The Deutsche Bank Commerzbank Merger

Deutsche Bank which, which was once a dominant German financial institution has now become extremely fragile. This German bank managed to make it past the great recession of 2009. However, the bank has been facing one challenge after another ever since the recession got over. At the present moment, the bank is functional and solvent. However, the German government is afraid that if the economy faces any shock or even if Deutsche bank has to pay a big fine, it will simply collapse. The German government is not very comfortable with this situation. Deutsche Bank is one of their central financial institutions and financial troubles at Deutsche Bank could endanger the fledgling export-led German economy. This is the reason why the German government is eager to merge the Deutsche bank with Commerzbank.

However, the merger process hasn’t been a smooth ride either. The government is facing stiff resistance from employees at these institutions. In this article, we will have a closer look at this proposed merger as well as the possible after-effects.

Why Has Commerzbank Been Chosen For The Merger?

The German government has made it very clear that it wants to keep the financing of German small and medium enterprises in German hands. This is the reason why it wants Deutsche Bank to merge with Commerzbank. Commerzbank, like Deutsche Bank, was under severe financial stress after the 2009 crisis. The bank would not have survived had it not been for the bailout by the German government. Also, Commerzbank itself has gone through several mergers. Hence, it has the required experience to manage a merger of this magnitude.

At the present moment, the German government has a 15% equity stake in Commerzbank. Also, it fears that Commerzbank is also volatile and hence is a likely target for a hostile takeover bid by a foreign bank. The German government, therefore, sees Deutsche Bank and Commerzbank as two entities which have complementary needs. If left alone, both the entities are likely to collapse. However, if merged together, the combined entities will have the financial wherewithal to survive grave financial distress.

Advantages

The merger of Deutsche Bank and Commerzbank would result in many advantages. Some of them have been listed below.

Dominant Firm: Firstly, the combined entity would be a dominant financial firm. It would control over one-fifth of the retail banking market in Germany which is a leading industrial nation. The combined entity is expected to have a market valuation of over $30 billion. Also, the assets under the control of this combined entity would be close to $2 trillion! Size will make a lot of difference as far as both these banks are concerned. This is because a large size will act as a deterrent for hostile takeover attempts.

Technology Costs: Banking has now become a technology-intensive business. This is the reason why the combined entity will have an advantage over its rivals. The combined entity will have twice the budget that other banks have. Hence, it will be able to introduce newer and better services which will help it capture market share. Also, the technological expenses as a percentage of the sales will be lower than the peers of the combined entity.

Labour Costs: Deutsche Bank and Commerzbank both employ a large number of people in Germany. It is estimated that their total workforce stands close to 140,000 people within Germany. When both banks are merged, there will be some synergies. As a result, it will allow the combined entity to cut some jobs. These job reductions are likely to reduce the operating expense of the bank by $2 billion per year.

Problems

There are many problems and issues which may arise once the Commerzbank, Deutsche Bank merger takes place. Some of these problems have been written below:

Labour Unions: Although, cost-cutting could save Deutsche Bank and Commerzbank billions of dollars per year, these banks are also facing a lot of resistance from German employee unions. The unions have already started spreading negative news. According to claims made by them, the combined entity will lose 10,000 jobs in the city of Frankfurt alone! This is why the talks between the two banks have been stalled. However, bank officials are trying to convince the unions that job losses are likely to happen regardless of the merger. Also, the bank officials believe that the combined entity may benefit from the Brexit hence the number of jobs lost may turn out to be much smaller.

Revaluations: Both Deutsche Bank and Commerzbank have a lot of assets on their balance sheet which has been held at the cost price. For instance, Commerzbank has extensively lent money to the Italian government which is now in a precarious financial position. Hence, if this merger goes through, the combined entity will be forced to revalue these assets and recognize the losses. This could significantly dent the market valuation as well as the asset book of the combined entity.

Negative Publicity: Lastly, Deutsche Bank already has a negative perception amongst the German masses. The bank is seen as a symbol of capitalist excesses. Now, it will also be seen as a bank that fired its loyal employees. If the combined entity were to ever run into financial trouble, it would be next to impossible for the government to garner enough financial support to bail-out this combined entity.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.

Banking