By Tom Sims and John O'Donnell
FRANKFURT, May 6 (Reuters) - As UniCredit prepares to take over Commerzbank, some members of Germany's government are examining a drastic step to fend off the unwanted Italian bidder by taking a bigger stake in a lender Berlin considers strategic, people involved in the matter said.
Germany already owns 12% of Commerzbank after a bailout during the financial crisis two decades ago and some in Berlin are considering whether it could use state bank KfW to increase the stake,
potentially creating a large enough bloc to hinder a full takeover, two people with direct knowledge of the situation said on condition of anonymity.
Although such a step would face several hurdles, not least the need to find several billion euros, it could be justified by Commerzbank's role as a financier of the Mittelstand firms that form the backbone of Europe's largest economy, they said.
A potential KfW stake "should certainly be considered," said Armand Zorn, an influential member of the Social Democratic Party that now controls Germany's finance ministry.
"It should be viewed as a last resort if all other options fail ... The impact would go far beyond the symbolic," said the vice chair of the SPD's faction in the German Bundestag.
The government and Commerzbank's management are growing exasperated as they fail to discourage UniCredit CEO Andrea Orcel's 37 billion euro cross-border takeover attempt.
Orcel has been pursuing Commerzbank since 2024, building up a nearly 30% stake in it as German Chancellor Friedrich Merz and the bank's CEO Bettina Orlopp sounded the alarm.
"The government should continue to signal that a hostile takeover of Commerzbank is not in the interests of Germany's financial centre," said Zorn. "Commerzbank plays a central role for the ... economic resilience of Germany."
KfW, the finance ministry and Commerzbank declined comment.
As Germany tightens its belt financially, such a move would be difficult and it is unclear if the free-market, pro-business Christian Democrats, who govern Germany in an uneasy coalition with the more left-leaning SPD, would back it.
Nonetheless, Commerzbank has become a test of the German government's resolve, after its ministers and chancellor repeatedly warned UniCredit against pursuing a takeover.
If it did nothing, it could further damage Berlin's standing, after bickering ministers failed to deliver on promises of economic reform and Germany's economy has ground to a virtual standstill.
Losing Commerzbank would be a further blow to Germany, which faces tariffs on trade with the U.S., the biggest buyer of German goods, from cars to machines. Compounding the acceleration of layoffs in Germany, China has turned from cheap producer to rival for some of its most prized industries.
The acrimonious battle for ownership has reached a critical juncture after Orcel on Tuesday formally launched a takeover at a lowball price. Orcel argues that Commerzbank has not been living up to its potential and that Europe would benefit from bigger banks in a world of chaotic geopolitics.
On Friday, Commerzbank will publish an updated strategy that its managers hope will convince investors of the value of its independence. The bank will announce cost cuts that will likely include plans to shave staff, two other people said, a third round of cuts this decade.
Last month, Orcel told investors that Commerzbank's "current trajectory will put at risk its survival in the medium term" and launched a negative ad campaign on social media.
Germany's financial regulator responded by telling UniCredit to drop advertisements critical of Commerzbank, while more than 3,000 people are following a WhatsApp chat by Commerzbank's workers' council opposing a tie-up.
A post last week showed a cartoon Trojan horse filled with UniCredit soldiers holding spears and shields and a caption that read: "Andrea Orcel can't be trusted".
Commerzbank shed 10,000 people, or a third of its German staff, earlier this decade and announced plans to cut another 3,900 last year. Orcel has made clear that he would slash the Frankfurt-based headquarters.
Some long-time Commerzbank corporate customers are also speaking out against a deal and threatening to jump ship if UniCredit succeeds.
"I see a takeover very critically and don't see any benefits," said Juergen Lindhorst, chair of Lindhorst Group with 4,000 employees, which turns agricultural land into solar parks and develops real estate.
Until 2024, Germany held an even bigger Commerzbank stake, but a botched attempt to sell down a portion of its holding went to UniCredit rather than a broad base of institutional investors.
The government's current stake is worth more than 4.5 billion euros. More than doubling that to reach a 25% blocking minority on the open market could cost at least that much and may not stop Orcel.
KfW was established in 1948 to finance the reconstruction of Germany after World War Two. Most recently, it helped bail out Lufthansa during the COVID-19 pandemic.
Whether a takeover occurs depends heavily on the federal government, said Michael Wisser, CEO of WISAG, a facilities management firm with 60,000 employees, and customer of both banks who opposes a deal.
"There will be no deal if the federal government takes a very clear stance," Wisser said.
(Editing by Alexander Smith)
