International financial giants are gearing up to acquire major German banks. Although the Germans are busy restructuring, they are still a good buy.

It was an unusual reception in an even more unusual location. Just under 200 politicians and top bankers, including Minister of Finance Hans Eichel and the President of the German Central Bank, Ernst Welteke, sat on brightly embroidered cushions under a clear sky, in the middle of a boundless desert 50 kilometers outside Dubai.

There were oriental fire-eaters and Bedouins singing traditional songs, but when three belly dancers began rhythmically swaying in the humid night, Klaus-Peter Müller, CEO of Commerzbank, could no longer control himself. To the delight of his colleagues, the jovial, hip-swinging Müller joined the belly dancers.

Germany's financial aristocracy is laughing again, dancing again, and filled with optimism. "We will be stronger as we emerge from the crisis," says Dieter Rampl, CEO of HypoVereinsbank (HVB), "and more profitable than ever before."

Although the crisis in the banking industry is by no means over, the prevailing view is that at least its lowest point has been reached. Industry insiders believe that bankruptcies and the call for the government to assume some of the risk are now part of the past. In fact, however, the future of German banks is uncertain than ever.

Foreign competitors are openly eyeing German financial institutions. They are looking for more efficient distribution channels in Europe's largest market, where government guarantees for savings banks are about to expire and the market is about to undergo a complete restructuring. And the German banks, too cheap on the exchanges to be able to defend themselves, are virtually helpless against the threat of takeover.

The Royal Bank of Scotland (RBS), for example, could acquire Commerzbank with its earnings from the last four quarters alone. Other major global banks could also acquire a German bank with relative ease. Even Deutsche Bank, with its market value of just over 30 billion Euros, is a dwarf in comparison to other international banks. Financial strategists from all over the world are currently mapping out their various options, and HVB CEO Rampl already predicts that "once the first deal has been made, things will begin happening very quickly all over Europe."

Of course, there is one thing that these cross-border sandbox games have in common: In contrast to the mergers and acquisitions of the late 1990s, which were fueled mainly by the desire for size and power, the key issues this time around are sales and a homogeneous customer base. Only those companies that are able to sell their banking and insurance products to customers inexpensively and efficiently are considered attractive takeover candidates.

Oswald Grübel, Co-CEO of the Credit Suisse Group (CSG) took the financial world by surprise a few days when he candidly announced that he could not only imagine acquiring a small, but attractive private bank in Germany. "In fact," he said, "we are considering something bigger," referring to the branch-based banking business.

Cross-border acquisitions are already a tradition at Credit Suisse. In the mid-nineties, CSG first attempted to swallow up the Austrian Creditanstalt, followed by Commerzbank, but its efforts were unsuccessful. In the early summer of last year, the group's internal strategy department reviewed a possible merger with HypoVereinsbank. If CSG had had its way, it would have swapped its insurance company, Winterthur, for HVB's shares in Münchener Rück.

But these plans never came to fruition. Insurance business losses in the billions and questionable investment banking practices brought CSG itself to the brink of ruin, and thousands of employees were laid off. But now the group's fortunes seem to be on the upswing again.

Securing its fragile capital cover continues to be CSG's top priority, and the group is more likely to embark on a major project in the medium term. Nevertheless, insiders report that ambitious scenarios are once again being analyzed in financial circles in Zürich. As in the HVB maneuver, CSG could become involved in a swap transaction, but with Allianz this time around: a restructured Deutsche Bank for a restructured Winterthur Insurance.

The advantage of this arrangement is that it would enable both groups to get rid of businesses for which they are traditionally poorly suited, with Allianz doing away with the banking business and Credit Suisse the insurance business. At the same time, they could retain and even expand the distribution channels for their own core products. "It would certainly make sense," says a senior executive at CSG, "but I am not aware of any concrete negotiations." A vociferous denial would sound a little different.

The US' Citigroup, under CEO Charles Prince, is also interested in the German market. In fact, President Sanford Weill has already been in touch with politicians, most recently speaking with the minister-president of the German state of Hessen, Roland Koch, to determine whether Citigroup would be welcomed in its efforts to acquire a major German bank.

Citibank even feels powerful enough to acquire Deutsche Bank. The market value of this financial giant from New York is estimated at more than 240 billion dollars, six-and-a-half times the value of Germany's largest bank. In the mid-90s, the market value of Deutsche Bank was still greater than that of the Americans. Nowadays Citibank could easily integrate individual divisions of Deutsche Bank, such as its investment banking division, which is strong in Europe, or its high-end private customer business.

"If an attractive opportunity arises and it's a good fit, I would not rule out an acquisition," says Christine Licci, CEO of Citibank's German subsidiary, carefully. For the time being, however, her biggest priority is expansion from within.

Although other German banks have begun closing branches, Licci intends to open 40 new branches by the end of next year. She is hiring additional staff and has already acquired three million private customers, almost as many as Commerzbank has.

Licci, originally from Austria's Southern Tyrol region, has proven that it is still possible to make money in Germany with banking services. "We are witnessing a revolution," says Licci. Straightforward and favorably priced products are the outcome.

The Royal Bank of Scotland, which, thanks to its lavish earnings as an oligopoly in its home market of Great Britain, holds substantial capital reserves, is also trying its hand in the German market. This spring RBS CEO Fred Goodwin first acquired Frankfurt-based Santander Direkt Bank, with 490,000 customers, then participated in the bidding for Norisbank and, finally, came to an agreement with HVB CEO Dieter Rampl just last week.

Under the agreement, Goodwin paid 323 million Euros for Bank von Ernst, a Swiss bank with many German customers.

At present, Goodwin is still ruling out the acquisition of a major German bank, "because of poor appreciation potential." But this could change very quickly, once German banks have completed their restructuring efforts through drastic job cutbacks and elimination of risk. The takeover experts at investment banks are expecting a healthy business. Walter Gubert, Chairman of American investment JP Morgan, expects "a major merger" among the four leading German Banks "and a cross-border transaction."