Strategic_Aspects_of_an_M&a_Transaction_-_the_Merger_of_Allianz_Se_and_Dresdner_Bank_Ag_in_the_Year_of_2001

Introduction The merger of Allianz and Dresdner Bank in the year of 2001 is considered to be one of the most famous M&A-transactions in Germany. It has been discussed for a long time. The “Allfinanz” concept, Allianz has realized through the merger, is the answer to changing customers demands. After the “Riester-Rente” has been introduced the market of investment funds shows a great potential. Furthermore enormous economies of scope have been forecasted. But many financial aspects of the merger have falsely been calculated. In the year of 2002 the Allianz Group has been in the red for the first time of the company´s history. Investors have been skeptic about the future development and this is why it is always been under great public interest. Although Allianz did not make a financial deal merging Dresdner Bank, this transaction significantly supported the establishment of the market position comparing to business rivals like Deutsche Bank or Münchner Rück. Because Allianz acts as a leading investor in the uprising market of global players, this paper emphasizes on the strategic aspects of the merger. After it has portrayed the merger chronological this paper also deals with issues concerning the valuation. 1. Companies involved 1.1 Allianz SE The Allianz Group, founded 1890 in Berlin, is considered as the biggest insurance company of Europe. 18 Million customers in Germany and more than 60 Million customer worldwide as well as half of the World´s biggest companies rank among the clientele of the Allianz. The company is affected by a very traditional management style enforced by Chief Executive Officer (CEO) Dr. Henning Schulte-Noelle, who is in charge since 1991. From that point onwards he has been preparing the company for the new challenges a company has to face in the market of the uprising “Global Players”. In 1999 English became the corporate language whereas Europe still is the most important trading center, holding a share of 80% in the insurance business. During the last years the Allianz has been acquiring several European insurance companies and it acts as the leading investor of Europe. It became listed at New York Stock Exchange on November 3rd 2000. At the end of the year 2000 the Allianz Group has a premium income of 68,7 Billion EUR and it owns 850 subsidiary and associate companies. It is divided into five mayor business segments: Indemnity and casualty insurance, life and health insurance as well as asset management. The Allianz Group has an agency fund of 713 Billion EUR. It employs nearly 120.000 people in 70 countries and 265.000 share holders trust in Allianz. Over the last years the company has overtaken 14 major and more than 50 small-sized companies, like American asset managers PIMCO or the French insurance company AGF. 1.2 Dresdner Bank A balance sheet with a total of 483, 5 billion EUR in the year 2000 makes the Dresdner Bank one of the biggest banks of Europe. It manages funds of 175.000 corporate and more than 6 Million individual clients. The “consulting bank” is the business partner of German medium-sized industry companies and employing more than 50.000 people makes it the third largest bank of Germany. The business unit investment banking is considered as one of the leading M&A consultants worldwide and the sector of corporate clients is well geared to the customer segments. The real estate division combines all expertise of the company, including Deutsche Hyp and DEGI, the biggest German real estate investment companies. During the deal, Prof. Dr. Bernd Fahrenholz holds the office of the CEO. Holding a share of 19,1 %, the Allianz is already the leading stock owner of Dresdner Bank in the year of 2001. 2. Strategic aspects of the merger Being asked about the specific reasons and the motivation of this merger, Schulte-Noelle and Fahrenholz always held the same answer in store: “This merger is the corporate answer to future challenges. It is a partnership for the customer and everybody will profit by it: Customers, share holders and employees.” There are four main ideas. 2.1 The “Allfinanz-Strategie” of the Allianz If legally separated classes of the financial services business cooperate, the whole process is called “Allfinanz”. Customers are able to take out an insurance policy at the counter. According to Dresdner CEO Fahrholz, “customers expect the access to a broad range of financial services on offer. Thereby they need the best possible consulting service regarding the products of an insurance company and a bank. The fusion of Allianz and Dresdner Bank is the answer to increasing demands, customers have nowadays. This is why they combine forces and create something new, which is stronger than the sum of both parts.” Allianz CEO Schulte-Noelle agrees with him: “We will profit by our corporate performance concerning the retirement provision, the capital formation and the fund management.” The new strategic concept aims for becoming the biggest financial concern of Europe. It plans to expand and to get access to new customers. Allianz wants to focus on the most profitable businesses life and asset insurance instead of property insurance, although the latter still makes up 70% of the total business. 2.1.1 The German “Riester-Rente” Merging Dresdner Bank was a clever move to sustain the core business and to enter the market of asset management, because the majority of investment funds saled in Germany are handled by banks. The asset management market has great potential because in the year of 2001 Germany´s Federal Minister of Labor and Social Affairs Walter Riester introduced the “Riester-Rente”, a privately financed retirement pay subsidized by the state. If employees invest parts of their annual gross income in a certified contract of annuity, they´ll receive direct subsidies of 1% of their spending from the state. This percentage rate will steadily be rosen to 4 % in the year of 2008. This is a result of the demographic development the population has undergone. Decreasing birth rates and increasing human age lead to an increasing demand for private retire arrangements. One part of the money has to be invested in low risk investment products but the other can be invested in funds . For these purposes Allianz initially keeps hold of the business units investment banking and corporate clients in order to get access to the occupational pension market. The company plans to combine these units in the new segment Corporates & Markets, which shall be sold during the following 3 years. Allianz plans to incorporate the retail banking into the concern before. 2.1.2 The uprising market of investment funds Specialists award the market of long-term investments an average growth rate of 12,5 %. According to McKinsey the market of private investments will almost double its volume from 1.521 Billion EUR (1999) to 2.738 Billion EUR (2004). A loss of demand for low-risk investments from 46 % to 36 % results in an increased demand for life insurance (27% to 28%), stock shares (13% to 16%) and particularly investment funds (14% to 20%). A JP Morgan Research shows that annual growth rates in the markets of funds (17 %), stock shares (14%) and life insurance (9 %) will be covered by a sales channels network of more than 69% in each of those. 2.2 Sales Channels Network Insurance companies usually run numerous small insurance agencies, which are very important for the sales of insurance policies. These agencies provide local presence and serve as a home base for insurance brokers, who traditionally work in the field in order to sell policies. After the merger Allianz has more than 12.000 insurance agencies and 1.000 branches available. 17 Mio. customers can be reached all over Germany. Experts estimate the value of the customer database in the tens of millions EUR. By pursuing a cross-selling strategy Allianz hopes to convince even more people of their financial products, emphasizing on the insurance products offered and saled in the Dresdner Bank branches. In order to support the cross-selling, 1.000 insurance experts are deployed in the branches, providing professional competence of the insurance business for customers and employees. Beside the development of insurance products fitting into a bank´s sales channels, the new company also incentivizes employees of Dresdner Bank. When selling more complex insurance products bank employees are able to revert to the knowledge of expert insurance brokers. On the other hand 300 portfolio managers of Dresdner Bank also support the employees of Allianz with selling extensive financial products, after they have been initiated in standardized products. The new company plans to arrange an organization of chartered financial accounting. Existing Allianz accountants cooperate with accountants of Dresdner investment counseling, consolidated in Dresdner subsidiary Advance Bank. This integrated sales channels network also attracts international financial service providers, planing to offer their products on the German market. Possible joint ventures could result in the opening of new international markets. Another very important channel of distribution is planned to be made accessible by a cooperation with Consors, the most successful direct bank of Europe. Consors is well schooled in selling financial products via new communication mediums like the internet. 2.3 Asset Management The business unit asset management is considered the most potential of the merger. Combined Assets Under Management of more than 1 Trillion EUR in the year of 2001 facilitate a far more efficient management. Furthermore new Allianz Dresdner Asset Management (ADAM) hopes to profit by a transfer of knowledge, boosting the corporate development and distribution of integrated products. The new company is established in every important financial center of the world. It is able to cover the markets of institutional and private investors with all investment styles Growth, Core and Value. Beside others ADAM can profit by the knowledge of Dresdner RCM and Allianz subsidiaries PIMCO and Nicholas Applegate, which are counted among the most powerful companies of the American market, the world’s most distinctive asset management market. ADAM plans to separate global and regional business. Development, production and sales support are organized globally, whereas sales and after sales management are operated regionally. 2.4 Economies of scope & cost reduction Another very important reason for the merger has been the potential for cost reduction as a result of economies of scope, planned to be realized during the following years. Allianz analysts are confident of the merger´s synergetic potential, that effects economies of 2,244 Bio. EUR until the year of 2005. From 2006 on, further cost reductions of 1,08 Bio. EUR per year are being predicted. Experts used the bottom-up analysis when they calculated these figures. Using this time-consuming approach not upper managers are being interviewed but ordinary employees of every sector. Accumulated cost reductions of 1,515 Bio. EUR in sales and distribution, 1,11 Bio. EUR in asset management and 695 Mio. EUR in organization, information technologies et al. encourage the people in charge as well as the customers. According to Allianz CEO Schulte-Noelle, this amount is in large part based on positive synergetic effects on profit and additional growth instead of measures of cost reduction. A severance charge of only 375 Mio. EUR is assumed until the year of 2006 because they plan to ax only 600 jobs as a direct consequence of the merger. In the long term the branch network is aimed to be reduced to 850 branches what results in axing jobs in the branches. Further costs can be reduced concerning the marketing budget of financial products as well as the products that shall be sold via new communication mediums. Additionally labor costs can be reduced, due to less managers being employed in the top management of both companies. They have fallen victim of the new management structure. 2.4.1 The new management structure Allianz AG still acts as a management holding. It is in charge of the strategic leadership and it controls the whole group. This contains the allocation of resources, the setting of strategic ideas, aims and a border as well as the corporate controlling and the intern transfer of knowledge in the company. It is controlled by Dr. Schulte-Noelle. The residual part of the company is separated into 7 sectors divided by the fields of activity and the regional target markets. Allianz Dresdner Asset Management and Dresdner Kleinwort Wasserstein (DKW) are global oriented business units. DKW becomes an independent legal entity. A going public is projected in the following three years. The business areas of indemnity, casualty, life and health insurance are divided by the regions Europe I, Europe II, Americas and Growth Markets. The latter is led by Michael Diekmann, who becomes Schulte-Noelle´s successor in 2003. Before he was appointed to the managent board in 1998, he has been initiating to establish the insurance business in Asia. The merger of Dresdner Bank was also a move to support this establishment. The business unit Allianz Dresdner Financial Services includes banking, retail asset management, the German life insurance business and the private banking activities beyond Germany. 2.4.2 High Reputation Dresdner Bank and Allianz have a brand awareness of more than 90% of the German population. Several high performance brands of this sector are incorporated. So the company can reduce marketing costs while the group has a high international reputation . 2.5 Economic reasons There are one time economic reasons beside the long term synergetic effects mentioned before. Allianz has to pay only 3,7 Bio. EUR to finance this transaction, because it has an interlocking participation in Münchner Rück, HypoVereinsbank and Dresdner Bank. These shares allow Allianz to self-finance the larger part of the transaction. This merger has been the signal for the decentralization of the so called “Deutschland AG”. 2.5.1 The decentralization of the “Deutschland-AG” This arrangement is characterized by complex interlocking participations between Allianz, Dresdner Bank (DB), Münchner Rück (MR) and HypoVereinsbank (HVB). The decentralization has also been a condition of the European cartel authority after it has proved the circumstances of the merger. This authority has to prove every deal resulting in a market share of more than 66% in the home country or revenues of more than 500 Mio. EUR, in order to guarantee the fairness of the competitive environment. Allianz and DB sold their shares in HVB to MR. In return MR and HVB disassociated from DB shares. Allianz and MR also reduced their shareholding in each other. Furthermore MR sold its shares of 40,6% in Allianz Leben to Allianz at the beginning of 2002. From then on Allianz holds 90,9% of the biggest life insurance company in Germany. This was possible, not until the German tax reform of the minister of finance Hans Eichel has come into effect on January 1st 2002. Since then the disposition of shares in other companies has been exempted from taxes. The new company holds shares in numerous stock-listed industrial companies that can be sold in the following years, so they could supply the company with liquid assets. A lower capital lockup in financial investments leads to a decrease of the excess capital. This allows the company to focus and invest on the core business. The rise of the free float from 65% to 80% enhances the liquidity and the higher weighting of the share in an index. If the company takes this opportunity, it is able to save taxes of about 10 Bio. EUR. Furthermore the company value will rise up to more than 100 Bio. EUR after the merger. It is forecasted to increase rapidly when German “Riester-Rente” has been introduced. 2.5.2 Future development of the share From the shareholder´s view the most important ratio of this merger is the return on investment (ROI) and its development in future years, because the dividend and the value enhancement of a share depend on it. Analysts count on a positive development of the share. Dresdner CEO Fahrholz even prognosticates that the earnings per share (EPS) will increase by 13% in the first year. Both shares showed a high performance during the last 10 years. The EPS of the Dresdner Bank share had an average annual growth of 15%, while the Allianz share has been performing at an even higher level of 17%. A compound annual growth rate (CAGR) of 32,5% supports the attractiveness of the Allianz share. 2.5.3 Peer pressure Another very important aspect of the merger is the peer pressure managers have to face. From 1999-2001 the globalizing business world has significantly been affected by M&A transactions. The European merger control registered 941 transactions during that time. There have never been so many M&A deals realized before. This trend continues to this day and it has only been slowed down by economic crises like 9/11 in 2001 or the recent financial crisis of 2008/2009. Furthermore the trade volume of the banking and the insurance sector, which reaches top levels of 280 Bio. USD in the year of 1999 and 260 Bio. USD in the year of 2001, makes this sector highly competitive. Managers have been under enormous pressure. The main principle was “grow or die”. Failed mergers with Deutsche Bank and Commerzbank in the year of 2000 additionally intensified the pressure on the part of Dresdner Bank. 2.5.4 The establishment of the Asian insurance business Allianz is the first European company that obtains a business license from the Chinese government. Merging Dresdner Bank has also been a strategic move in order to establish the Asian business and to get access to more than 1 Bio. customers. According to Brian Shea, an insurance analyst, “a list of wishes of Allianz would include the support of the German sales, a disentanglement of the relations to German banks, the downsizing of financial surplus, the decentralization of interlocking participations and a rise of the free float. The merger and the transaction have met the demands in a very innovative way.” 3. Chronology of a merger On April 1st 2001 Allianz and Dresdner Bank announced the merger after due diligence and further preparation have been accomplishing since August 2000. At the press conference on April 5th 2001 Dresdner Bank pronounced the spin-off of Dresdner Kleinwort Wasserstein, which will be in charge of the asset management business. On May 11th the shareholder´s meeting of Dresdner Bank took place. Even Dr. Schulte-Noelle, who is also a member of Dresdner supervisory board, attended, but he has given no statement concerning the merger. The shareholders did not express plenty of criticism. They only cried out for a financial improvement of the takeover bid. In the meeting a more efficient program was passed. Among other things this program contained a demand for an ROI of 15%. 3.1 The takeover bid At the press conference of the Allianz Group on May 31st 2001 the company published its takeover bid to the shareholders of Dresdner Bank. This bid will run from May 31st till July 13th 2001 and it will be advertised all over Germany. Shareholders of Dresdner Bank received a combined offer from Allianz Bankbeteiligungs GmbH and DAD Transaktionsgesellschaft mbH, which is a Special Purpose Vehicle (SPV) initiated by Deutsche Bank AG and Oppenheim GmbH. This share deal contained an offer from Allianz, to acquire the shares of Dresdner Bank at an amount in cash of 53,13 EUR and the opportunity to purchase shares of Allianz from DAD, paying a part of the amount received. But the offer of DAD was compulsory. Shareholders of Dresdner Bank could not sell their shares without buying shares of Allianz. If a shareholder sold 10 shares of Dresdner Bank he received one share of Allianz and 200 EUR in cash. In order to provide the shares for this takeover bid Allianz had to realize a capital increase in return for stock. For this reason the management board decided to repurchase shares of 3,5%. The investment banks operating in the background have been UBS Warburg (Allianz), Dresdner Kleinwort Wasserstein and Goldman Sachs (Dresdner Bank). Deutsche Bank gave a fairness opinion to Allianz and the whole executive board of Dresdner Bank recommended its shareholders to accept the offer. Most of the shareholders accepted the takeover bid. Altogether Allianz acquired 325.191.201 shares of the issued stocks, what equates to an acceptance rate of 94,1%. The existing share in Dresdner Bank as well as some call options result in a overall share of 96,4%. On July 19th 2001 the European Commission also acceded to the merger. Bernd Fahrholz, Leonhard Fischer and Horst Müller became members of the management board of the new holding company. Bernd Fahrholz became vice chairman. From the middle of July on insurance products of Allianz have been offered in the branches of Dresdner Bank. The personnel exchange mentioned before has been set into operation. Allianz also offers products of Dresdner DIT. On August 7th 2001 the official takeover was being celebrated in Frankfurt, Stuttgart and Munich. At a press conference on November 14th 2001 Allianz and Dresdner presented the measures realized so far. Parts of the personnel exchange have been realized. 700 insurance experts work at the branches while 120 portfolio managers work at insurance agencies. But the merger has not been successful concerning the financial matters. Dresdner Bank records a profit collapse in 2001 which is reflected in the balance sheet of the concern. It halves the net earning of the concern to 820 Mio. EUR. However Allianz is awarded the prize for “German M&A-Deal of the year 2001” at the “Financial News European Awards for Corporate Excellence” on March 1st 2002. 3.2 The squeeze out of minority shareholders The annual meeting of May 24th 2002 decided to pay the minority shareholders off by using the so called squeeze-out method. Allianz hereby took the opportunity, which has been existing since 2002, to squeeze minority shareholders out of the company by means of cash compensation. The only condition to use this method is that the main stock owner holds 95% share of the capital. Additionally the preclusion of the minority shareholders must be decided by the shareholders meeting. According to Paul Achleitner, Chief Financial Officer (CFO) of the Allianz AG, “high costs would be generated concerning the listing on the stock exchange, the disclosure requirement, the organization of the shareholders meeting and many other aspects. Shareholders would have to face limitations of their options as well as risks caused by the pricing of such financial stocks because the narrowness of the market brings low liquidity about. The exact amount of the cash compensation of 51,50 EUR per share has been calculated by Ernst & Young. This valuation report has been reviewed and confirmed by Susan & Partner. The valuation was based on the income approach. Considering the stock price, which temporarily has fallen under 40 EUR after the expiration of the conversion period, the calculated price was quite fair according to financial experts. But the minority shareholders did not make a deal when the offer price of 53,13 EUR is reconsidered. 3.3 Consequences of this merger At a press conference on March 20th 2003 the management board declared that Allianz is in the red for the first time in the company´s history. At the same time the resignation of CEO Henning Schulte-Noelle and his representative Bernd Fahrholz have been announced. Another appointment was an austerity program at a volume of 250 Mio. EUR in the year of 2003. The going-public of Dresdner Kleinwort Wasserstein has been deleted from the agenda. However, the Allianz Group has achieved the turnaround in 2003, because it realized restructuring measures and the market has recovered. It is back in the blacks because it has gained net earnings of 1,89 Bio. EUR. In 2004 Dresdner also showed profits of 142 Mio. EUR while Allianz increased its net earnings to 2,19 Bio. EUR. 4. Valuation Pursuant to Seuferle, there occur typical problems valuating a bank: - The “change-of-control” condition concerning hybrid instruments of refunding - The change of the core capital ratio and the resulting change of rating - The adjustment of the interest income as a result of a term transformation - The adjustment of the trading result - The normalized rate of failures concerning credits - The restriction on dividend payout These problems affect the method of valuation. To introduce the most reasonable method, valuating a bank, I will briefly describe the approach of the Discounted Cash Flow (DCF) method. Predicted cash flows are discounted by the Weighted Costs of Capital (WACC). Analysts also account for future tax liabilities calculating the Net Present Value (NPV), which is the DCF. The method is separated into two approaches. Using the equity-approach, only after tax payments to the owner are considered. Net incomes are discounted by the suited market risk premium of investors. Experts hereby assume, that the whole surplus has been paid out and that all outside creditors have received their money. If the entity-approach has been chosen, the shareholder-value is indirectly calculated by discounting the payments to all creditors. The entity-approach differentiates between the methods of WACC, the Adjusted Present Value (APV) and the Total Cash Flow (TCF). Using this approach, analysts calculate the NPV paid to all creditors. In order to calculate the company value, the NPV of debt capital is discounted from the total capital at market values. The monetary profit, which is available to all creditors stands for the cash flow. The method used, valuating Dresdner Bank, has never been published. Considering the share price of 47 EUR before the merger has become apparent, it is an approximate approach to the market value, if you multiply the price of the share by the number of shares without par value entitled to dividend (575.333.145). This calculation results in a market value of 27 Bio. EUR. At an analyst conference in July 2001 Allianz declares a total transaction volume of 24 Bio. EUR. The estimate extern borrowing requirement is 3,7 Bio. EUR which is adjusted to less than 3 Bio. EUR shortly after the conference. The remaining amount of money is financed by the distribution of shares within the “Deutschland-AG” like mentioned before. 5. Conclusion Allianz has not been awarded for nothing. This deal had an overriding public interest. It was a concern to many with regard to their jobs, their money and their insurance. In order to manage such an huge transaction, people in charge had to work very hard, precisely and efficient. The transaction has been realized well structured and efficiently. Regarding to the huge transaction volume of 24 Bio. EUR , this has been a well organized merger. An acceptance rate of 94% proves that all steps, varying from the valuation over the funding to the advertising effort have been managed and prepared very well. The management board of Allianz has defined straight goals and strategic reasons for this merger. It trusted in the potential of synergetic effects and economies of scope. The bottom-up promises have been overvalued right from the start and they have been shaped up as unsustainable. A heavy drop in the stock price led to financial losses in both companies. From the beginning on Dresdner Bank has been in the red. It has weakened the performance of the concern till the year of 2004. But the performance of the companies has also been hit by the financial crisis following 9/11. It is always risky to merge a company, especially in this upper region. Although financial aspects of the merger have not been successful, it helped to sustain the market position of Allianz compared to Deutsche Bank. The new customer database and the sales channels network made it possible to take the opportunities of the uprising market of investment funds, encouraged by the “Riester-Rente”. When Dresdner Bank was sold to Commerzbank in 2008 it had a remaining company value of 8,8 Bio. EUR. The bank has served a purpose to Allianz, also in matters of the establishment of the insurance business in Asia. 6. Works Cited - Allianz(2001): Infobuch zum Übernahmeangebot. https://www.allianz.com/de/presse/presse-events/page39.html'mode=print (01.05.2010) - DOLLINGER,N.(2001): Chancen und Risiken der Fusion von Großunternehmen anhand des Beispiels von Allianz und Dresdner Bank. http://www.hausarbeiten.de/faecher/vorschau/106137.html# (01.05.2010) - SABEL, T.(2005): Die Übernahme der Dresdner Bank AG durch die Allianz AG im Jahre 2001. http://www.hausarbeiten.de/faecher/vorschau/38776.html#