Always the takeover target...

Since then, not very much has happened at the bank, which took until 2021 to start making decent profits again. Then, in September 2024, to everyone’s surprise, Italy’s UniCredit took the opportunity to acquire a nearly 10% stake.

Orcel, an experienced investment banker, was prepared to offer €13.20 per share but only if he could buy the whole 4.5% stake. The federal government hadn’t agreed any wording in the terms of the share offer that would have covered a case like this (in which all shares are allocated to a single bidder) and so felt itself bound by EU law, which demands a sale ‘free of discrimination’. It would also have been difficult to explain to taxpayers why the shares were not sold to the highest bidder. The following morning, UniCredit announced, to general amazement, that it had already acquired a 4.58% stake in Commerzbank and now had nearly 10%.

There has been outrage in Germany over the way UniCredit ‘crept up’ on Commerzbank. Federal Chancellor Olaf Scholz spoke of ‘unfriendly attacks’. The board of Commerzbank is insisting that the bank should remain independent. But what is at least as important is that the share price of both Commerzbank and UniCredit has risen. That suggests that shareholders like the idea of a merger and it also raises some questions. First, does it make sense to talk about a hostile approach when, after all, it is the shareholders who decide? Second, could the government actually prevent the sale of Commerzbank ‘to Italy’? Third, why do the owners of both banks like the idea of a merger?

Hostile takeovers in banking are considered more or less impossible. Banks don’t manufacture goods. Their value creation is a function of the interest margin that they earn from lending and from assets, as well the money they make from other services such as payments. The basis of the business is trust. Customers can easily depart to another bank and employees in financial hubs such as Frankfurt can quickly find another employer.

However, Germany is still considered to be over-banked, and that is before JPMorgan and Spanish bank BBVA launch new private banks in the country, probably this year. That will only increase competition in Europe’s largest market. That said, Commerzbank may have a niche that it can defend: it has an excellent standing as a trade bank, providing services such as export guarantees and letters of credit to companies in an increasingly protectionist global economy.

Given all of this, UniCredit is likely to have thought seriously about whether or not to buy Commerzbank if an acquisition were to encourage important customers and employees to leave because they would be taking much of the bank’s value with them. Orcel also has his eye on an Italian competitor, Bank BMP, and has said that he wants to conclude that acquisition before June this year.

There is little doubt that UniCredit intends to acquire all of Commerzbank once it has dealt with Bank BMP. Immediately after the acquisition of the 10% stake, UniCredit made an application to ECB regulators for permission to increase its holding in Commerzbank to 29.9%. The procedure for gaining control of a company takes three months, but that period can be extended by requests for information. The final outcome, though, is not expected to be an ECB veto. And, as soon as UniCredit has crossed the 30% threshold, it would have to make a takeover offer for the remaining shares.

The German government still holds 12% of Commerzbank’s shares, but that is not enough to prevent a takeover of the bank and an opposing bid by German competitors is considered unlikely. Deutsche Bank’s Chief Executive, Christian Sewing, found the acquisition of Postbank in 2008 to be bruising. Cornelius Riese, the head of DZ Bank, has ruled out being a white knight.

What’s left for Commerzbank, then, is persuading its shareholders that a stand-alone strategy can create more value in the future than a merger with UniCredit would. Bettina Orlopp, the Chair of the Board who was put in place on 1 October 2024, has scheduled a capital markets day on 13 February to try to do just that. One thing is already clear: from 2027, Commerzbank will set itself far higher goals than the current 12% return on capital and will announce further buy-backs to keep current shareholders happy and attract new ones.

What is probably more important than Commerzbank’s strategy, though, is that UniCredit’s aims are at odds with some hard geopolitical realities. In principle, European regulators support the idea that Europe needs bigger banks so that there can be more investment in green companies and in digitalisation. Funding in Europe tends to come less from capital markets and more from bank lending than is the case in the US and UK. ‘Big banks can make bigger loans’ is the logic behind mergers, pushing concerns about too-big-to-fail into the background, even for regulators.

Until now, German savings banks and mutuals have prevented their national funds being put into a European deposit protection scheme. That is why regulators are careful to ensure that deposits don’t cross borders. When Orlopp was asked, in an interview with the Frankfurter Allgemeine Zeitung, whether the deposits of German Commerzbank customers could be used to fund lending in Italy or Eastern Europe, she said: “No, UniCredit is not allowed to do that.”

Given that, UniCredit’s plan for Commerzbank is more of a merger between German banks than a cross-border merger. Because if UniCredit got its way, it would tie up Commerzbank with its existing German subsidiary, Hypo-Vereinsbank (HVB), which is based in Munich. HVB, which UniCredit acquired in 2005, has a trade and transaction banking business almost as big as that of Commerzbank and, although the branch networks overlap in northern and southern Germany, HVB has limited presence in the middle of the country.

If UniCredit/HVB and Commerzbank were to merge, it would take around 18 months to process everything, as the merger between UBS and Credit Suisse in Switzerland shows. Although UBS appeared to have got a bargain – it paid just €3bn for its rival – its Chairman, Sergio Ermotti, says that UBS had to forgo between €15bn and €20bn in profits to save Credit Suisse, which was in structural deficit. Ermotti claims that the merger is a blueprint for others, although the tie-up of the two IT systems is still a work in progress. UBS has to transfer 110 petabytes of data from Credit Suisse to its own systems. One petabyte is equivalent to around 500m printed pages and it can take months to move, depending on network capacity and the amount companies are willing to spend.

The integration of Commerzbank by UniCredit would require similarly heavy lifting. That is why the chief executives of Deutsche Bank and DZ-Bank already see a chance to lure away Commerzbank customers while it’s in its ‘busy with itself’ phase. Sewing, the Chief Executive at Deutsche Bank, who led a failed merger bid for Commerzbank in 2019, seems relieved to be spared the tricky tasks of bringing together IT systems, branches and departments.

Given the resistance to the merger in the German government and among Commerzbank staff, as well as the limited synergies that are to be expected while banking union remains unfinished, would UniCredit be better off backing down?

According to analysts at JPMorgan, despite the downsides, the overall advantage for shareholders remains. A merger could lead to cost savings of between €1.1bn to €1.4bn before tax through the closure of around 111 branches, or about 17% of the current total. There would also be opportunities to drive down costs at the current head offices in Munich (HVB) and Frankfurt (Commerzbank). The analysts point out that UniCredit cut the costs at HVB by €1bn, or around 27% to €2.7bn. Part of that was due to staff cuts of 21%.

Employees at Commerzbank, led by the Verdi union, are angry at the prospect of similar job losses. In the Commerzbank head office in Frankfurt alone, there are around 10,000 employees. That will be something that the German government bears in mind when UniCredit comes back for the rest of Commerzbank.