Germany's second -largest bank Commerzbank AG has agreed to buy Allianz SE's Dresdner Bank for €9.8 billion ($14.4 billion) in the country's biggest banking takeover in three years, letting it overtake bigger rival Deutsche Bank AG by customers and branches at home.

The deal will be done in two stages and be completed by the end of 2009 at the latest, Allianz said Sunday. In the first stage, Commerzbank is to get 60.2 per cent of Dresdner in exchange for its own shares which would represent 18.4 per cent of its equity, once a capital increase is carried out.

Once the deal is completed, Allianz will hold a stake of "nearly 30 per cent" stake in the merged bank, making Allianz the biggest Commerzbank shareholder and enabling the insurer to reduce exposure to the banking sector while maintaining an important bank distribution channel for its insurance and asset-management products.

The deal, which will combine Germany's second- and third-largest banks by assets to create a more formidable domestic rival to Deutsche Bank AG, also includes a risk shield of around €975 million. Allianz said Commerzbank will pay €2.5 billion in cash. Of this sum, €975 million will be withheld as coverage for specific asset-backed securities assets of Dresdner bank and will only be paid out if not needed for coverage by 2018.

In addition, Commerzbank will transfer its Cominvest asset manager, valued at around €700 million, to Allianz. With the acquisition, Allianz said it will strengthen its market position in the segment and become Germany's largest asset manager with more than €300 billion assets under management.

Commerzbank CEO Martin Blessing will increase the lender's German retail clients to about 11 million with the biggest financial-services takeover in Europe this year. For Munich-based Allianz, Europe's largest insurer, the sale unwinds the €23.5 billion purchase of Dresdner, which has dragged on the company's profit and stock. The combined entity would also have 1,200 branches in Germany and more than 100,000 corporate and institutional clients.

Allianz CEO Michael Diekmann put Frankfurt-based Dresdner up for sale this year after sub-prime-related losses at the Dresdner Kleinwort securities unit eroded profit. Dresdner posted its fourth straight quarterly loss on 7 August, following write-downs at the investment bank.

Citigroup Inc. announced on 11 July the sale of its German consumer unit to France's Credit Mutuel Group for €4.9 billion in cash. Lone Star Funds, the Dallas-based private equity firm, agreed to buy IKB Deutsche Industriebank AG, the first German sub-prime casualty, on 21 August. (See: Citigroup sells German unit to France's Credit Mutuel for $7.8 billion and Lone Star acquires IKB Deutsche Industriebank AG, first German casualty of sub-prime mortgage crisis)

Takeovers will shake up financial services in a market where ''tooth-and-claw'' competition has sapped profitability, Citigroup analysts said in a February report.

The acquisition comes with a heavy toll in terms of job cuts: 9,000 workers out of the combined banks' ranks of 67,000 workers will be eliminated, including back office, production and investment bankers. Of those cuts, 6,500 will take place in Germany with the other 2,500 abroad.

Separately, Commerzbank employs more than 41,600 workers while Dresdner employs more than 25,000 workers. But executives at Allianz and Commerzbank said the deal made sense financially and in terms of expanding market share in Germany and abroad.

Commerzbank and Dresdner together have about €1.1 trillion in assets, compared with Deutsche Bank's €2 trillion. Deutsche Bank CEO Josef Ackermann has said he would consider acquisitions to boost consumer banking. The company was outbid for New York-based Citigroup's German unit.

Allianz bought Dresdner in 2001, in it's biggest-ever acquisition, with the aim of selling more insurance products through bank branches. Mounting loan losses at Dresdner and falling stock markets led to the insurer's first annual loss since World War II in 2002.

Allianz has since cut more than 18,000 jobs at Dresdner, or about 40 per cent of the workforce, and shed about $48 billion of bad loans to revive profit at the bank. The insurer insisted on owning both a bank and an insurance company even as rivals such as Citigroup, Zurich-based Credit Suisse Group and London-based Prudential Plc abandoned the approach.

Allianz's takeover of Dresdner was announced a year after negotiations about a €30 billion sale of Dresdner to Deutsche Bank failed because of a disagreement over the future of their investment banking units. Dresdner executives refused to bow to Deutsche Bank's demands that they sell the securities unit, then called Dresdner Kleinwort Benson.

Following the failed combination with Deutsche Bank, Dresdner also tried to merge with Commerzbank. Those talks were called off in July of 2000 because of a disagreement on how the banks would be valued in a merger.

This year, Allianz has also held discussions over Dresdner with state-owned China Development Bank (CDB), which finances the nation's public works projects. Banco Santander SA, Spain's biggest bank, and Lloyds TSB Group Plc of Britain had also reportedly shown interest in Dresdner.

Political considerations may have scuttled CDB's chances however, since the mood in Germany at present is one of wariness regarding foreign investors, especially when it comes to what are considered strategic interests.

Allianz shares closed up 0.5 per cent in Frankfurt on Friday at €114.10 while Commerzbank shares closed down 1.8 per cent at €20.09.