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German financials surge
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December 23, 1999: 6:46 a.m. ET
’Overlooked’ proposal will allow tax-free asset sales by banks, insurers
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LONDON (CNNfn) - German banking and insurance shares soared Thursday as government plans to cut company taxes promised to speed a shake-up of corporate ownership, freeing up billions of marks of profit.
Financial institutions stand to earn huge tax-free gains if they sell stakes in blue-chip German companies such as DaimlerChrysler (FDCX) and BASF (FBAS). However, the surge in interest from investors Thursday took traders by surprise.
The plan to slash capital gains taxes for companies selling equity stakes from 50 percent to zero was first published Tuesday as part of the government’s latest federal budget. Traders in Frankfurt said the proposal had at first been overlooked: bank and insurance shares showed little reaction Wednesday.
Investors piled into the financial sector to send the Xetra Dax index surging more than 4 percent. Reinsurer Munich Re led the charge as its shares climbed almost 20 percent. Allianz (FALV), the country’s largest insurer, was more than 16 percent ahead, valuing the company at more than $73 billion. Each of the two companies owns a 25 percent stake in the other.
Deutsche Bank (FDBK), which had already started a program of asset sales, was trading 12 percent higher at midday while HypoVereinsbank and Dresdner Bank, the second and third-largest banks, gained 11 percent and 7 percent respectively.
The government also plans to cut the headline rate of corporate tax, but this and the reduction to capital gains tax won’t take effect until 2001, and first need German lawmakers’ approval.
Punitive tax rates
Deutsche Bank has been at the forefront of an increasing commitment among German banks to maximize shareholder value. In part, that entails seeking ways to realize the value of its long-standing investments in German industry. However, punitive rates of tax on capital gains have hitherto limited the volume of sales, tying up valuable capital.
"The tax changes [should] make financial companies more likely to unwind surplus equity stakes and cross holdings,” JP Morgan chief equity strategist Tim Harris said in a note to investors.
The latest proposal, which was reiterated by the German finance ministry Thursday, promises to transform the German corporate landscape.
Tight webs of shareholdings have been one of the key restrictions on takeover activity among the country’s blue-chips, especially hostile and cross-border bids. Vodafone AirTouch’s offer to buy engineering and telecom company Mannesmann for $138 billion, formally launched Thursday, is as unusual for being a rare hostile takeover bid as for its size.
Allianz’s links to other German companies make it typical of the country’s close-knit business community. The insurer owns a 5 percent stake in Deutsche Bank, 10 percent of chemical giant BASF (FBAS), 1.1 percent of DaimlerChrysler and 16 percent of the utility being formed from the merger of Viag (FVIA) and Veba (FVEB). 
-- from staff and wire reports
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