Ending Germany Inc.

For the better part of a half-century, Germany’s major banks, insurance companies and industrial holdings have been linked by a comfortable but incestuous relationship. Known informally as Germany Inc., the country’s top companies owned shares in each other’s businesses, worked together for their common good and helped produce the country’s postwar economic miracle. But in the age of globalization, that model is looking more and more out of date. With last week’s acquisition of Dresdner Bank by Allianz, Europe’s second- largest insurer, the cosy relationship is starting to unwind. Said Dresdner chairman Bernd Fahrholz: “Our union is above all a very important step toward the dismantling of Germany Inc.”

Allianz’s $21 billion purchase of Dresdner, Germany’s third-largest bank, creates a $100 billion financial behemoth. With just short of $1 trillion in assets, Allianz becomes Europe’s second-biggest asset manager. More important, the marriage of two of Germany’s financial leaders will likely unleash a wave of consolidation, adding some welcome competition to Germany’s overcrowded banking market.

The deal involves a complicated four-way swap of shares. Munich Re, Allianz’s cross-town insurance rival in the Bavarian capital, is swapping its 40% stake in Allianz’s life insurance arm, Allianz Leben, for Allianz’s 17% stake in HypoVereinsbank. Dresdner is also doing a share swap with Munich Re. In the process, the center of gravity of German finance moved a step toward Munich from its traditional base in Frankfurt. “By reducing cross-holdings, Allianz and Munich Re are laying the foundation for a crucial realignment within the German financial services sector,” said Allianz chairman Henning Schulte-Noelle.

The deal became feasible after the government of Chancellor Gerhard Schröder last year pushed through an end to the 50% capital gains tax for corporations, which had led many firms to sit on their investments. “The end of the capital gains tax is facilitating the restructuring of the financial sector in Germany and the eurozone,” says Thomas Mayer, chief economist at Goldman Sachs in Frankfurt. “An acquisition currency has become usable with the elimination of capital gains tax.”

Also driving the deal was the knowledge that as Germany’s baby boomers approach retirement age, the market for pensions and other savings products like mutual funds seems certain to expand. With Dresdner’s DIT, Allianz’s large insurance sales force will have mutual funds to peddle, while Dresdner’s retail bank network will become a distribution channel for Allianz’s array of insurance products.

Some analysts questioned the steep price Allianz is paying for Dresdner, a 40% premium over the bank’s recent share price, but the consensus was that the deal will probably go through. “I think for Dresdner it’s a fair price and a graceful exit,” says John Leonard, a banking analyst at Salomon Smith Barney in London. The merged company has decided to finesse the problem of what to do with the profitable Dresdner Kleinwort Wasserstein investment bank. DKW will be floated on the stock market in about three years as an independent entity, but with Allianz keeping a majority of the shares.

Allianz also seems unlikely to stop its expansion push with the takeover of Dresdner. “We will remain capable of action and thirsty for deeds,” Schulte-Noelle told a press conference. There was immediate speculation that the next deed would be acquisition of an online bank.

Another possibility might be that Allianz would now extend a hand to Commerzbank. Unlike Allianz’s takeover of Dresdner, where there is little overlap, merging two big banks has the attraction of instant cost savings as the two close down duplicate branches. More importantly, with Allianz’s linkup with Dresdner, the German financial scene seems more and more like a three-legged stool: Allianz and Dresdner, Munich Re and HypoVereinsbank, and Deutsche Bank. With traditional banking taking a backseat to the more profitable business of asset management, Commerzbank seems isolated and may now be amenable to a deal. One thing seems clear: the restructuring of Germany Inc. has only just begun.