The Italian job: What Unicredit’s bold bid for Commerzbank tells us about European economy

The Italian banking group’s hostile takeover bid for the German bank could signal the beginning of a restructuring in the European banking sector.

Former Italian Prime Minister and economist Mario Draghi delivers a speech at a plenary session of the European Parliament, in Strasbourg on September 17.  | Photo Credit: FREDERICK FLORIN/AFP 

Europe is clearly battling to stall its economic decline, and Mario Draghi’s recent report on the future of “European competitiveness” commissioned by the European Union reflects this fact. At the centre of Europe’s economic slide is the descent of Germany to the status of the “sick man” of Europe. Inflation, rising unemployment, falling competitiveness, and slow growth have been plaguing the nation for the past few years.

This European disease, while leading to much hand-wringing on the future of Europe vis-a-vis the rest of the world, is triggering economic conflict within Europe as well. A telling example of this conflict is the controversy surrounding the acquisition of a 9 per cent stake in the Frankfurt-headquartered Commerzbank, the third largest commercial bank in Germany, by the Milan-headquartered Unicredit, the second-largest Italian banking group. That acquisition has been followed by actions suggesting that Unicredit has in mind a complete takeover, executed in steps to ensure that it is not violating European Central Bank (ECB) rules on transfer of banking stakes in Europe.

Unicredit seems clear about its objectives, which are based on an assessment that “there is substantial value that can be unlocked within Commerzbank, either standalone or within UniCredit, for the benefit of Germany and the bank’s wider stakeholders”. The ECB’s permission is required for one European bank to acquire more than 10 per cent stake in another. The first step was the 9 per cent acquisition, followed by a request for permission from the ECB to raise Unicredit’s stake in Commerzbank to 29.9 per cent. Additional permissions are required to raise the stockholding to 50 per cent or more.

The Unicredit move suggests that in the current churn in Europe, European companies are seeking to expand profit opportunities at the expense of other firms within the continent. Since Europe has lost competitiveness and the related ability to garner much profit from manufacturing, the focus is on services, with banking being the more lucrative among them.

Not surprisingly, the 9 per cent acquisition has triggered a standoff involving governments. German Chancellor Olaf Scholz has characterised the bid as an “unfriendly attack” and condemned what he sees as an effort “to aggressively acquire stakes in companies without any cooperation, without any consultation, without any feedback”. The Italian government, on the other hand, appears to be backing Unicredit’s adventure. Italian Foreign Minister Antonio Tajani reportedly stated that Unicredit’s actions were “more than legitimate”. And not being German, the ECB President Christine Lagarde may not be opposed to a process of consolidation that could be seen as strengthening European banking.

However, the takeover story has followed a more convoluted trajectory than just a unilateral and hostile bid by the Italian bank. It was in early September when Unicredit, which has reportedly been eyeing a merger with Commerzbank, acquired the initial 9 per cent stake by buying shares that were held by the German government. The government in Berlin had acquired a significant stake in Commerzbank after the 2008 financial crisis, which revealed that German banks hitherto considered as “staid” and “safe” were greedy and acquired toxic derivative assets abroad in search of higher yields and profits. When those assets lost value, banks like Commerzbank experienced an erosion of their balance sheets and had to be saved from insolvency by the government implicitly recapitalising them by acquiring equity. Since the intention was never to actually “own and run” these banks, as things returned to normal, the government was open to retrieving a part of its money through sale of the equity it held.

That offered Unicredit an opportunity to acquire a stake in the German bank, which it decided to seize when disappointing results led to a decline in the value of Commerzbank’s shares. The German government still holds 12 per cent of the shares of Commerzbank. Unicredit wanted to enter into negotiations with the government to acquire that stake as well and sought permission from the ECB to acquire 29.9 per cent. It did not expect much opposition, but it turned out that the 9 per cent acquisition by a single, “foreign” buyer came as a surprise to the German government, which turned hostile.

It also triggered alarmist responses in other circles. Opposition parliamentarians argued that the entry of a profit-hungry foreign owner would adversely affect the flow of credit to Germany’s “Mittelstand”, its small and medium enterprises. Unions felt that the acquisition would lead to a loss of jobs. Some of these perceptions harked back to the role of German banks in the years before the shift to neoliberalism, a shift whose impact became glaringly evident when these banks—once deemed “conservative” and “safe”—were found to be deeply involved in speculative assets and trades emerging from the fully deregulated US markets.

But these responses have not reined in Unicredit, which had earlier said that it would not resort to a hostile takeover or acquire a majority stake in Commerzbank without the approval of the government. Following the refusal of the German government to part with the remaining 12 per cent stake it holds, Unicredit’s chief executive officer Andrea Orcel bought financial derivatives that provided the firm an assured option to acquire shares that would raise its stake to 21 per cent in Commerzbank, if approval to cross the 10 per cent holding barrier is received from the ECB. According to Reuters, Unicredit has said its exposure to Commerzbank had been hedged “to provide it with full flexibility” to either retain, sell, or increase the stake further. Any settlement will occur after it receives permission to raise its holding to 29.9 per cent.

Meanwhile, there are signs that Unicredit is in contact with non-governmental shareholders of Commerzbank. A Commerzbank representative reportedly told Financial Times that the bank had “taken note” of Unicredit’s move and that its board was “always open to responsibly evaluating strategic options”, while keeping in mind the interests of all stakeholders: investors, employees, and clients. That definitely appears to keep the door open, if the ECB relents.

As the story unfolds, the German government, in search of resources to fund expenditures that could stimulate its economy without increasing the budget deficit, might find reason to sell its remaining stake at a negotiated price.

Europe is in the midst of change, and this major step may be difficult to stall. That would begin a process of restructuring of the European banking sector that may not be in the best interests of small- and medium-sized businesses and ordinary depositors. 

C.P. Chandrasekhar taught for more than three decades at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts Amherst, US.