Allianz-Dresdner Deal Spurs Hope

By HANS GREIMEL
AP Business Writer

FRANKFURT, Germany (AP) -- Allianz AG's $21.6 billion
takeover of Dresdner Bank AG creates a new European
financial powerhouse with tentacles stretching to the United
States, but it also promises to help streamline Germany's
often inefficient business landscape, executives and
economists said Monday.

The deal is the first step in simplifying a tangle of corporate

cross holdings that critics say has hindered competition and
made the German economy less efficient.

``Our union is above all a very important step toward the
dismantling of Germany Inc.,'' Dresdner Bank chief
executive Bernd Fahrholz told a news conference detailing
insurance giant Allianz's nearly 24 billion euro stock and
cash takeover of Germany's No. 3 bank.

Under the deal announced Sunday evening, Europe's
second-biggest insurer, which owns the U.S.-based
Fireman's Fund Insurance and American Credit
Indemnity, extends its reach into asset management and
retail banking.

That follows a strategy already adopted by rivals such as
Citigroup of the United States, Switzerland's Credit Suisse and Fortis of Belgium.

As part of the deal, Allianz will transfer its 13.6 percent stake
in Germany's second-biggest bank, HypoVereinsbank, to
rival insurance company Munich Re. In return, Allianz gets
Munich Re's 10 percent stake in Dresdner.

Rearranging the holdings breaks a decades-old tradition of
cross holdings. Immediately after World War II, German
banks and insurance companies often took shares in the
country's rebuilding and cash-poor industries in return for
loans.

Companies such as Allianz and Dresdner have kept those
holdings because the country's 50 percent capital gains tax
discourages them from selling. The system has tied up
massive amounts of capital that economists say could be
better invested elsewhere.

``It doesn't guarantee a clear line between competitor and shareholder interest,'' said Torsten
Polleit, an economist with Barclays Capital in Frankfurt.

``A breakdown in that would be a step forward for transparency and competition in Germany.''

Economists expect a wave of mergers and acquisitions when the country eliminates capital gains tax next January. But, as the Allianz deal indicates, companies are already jockeying to
line up deals.

``The repeal of the tax by the German government has set a powerful force free,'' Allianz chief
executive Henning Schulte-Noelle said. ``One can either drift along defensively, or use them as
a chance for active developments.''

Yet, despite the modest changes brought by the current Allianz deal, Allianz still has a 38 percent stake in Beiersdorf pharmaceuticals, a 10 percent stake in chemical company BASF, a
10 percent stake in drug maker Bayer and a 5 percent stake in Deutsche Bank, among others.

Likewise, Dresdner Bank owns a 7 percent stake in Munich Re, a 5 percent stake in BMW and a 21 percent stake in cement maker Heidelberger Zement.

Investor initially drove up shares in both companies Monday morning. But in late afternoon trading in Frankfurt, shares in Allianz tumbled 2.39 percent while Dresdner shares fell 1.23
percent.

Some analysts said the takeover was a good move for Allianz.

``People think that the all-finance company is the future strategy for the financial services industry,'' Polleit said. ``This is a step in the right direction.''

But Standard & Poor's, the stock and bond rating company, placed Allianz on a credit watch late last week when takeover talks were announced. It warned that Allianz's bottom line would be bruised by Dresdner, which has weaker earnings.

The Dresdner deal is also seen by many a second-best solution for Allianz after last year's failed merger attempt between Dresdner and Deutsche Bank, said James Alexander, an analyst with
Commerzbank in London.

Allianz tried to broker that deal in hopes of using Deutsche Bank's retail bank as a channel to market its financial services.

Deutsche Bank's plans to sell the Dresdner investment banking unit ultimately torpedoed that deal.

This time, Allianz has plans to make a minority stake in the investment bank unit Dresdner Kleinwort Wasserstein available on the stock market ``within the next few years,'' adding it would still hold the majority of shares in the spun-off company.

Shareholders of both companies are expected to vote on the deal by June. And executives hope to finalize the takeover by the end of July, pending antitrust approval.

Allianz predicted that the merger would boost its earnings by 13 percent this year.

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