BERLIN -- Banking has never been considered the humblest of professions, but the failed merger talks between Germany's
(DRSDY:OTC BB) and
(CRZBY:OTC BB) prove that it can be humbling.
Only months after Dresdner balked at being the junior partner in a deal with
(DTBKY:OTC BB), Dresdner's apparent demand for a larger share of the pie in merger negotiations with Commerzbank has brought its latest talks to an abrupt end. While Commerzbank was hoping for a merger of equals, Dresdner and its main shareholder, insurer
(ALLZF:OTC BB), were thought to be pushing for a valuation giving Dresdner more than 60% of the combined operations.
Commerzbank had been under pressure to come up with a deal on its own terms before the Netherlands-based investment group
could force the bank into the arms of a foreign buyer via its
holding vehicle and the 17% of the bank's shares it controlled. But last week, German regulators said they would not allow CoBRa to exercise its voting rights, which, combined with healthy first-half results, strengthened Commerzbank's bargaining position.
Both Dresdner and Commerzbank have tried to put a brave face on the failure of the talks, each saying it was merely protecting the interests of its shareholders, but it appears as if the sorely needed consolidation has been put on ice indefinitely. Still, both Commerzbank, Germany's fourth-largest bank, and Dresdner, the third largest, could now become easier pickings for a foreign predator, despite their intention to slog ahead independently.
After the talks were called off, Commerzbank shares in Frankfurt fell 0.10 euros, or 0.3%, to 37 ($34.70) and Dresdner, also weighed down by poor second-quarter earnings, dropped 0.65 euros, or 1.4%, to 47.10.
Both banks had tried to downplay expectations when the talks began, maintaining that a merger was never guaranteed, but the collapse is bound to be seen as a setback for both. With domestic consolidation now all but ruled out, both institutions will risk becoming bit players at home unless they find international partners.
Whether overseas financial institutions will have any interest is something else entirely. "Foreign banks will probably be a little more cautious after all this," says Metehan Sen, an analyst for
in Frankfurt. "They will probably let the dust settle first to see if Germany is even an attractive place to be -- especially in retail banking, which is one of the main reason banks here aren't that profitable." Oppenheim doesn't have an investment-banking relationship with either Dresdner or Commerzbank.
German retail banking is dominated by state-sponsored savings banks, making it difficult for the big commercial banks to squeeze out returns. Part of the attraction for Allianz in joining Dresdner with Deutsche or Commerzbank was to create more outlets for its insurance products, but it would also like to get the best possible return on its 21% stake in Dresdner, too.
"I think Allianz probably demanded 60% valuation for Dresdner," says Sen. "When they realized that wasn't possible, they probably weren't interested in a merger between the two banks at all. And that was probably the right thing to do for Allianz shareholders."
Commerzbank's recent rosy financial results, and the silencing of CoBRa, have given Chairman Martin Kohlhaussen a little more breathing room to go it alone for the immediate future. But even if business continues to clip along, the bank is sure to be dogged by doubts about its long-term independence.
For Dresdner, this second failure to merge in only a few months may give investors more reason to scrutinize management's every move, especially in light of
(HVMGY:OTC BB) takeover of
over the weekend. That deal has largely been praised for strengthening the position of Germany's second-largest bank in central and eastern Europe.
Plus, if Dresdner could actually pull off a similarly strategic acquisition, it could help the bank be even less humble about its valuation next time an offer for a megamerger comes its way.