficient scale and expertise. The acquisition aimed to exploit cross-selling opportune-ties and an unique position in the attractive long-term savings market in Germany. By creating a multichannel distribution platform the merged firm would be well positioned across its own agent-based insurance platform and the Dresdner's extensive retail network. The key attraction of this model was the extensive excess to both German individual and institutional clients. In addition to a broad corporate reach the combined entity would have a customer base of 20 million clients in Germany.

The other main reason for the deal was to build its combined fund manage-men business, Allianz Dresdner Asset Management (ADAM). The merged platform ADAM promised significant scale economies and offered a broad diversity in investment styles and should be build into an world-class asset management platform serving as an in-house factory of high-performance financial products. When Allianz announced the merger the management estime-ted it would contribute about $285 million in net synergies, starting in 2002, and eventually reach $1 billion by 2006. During this period cum u-lati ve net synergies were to amount to about $3 billion, including $360 million in restructuring costs. The bulk of synergies would be provided by distribution (46%), asset management (33%) and by organizational restructuring and IT (21%). Most of the synergies were revenue-based and expected to rise from only 11% in 2002 to 70% in 2006.4.

2 The Performance of Allianz Group and Dresdner Bank after the Merger In August 2002 Dresdner Bank announced to cut 3,000 jobs. Over one-third of the cuts affected the group's investment banking division Dresdner Kleinwort Wasserstein which - after a year of sharp falls in merger and advisory business - was made responsible for its loss-making. However, the bulk of the job cuts already had been planned and announced at the general annual meeting 2001 of Dresdner Bank, i.e. before the merger of Allianz and Dresdner took place. Since the start of 2002 a global market tumble in the banking industry shed almost 60,000 jobs worldwide, thus Dresdner Bank followed the trend. The head of the investment unit Leonhard H. Fischer, one of the board members of Dresdner Bank who became member of the Allianz holding board, resigned over the differences.

With a so-called turnaround programme Dresdner Bank wanted to create cost-savings of EUR 700 million by the end of 2003 and reduce its administrative costs from EUR 8.7 billion to EUR 6.5 billion. A year after the merger many of the expectations of Allianz Group had not yet materialized. Revenues had indeed grown although Dresdner Bank alone was estimated to have lost more than $2 billion in 2002. Additionally, investment losses in the insurance business were encountered owing to weak stock markets. In March 2003 Allianz announced its first annual loss since 1945, totaling EUR 1.2 billion after tax for the year 2002, dropping from net earnings of EUR 1.6 billion in 2001. Management continued to defend the competitive model although the future of Dresdner Kleinwort Wasserstein was called in question and in 2003 Allianz succeeded in raising its net earnings to EUR 1.6 billion.

Partly this was also a success of Dresdner Bank which stabilized its income in 2003 and reached the break-even point after the first six month. 4.3 The Programs for a Better Future Allianz had learnt the lesson from the loss in 2002 and started in 2003 a so-called 'Three plus One programme' whose implement a-ti on will be finalized in 2005. The four strategic concepts of this program are: Protecting and strengthening the capital base, significant boost of the operation profitability, a leaner portfolio and reduction of complexity and (the Plus One) sustainable increase of the competitive strength and value. The management expected to increase the total premium income by about 4%. Similarly Dresdner Bank started in August 2003 the so-called 'New Dresdner' program with the following steps: By the end of 2003 the operational performance was stabilized and at the beginning of 2004 the cost-cutting program adopted and the implementation started. By mid 2004 the revenue growth initiatives started as well as the imply-mentation of the new business model and for end of 2004 a positive net income was expected.

By mid 2005 the 'New Dresdner' will be imply-men ted and by the end of this year cost of capital will be earned. Indeed, the results of last year which just now have been published show that 2004 was a year of profitable growth for Allianz. There was a significant increase in the operating profit which rose by EUR 2.8 billion to EUR 6.9 billion and the net income reached EUR 2.2 billion. The banking segment Dresdner Bank reported an operating profit of EUR 603 million in 2004 (operating loss of EUR 369 million in 2003).