The Merger of Allianz Group and Dresdner Bank

1. Introduction

In our days mergers and acquisitions are a predominant feature of the international business system as companies attempt to exploit new market opportunities and to strengthen their market positions. Each year sets a new record for the total value of mergers and acquisitions and nearly every day new announcements are made in the business newspapers.

In the literature one finds a large number of explanations for the occurrence of mergers and acquisitions. Sometimes, these explana-tions are also applicable to related forms of interindustrial links such as joint ventures or strategic alliances. Therefore it is necessary to define the term merger and acquisition as it will be used throughout this seminar paper.

1.1 Definition of the Term Merger and Acquisition

Two different phenomena are described by the term merger and acquisition. A merger is a combination of two corporations in which only one survives and the merged corporation goes out of existence. It is a unification of two or more firms into a new one and thus characteri-zed by the fact that after unification there are fewer firms than before. On the contrary can the target firm after an acquisition either remain autonomous or be partially and/or wholly integrated into the new parent company. However, from a legal point of view the firms remain independent entities.

In most of the cases, one company acquires the majority or minority equity stake in another which is not a true merger in the legal sense. The two companies are not legally united, but form an economic unit where both remain legally independent, a so-called quasi-merger. The term acquisition mainly is used when more than 50% of a

company's equity are purchased, i.e. the buyer gains complete control over its target. Equity stakes of lesser percentages are referred to as minority holdings.

In spite of the legal difference between mergers and acquisi-tions, both terms are often used together. In international business the expression merger and acquisition, abbreviated M & A, or only merger, has become a general term referring to all kind of activities which are related to the selling and buying of a company. It includes classical mergers and acquisitions as well as management-buy-outs and management-buy-ins, minority equity purchases, joint-ventures, spin-offs and divestitures. Nevertheless, strategic alliances generally are not included under this expression, because often they are only of temporal character and not manifested by equity exchanges. From a strategic point of view they can be considered as an alternative to mergers.

1.2 The Different Types of Mergers

The merger boom in the early nineties was different from pre-vious waves, not only in terms of its geographical spread and increased scale, but also in terms of the type of organizational combinations it has produced. Usually mergers and acquisitions are considered in terms of the extent to which the business activities of the acquired company are related to the acquirer. There are four main types of mergers: Horizon-tal, conglomerate, vertical and concentric mergers.

A horizontal merger combines two similar companies in the same industry. A conglomerate merger refers to the situation where the acquired organization works in a completely unrelated field of business activity. A vertical merger unites two companies from successive pro-cesses within the same industry. Very often it is subdivided into vertical backwards or vertical forwards mergers , e.g. a manufacturer acquires retail outlets. In a concentric merger the acquired company works in an unfamiliar but related field into which the acquiring company wishes to expand.

1.3. An Overview of the Various Motives for A Merger

The oldest explanation for a merger goes back to the concept of monopoly power which is reflected in a companies market share and the barriers to entry its market. In the monopoly theory mergers, espe-cially horizontal ones, represent an easy and quick way to increase market shares of a firm and to limit the competition in a particular market. Conglomerate and vertical mergers help to strengthen the market power by discouraging potential entrants. The monopoly theory played a dominant role in the past, especially in the first great merger wave in the U.S. between 1887 and 1904. Today most of the horizontal mergers are too small to confer monopoly power, because larger acqui-sitions fall under intense antitrust scrutiny.

In the industrial strategy and organization literature mergers are often explained in terms of synergies and/or efficiencies. The efficiency theory is based on the assumption that the combined firms are more profitable than the companies operating separately because of the operational, managerial and financial synergies. Operational synergies include economies of scale, economies of scope and economies of experience.

The valuation or information theory explains a merger from a financial instead of a strategic perspective and assumes that the current market price of a company does not reflect the true value. The company which buys an undervalued firm believes it can manage the target company better than the current management. Corporate buying and selling activities are traced back to the conditions of financial markets.

Presently globalization is the key feature of the new competitive landscape within which mergers are taking place. However, it is impor-tant to keep in mind that globalization is a trend and not an already exis-ting condition. Globalization is not spreading evenly across the world and it is more frequent in certain areas of activity than in others. None-theless, it can be defined in terms of different levels of focus. At a world-wide level it refers to a growing economic interdependence among countries and is reflected by increasing cross-border flows of goods, services, capital and know-how. At the second level it shows the interlinkages a specific country has with the rest of the world or the competitive position of a company within a specific industry with compa-nies of other countries. On the third level globalization refers to the extent to which a firm has expanded its revenue and asset base across countries and engages in cross-border flows of capital, goods and know-how across subsidiaries. Consequently international mergers and acquisitions are seen to be the inevitable in order to respond to the increasingly powerful drivers of globalization.

2. Allianz Group and Dresdner Bank

2.1 Allianz Group

Allianz was founded in 1890 in Berlin and is today one of the world's leading insurers