With his meticulously planned entry into Commerzbank, Unicredit CEO Andrea Orcel has surprised both allies and rivals. Despite opposition from trade unions and politicians, and concerns from Commerzbank's board, the markets do not doubt that the Italian banking giant will eventually absorb its German competitor. This is also reflected in the positive performance of Unicredit’s stock. It seems the question is not if the acquisition will happen, but when. For the decision-makers in Germany, the focus is more likely to be on how the deal will be structured, and under what conditions it will take place.

Financially, the acquisition poses no problem for Unicredit. The group has surplus capital exceeding 6.5 billion euros, and enjoys a significantly higher market valuation. The bank could complete the acquisition without notable impact on its core capital ratio. Strategically, the project makes sense for Unicredit as well. Germany, the strongest economy in Europe, would become its largest market. Moreover, Unicredit is already familiar with the German landscape through its acquisition of HypoVereinsbank (HVB) in 2005, which Orcel has referred to as a „blueprint“.

Regionally and in terms of business strategy, there is little overlap between the two banks. HVB’s cost-to-income ratio, at 39%, is around twelve percentage points lower than that of Commerzbank, demonstrating Unicredit’s ability to unlock potential. However, they have been ruthless in doing so. The original guarantees and rights for HVB have vanished, with decision-making powers gradually shifted to Milan. The bank was downgraded to a GmbH, and its workforce was reduced to one-third.

For Orcel, the Commerzbank entry is a major win, regardless of the outcome. He has given reassurances that no hostile takeover is planned. Instead of obstructing the deal, the German government and Commerzbank management should exert as much influence as possible. One reason is that Unicredit’s poor credit rating could negatively affect Commerzbank, potentially scaring off customers and increasing refinancing costs. Another concern is Unicredit’s large holdings of Italian government bonds, whose creditworthiness remains questionable.

In the past, the Italian government has not hesitated to pressure banks into acquiring more government bonds. This is facilitated by the fact that these bonds don't need to be supported by equity capital. In the worst-case scenario, German customers and taxpayers could bear the burden. The recent discussion in Italy about a potential windfall tax on bank profits is yet another reminder that Rome is unafraid to intervene.

Big isn’t always better. Many large acquisitions fail. Orcel advised on the 2007 takeover of ABN Amro by the Royal Bank of Scotland. This ended disastrously, and left taxpayers to foot the bill, and serves as a potential warning. Unicredit has benefitted from state aid and continues to do so, through mechanisms like tax credits for green building renovations, and state-guaranteed loans that nearly eliminate risk. Its success also relies heavily on bank fees, which are among the highest in Europe, feeding the profits that enable an acquisition.

While the acquisition would clearly benefit Unicredit, for it to be advantageous for Commerzbank the German side should demand trade-offs. Guarantees for maintaining the role of the German location seem logical, given Germany’s economic importance. A relocation of the corporate group headquarters to Frankfurt could also be a possibility. Moreover, the German side should push for a reduction in Unicredit’s holdings of Italian government bonds. Rome may attempt to block or complicate such demands, providing a test of Italy’s commitment to a market economy. Conversely, a foreign takeover of such a large Italian bank would be almost inconceivable.