By IPS Correspondents
BERLIN, Mar 10 2000 (IPS)

The announced merger of Deutsche Bank and Dresdner Bank to create the world’s largest bank in asset terms – worth 1,2 trillion United States Dollars – is yet another sign of the increased need for large companies to fall back on economies of scale to compete on the global market place.

But analysts, including the influential Bank for International Settlements in Basle, have warned that not all mergers will result in greater strength as some institutions fail to properly integrate companies they take over.

This is particularly the case in cross-border take-over bids where corporate cultures and gearing towards markets make integration particularly difficult.

Nonetheless, analysts say, in the increasing globalisation of the market place, size and brand-name are among the most important factors steering the merger-mania which reached a peak in Europe in 1999 and shows no sign of abating.

Massive mergers took place last year in the European automobile sector, telecommunications and banking, such as Banc Nationale de Paris and Paribas in France and the agreed merger of Britain’s Natwest with the Bank of Scotland.

In Europe, mergers are particularly strong in areas most likely to be affected by electronic commerce.

In an age of electronic commerce, where money can be moved easily across borders, only a few large and trusted institutions can survive.

“It is a winner-takes-all market,” says one analyst.

The launching of the single currency, the Euro, has also made it easier for international companies to trawl for business across the whole Euro-zone.

This means a United States bank, for example, can easily gain a huge slice of the European market unencumbered by the risks of exchange transactions.

The Euro market and buoyant stock markets have also made it easier to raise cash to finance gigantic mergers, which would not have been possible in the past.

Investors in the Euro zone can also lend money for megamergers without attendant currency risks.

But in practise, little money actually changes hands. Mergers are occurring through share-swaps, something that is new to the German business landscape.

With powerful United States banks already pushing to gain a slice of the Euro market, the Deutsche-Dresdner merger aims to create an investment bank that can rival US giants such as Goldman Sachs and Morgan Stanley Dean Witter in their own back yard, analysts note.

At present the main mergers and acquisitions have occurred within national boundaries. But many believe that the wave of mergers has only just begun despite 1999 being a record year for European mergers.

“Domestic consolidation is only the first step. It is only when companies outgrow their own domestic market that they seek to expand and take on the giants in other markets within the Euro- zone and then the world,” says an analyst.

Rolf Breuer, chairman of Deutsche Bank made his ambitions clear at a press conference in Frankfurt Thursday

“We are a European powerhouse with global reach. First comes domestic consolidation, then comes the cross-border appetite. We are well-placed for phase number two – European Consolidation,” he says.

Schroeder also praised the merger although loss of jobs is a big issue in Germany with a possible 16,000 jobs to be cut worldwide as a result of the Deutsche-Dresdner merger.

“This new bank can play a strong role in international financial markets,” Schroeder said.

Whether Deutsche Bank can go on to take on the US market is another matter.

Analysts believe it will take some time to integrate Dresdner in its structure before it can look further afield. Deutsche Bank has already acquired the American Bankers Trust, it is thought, with a view to tackling that market.

Analysts believe that Deutsche is more likely to target European banks first. However there have been warnings, even as companies start to trawl, for likely candidates for a merger.

A recent study by the Bank for International Settlements said the experience of the majority of mergers was ‘disappointing’.

Banks underestimated organisational problems of running massive institutions. Size did not offer protection against failure, the BIS said.

Worse, the consequences of failure of a mega-banks would be horrendous. It was highly likely that billions in tax-payers money would be used to bail out such a bank because of the effects on labour and the entire economy of such an event.

Although there is little empirical evidence of the success of mergers and acquisitions, research by Germany’s Commerzbank says that more than half of mergers in the banking sector fail to create value.

“Mergers only temporarily offset inevitable decline,” Commerzbank said in a newsletter.

Management consultants Bain And Co. notes that two thirds of Bank mergers do not succeed in achieving their goals.

“Increasing the size of the tanker does not mean it cannot sink,” said another analyst. Adding that mergers often meant being dragged down by another company’s weaknesses as well as its strengths.

“The key thing about the merger is to make it crystal clear who is going to lead the operation,” says Stephen Barrett, head of mergers and acquisitions at KPMG. “This is where problems arise, particularly in cross-border mergers where national pride is at stake, and corporate cultures may be completely different,” he adds.

The hostile takeover of Germany’s Mannesmann, the German telecommunications and engineering group, by Britain’s Vodaphone Airtouch, the world’s larges mobile phone group, in early February unleashed a barrage of anti-British comment in Germany. This was despite the fact that in 1999 German companies had taken over major British car firms.

It was the first major hostile bid on a German company to succeed and in the eyes of many analysts, changed the corporate landscape forever.

“Germany is no longer sacrosanct,” said one analyst.

German politicians and the local media however, characterised Vodaphone’s bid as an attack on Germany’s business culture based on consensus between management and workers compared to the “Anglo- Saxon” model of pure shareholder capitalism.

Freewheeling Anglo-American business practices challenge the rigidities of the German labour market and undermine the German view that a company must contribute something to society as well as make quick profits for shareholders.

German Chancellor Gerhard Schroeder last November rejected hostile takeover bids in general saying they were “never helpful” as they destroyed corporate culture and undermined employees’ commitment to a company.

Schroeder has now set up an advisory commission on corporate takeovers which held its first meeting this week. But the Chancellor’s own tone has changed somewhat, partly because of Mannesman chief Klaus Esser’s own attitude which rejected the politicians’ xenophobic rhetoric.

According to business analysts Esser played the role of the ‘internationally-minded’ corporate executive, open even to a foreign bid as long as it is in his shareholder’s interest. This was seen as a signal that even in Germany the logic of the Anglo- American business culture was beginning to find acceptance.

“More and more German companies are realising that its not about long term commitment and is more about short-term shareholder profit,” says an analyst.

Whether this is good for Germany is still being debated.

However analysts note that in a globalised economy there is less room for national differences.

“Everyone must fight for the global market using the same set of rules, and unfortunately for Germany, the Anglo-American model dominates. They have to follow suit if they want a slice of the pie,” says a British analyst.

With Germany’s economic competitiveness and dropping since the economic boom of the 1970s and 80s, analysts maintain that the big conglomerates have little choice but to adapt to the Anglo- American model or slide further.

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