Fortis

(flickr's benidormone)

I hope, I think, it's not unethical for me to put together a few thoughts about reporting on Fortis over the past year and a half.

But first, a few bits of comedy _ well, irony _ to lighten things up.

Actual Fortis slogan: "Here Today, Where Tomorrow?"

***

Next, an email exchange. Note the date. I think it's right that I remove a few identifiers here.

From: Xxxxx@fortis.com [mailto: Xxxxx@fortis.com]
Sent: Thursday, September 25, 2008 4:32 PM
To: Sterling, Toby
Subject: RE: 26 June press release

Dear Toby,
Thanks, but I shall not answer your question since this scenario is not on the table.
Bests,
Xxxxxxx

From: Sterling, Toby [mailto:tsterling@xxxx]
Sent: Thursday, September 25, 2008 4:14 PM
To: Xxxxxxxx Yyyyyyy
Subject: RE: 26 June press release

Thanks Xxxxxxx.

One other question: Fortis could always get a loan from the Dutch and/or Belgian central banks if it came to that, no?

Best,


Toby Sterling

***

Finally, I just wanted to note that S&P, Moody's and Fitch all downgraded Fortis' credit ratings on Monday _ AFTER the 12 billion euro cash injection by the Dutch government.

In Dutch they say "Als 't kalf verdronken is, dempt men den put."
In English we say "closing the barn door after the cow has gone."

Once upon a time, I used to respect the ratings agencies...

***

So, the central question I want to address in this post is: what, if anything, should I have done to make it clear I thought Fortis was heading for disaster?

The short answer is, in the moment I didn't think I could or should do anything. After all, it's not the media's job to speculate, and I certainly didn't KNOW there was anything wrong with Fortis. In fact, well-meaning analysts who understand far more about finance than I told me as recently as last week that they thought there was nothing wrong with Fortis' balance sheet.

And in fact, lots of people think there really, truly, was nothing wrong _ apart from a lack of confidence from investors and depositors. And confidence is everything for a bank.
I think, it's my opinion, that the company itself believed it was healthy and did not, could not comprehend that the wolf was at the door until it was too late.

So now I turn on the way-back machine:




From the time that Fortis entered the bidding to buy ABN Amro, it always seemed like a bad idea to me: I'm not a financial wizard, but I would say from what I've seen and read, large takeovers fail as often as not.

Both in minor ways and in major ways.

I remember at one point looking at Fortis' market capitalization _ market value _ and thinking 'they're paying EUR24 billion and they are only worth EUR36 billion themselves? It's like an Elephant eating a Hippopotamus.'

I put the figures prominently in a few stories and including skeptical analyst comment. That's what I did.

By the way I had vague nightmare fantasies that proved incorrect about what would go wrong:
I imagined an exodus of ABN Amro employees and customers walking out over petty national jealousies. Or in anger at the increasing lack of choice in the Dutch market. Or the way ABN and Fortis are always nickle-and-diming their customers. And that these things would lead Fortis to miss its integration targets. I had no idea at the time that it would be a credit crunch that would actually derail the buy.

In fact, as the U.S. economy was starting to run into trouble, I thought very much that it wasn't a bad time to be buying Dutch assets _ Europe was in better shape, and the Dutch market has been outperforming the rest of Europe for several years now.

So, I thought Fortis overpaid, but the most likely scenario was that the integation would be a bit clumsy, and the two would eventually settle in together.

When the shares were down around EUR22, I thought the worst of the selloff was over, the customers who were going to walk had walked, and now the question would be, how well does the integration go?

But as the year went on and markets went down, down, down, and Fortis always falling worse than the market, it did seem increasingly unlikely that it was going to be able to raise much money by selling assets.

Furthermore, I had a kind of uneasy concept, an idea in my mind, that probably only shows my lack of understanding: it seemed to me that if the company's debt remained the same while its assets were shrinking in value by the day, then the amount of $$ it needed to raise would be increasing as markets fell, fell, fell.

When Fortis issued shares and canceled dividends in July, it was treated by most investors as a betrayal and they screamed bloody murder. The CEO resigned (that particular event I missed while on vacation). But funny enough, in retrospect it was one of the most responsible things that the company did.

About 2 weeks ago it got so bad that I personally thought that one bit of really bad news could topple the company.

Whoever I talked to about things agreed that the situation was dire, but no one really thought they would go bankrupt. I agreed _ I guess it was always clear the government was going to bail them out if it came to that. But the details of how that would work...very unclear.

I didn't expect they would have to sell ABN, because I figured it would be too disruptive for them, such a large bank, crucial part of the Dutch economy, to change hands yet again.

Rumors were swirling around about Ping An not going through with its much-needed EUR2B buy of a Fortis asset management arm.

Fortis denied those rumors, but after the fall it appears they were true.

The price they got for selling assets to Deutsche bank _ I thought, if these are market prices right now, Fortis is going to be going BACKWARDS by selling things.

But by late last week, the most amazing thing was the incomprehension among Fortis managers. What's going on? Our numbers show no problem at all! Why are you barbarian shareholders behaving this way? This was clearly not something that business school (or wherever it is Belgian bankers go) prepared them for.

Probably from the moment Lehman failed, their destiny was written. Unless they had pulled out all the stops to find a merger partner on very unfavorable terms, or said 'damn the consequences' and issued more shares, they were going down.

But how does a reporter write those kind of things? With what evidence? Furthermore, by writing about a "crisis" at a bank, you are essentially yelling fire! in a crowded theater. The act of writing a story like that _ unprovable _ can cause a company huge, unfair harm.

What I did? Every time their shares fell, I wrote a brief story saying "shares fell on fears their plan to sell assets won't work."

Was there a better approach? In the financial world, you run into analyst opinion pro versus analyst opinion con pretty quick. And they know infinitely more about finance than reporters. (Reporters who know too much tend to become analysts themselves, or at least move into in-house PR).

And it goes without saying that all companies not only reflexively deny any trouble, but they also indisputably have better information about their own business. So it's easy for them to refute skeptics with "facts."

But sometimes, facts can obscure the forest with trees.

Well, I leave this line of thought in aporia. What's done is done.

***

Sometimes I criticize Dutchies on this blog, but I want to say that in this crisis they showed off one element of the national character that I love.

When the bailout was announced, I heard more than once "yeah, that's what you get when you let Belgians run things." But _ and this is essential _ the joke was told with no ill-will, just to relieve the tension.

It's a friendly rivalry, and if anything I think the Belgians have slightly more of the inferiority complex _ there was a little too much gloating when Fortis was buying ABN.

Lapwing. Icarus.

***

For weeks now I've been thinking: wouldn't the fallen ABN Amro CEO Rijkman Groenink be the ultimate interview right now?

Rijkman, where are you?

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Vredeskerk / ABN Amro / Ahold

(ABN Amro CEO Rijkman Groenink, a man almost certain to lose his job before Thanksgiving).

Well, I'm not sure why that little glitch with Google occurred, but it seems to have blown over now.

Another busy week. If I never have to write about ABN Amro _ or Ahold for that matter _ again it will be too soon. Unfortunately, I'm sure that ABN Amro will be right back in the spotlight on Monday.

(credit: ap)

I did manage to slip away on Thursday to see the blessing of the animals at Vredeskerk, in Amsterdam.

The goldfish went first and appeared very much in its element as Valkering sprinkled it with holy water.

Amadeus, a Cocker Spaniel, attempted to drink it. His owner, Luba Fedossova, an immigrant from Russia, said later, "They wouldn't allow animals into churches back home."

-AP

Harmless, no?

(credit: suzero) MORE

Fortis shareholders sharpen knives for ABN

Fortis wants to buy ABN Amro, but is it a wolf in lamb's clothing?

What would Max Havelaar do?

Non-business-types can tune out now.

While to some, Fortis's shareholder meeting(s) Monday might like just another squabble in the jackal vs. vulture fracas to buy ABN Amro, to me it looks like high noon in Dodge City.

A Fortis approval will mean the consortium's "weakest link" has held, and the RBS-led bid of at least 10 percent more than Barclays' offer will very likely end up winning ABN Amro. Because: if I offer you your choice of $90 or $100, which would you choose? Now ask yourself the same question, and add the word "billion" after those numbers. That's more or less the situation.

On the other hand, a surprise rejection by Fortis shareholders would mean chaos for the RBS-Fortis-Santander consortium, dogs and cats living together, mass hysteria. Their bid could fall apart. Of course, maybe they have a "Plan B" ready for just that scenario. I can't think of what that plan would be, but then: I'm not a financial journalist. I just play one on TV.

At any rate, things would get exciting.

I mean, exciting in terms of a banking deal. It's relative.

The protagonists, or antagonists, depending on which side you take, have made all their moves and the very, very, very smart money probably already knows which way the vote at Fortis's shareholder meeting will work out.

I personally have no idea. Looking at the share prices all around, and forgetting about little niggling details like "arbitrage," it looks like the market is betting the Fortis share issue will be approved.

Clear your mind of the present situation and look at the history of big acquisitions with a high premium like the one Fortis's shareholders are being asked to approve. You'd have to think: if this were my company issuing stock like that, I'd be running for the door.

Hence the massive Fortis share decline since they entered the bidding back in April. Scaredy cats such as the fictional me have already run away.

Conversely, a Barclays' emission of even greater size should have a dramatic negative effect on its shares. No such massive decline at Barclays, just a minor one. So, again, the market thinks Fortis will mostly likely win, i.e., Barclays will lose, and so, no selloff in Barclays shares.

However, speaking as someone who went to the casino this week and walked away with a whopping EUR25, I'm thinking about the following:

If someone with lots of money to play around with _ call him Donald Trump, Rupert Murdoch, or whomever you will _ was interested in earning a little jack without much work, all he would have to do is buy, say, EUR8 billion worth of Fortis shares in order to have a comfortable blocking minority.

This Dupert Turdoch votes against the emission and *hey presto* Fortis stock is up at least 10-15 percent overnight, and he's netted himself a healthy profit. Maybe more if this Rupald Mump has got huevos grandes and has also shorted Barclays shares.

The only problem with this cunning plan is that, someone would *surely* have noticed had Fortis's shares been under accumulation to the tune of 1/5 of its total share capital.

A paltry 11 million Fortis shares traded hands Friday, I assume that was a heavy volume. At around that rate, every single Fortis share sold for the past month would have had to have fallen into the hands of Turdoch and his cronies for them to have a blocking stake.

Not bloody likely.

But imagine that this Turdoch _ a visionary _ saw this scenario developing, say, back in early June. Then it's two months to get ready. And in addition, he's been borrowing stock to vote those shares too, making deals with big Fortis shareholders and pulling other sharky shenanigans.

It's a crazy plan; he would have already taken quite a whuppin' on the stock fall even since June, but a big pop Monday could more than make up for that (especially in combo with a big short position in Barclays).

So, in summary: this is all a very hypothetical scenario, and the markets tend to suggest that things will simply go the other way. The more I think about it, the more it seems like this is a done deal for RBS and co.

Put a fork in it.

But: a wacky upset would sure make for a good story. MORE

Groenink strikes back

A fascinating interview with ABN Amro CEO Rijkman Groenink (see earlier post "hero or goat") in today's NRC Handelsblad, and a good scoop for the paper.

Unfortunately it's all in Dutch _ somebody would do the banking world a favor if they would translate it into English, but I couldn't do that here without violating fair use rules, I don't think.

Suffice it to say, he continues to prefer Barclays as a merger partner, despite the financially much better offer from the RBS consortium, which he views as hostile.

"The Consortium doesn't need to be concerned with us (management) at all, and it hasn't, right up to this moment. Even the discussion with the employees was done (over our heads) directly with the unions. I wouldn't call these negotiations, because they aren't: there's a un-asked-for and complete offer on the table, and we have nothing to say about it _ at most, we can say that we find some things unacceptable and that we'll make that public soon if we don't like it."

-NRC

Here's a link to the AP writeup in the Herald Tribune
He also says in the interview that:

-the talks were "businesslike" and he wasn't directly involved (no surprise there; the board committee is handling talks from here on out).

-ABN 'has performed fine with respect to comparable European banks.'

(there's truth in that _ in terms of financial returns, but not share price, I think, and that's what turned the company into prey. One wonders: would Groenink not be trying to acquire Fortis if it were on the ropes?).

-the Supreme Court decision "completely supported us"

(again, there's obviously truth in that: the decision said they had the legal right to sell LaSalle. But he doesn't mention the advice of the Attorney General, which declined to comment on whether the sale was a good or fair decision from a shareholders' perspective).

-He makes a good point that there hasn't been nearly the protectionist outcry in the Netherlands about 'losing' the country's largest retail bank that you might hear in France or even the U.S.

Imagine in the U.S. if Bank of America Corp. were bought by a Japanese bank.

For some people, the lack of worry by even the country's Socialist Party should be a compliment to the Dutch capitalist trading nation spirit. In any event it's probably a bit disingenuous of Groenink to suggest that ABN will be destroyed in the Netherlands by an acquisition _ whether it's Barclays-ABN or Fortis-ABN, the core business in Holland (and each region) will survive largely intact.

-Finally, one thing that came as a surprise to me was an NRC assertion that many Dutch ABN employees actually prefer Fortis to Barclays as a partner. Groenink seems to agree, saying "of course in a merger some divisions aren't so thrilled with the new partner," and that it boils down to who's likely to lose jobs, which vary in each scenario.

For me, the 1+1=2 logic has always been that the Fortis merger will lead to layoffs in the Netherlands as they combine retail branch offices, but I've never seen an analyst report breaking it down, and Fortis says otherwise. And it's true that having the Barclays headquarters in Amsterdam would boost the city's standing as a financial center.

Well, we'll see if Barclays doesn't have a last ace up its sleeve before the game is over.

In all, good fun on a Saturday.

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ABN CEO Rijkman Groenink, Genius or Goat?

This story has been dragging on for months now, but an end is in sight:

"The ruling clears away legal uncertainties and any bidder wishing to purchase ABN Amro's remaining operations -- plus the $21 billion in cash it is getting for LaSalle -- can step forward.

British bank Barclays PLC has the inside track. It already has agreed with ABN's management to buy the bank in an all-share deal worth 63.7 billion euros ($87.6 billion).

But a rival consortium led by Royal Bank of Scotland PLC, which had hoped to acquire LaSalle as well, said Friday it will bid before a July 23 deadline."

-Associated Press

So, there are few who will care to know the intricacies of this case, but the bottom line is, ABN Amro CEO Rijkman Groenink agreed to sell his bank's U.S. arm LaSalle for $21 billion in four days time.

Was that a stroke of genius, or mismanagement?

RBS will now probably bid EUR1 per share less for ABN ex-LaSalle (a number that is buried deep in their preparatory bidding documents) than otherwise. If that turns out to be true, Groenink will have lost around 3 percent for shareholders by favoring what he knew was very likely to be a worse deal.

His reasons have never been fully explained; he said he believes the worse deal will be better for ABN in the long run, but pretty much everybody else (analysts, employees, customers) disagrees or is neutral. He personally stands to LOSE money as a result, so you can't accuse him of financial self-interest. One possibility is that this was an ego-driven patriotic self-interest in preserving some kind of 'legacy' of ABN.

If so, that's weak for any number of reasons. Not least: in my experience, nobody is going to feel much nostalgia if ABN disappears completely.

On the other hand, at least Groenink made sure ABN got a reasonable price for LaSalle. At the shareholders meeting, he was challenged that only a fool would sell something worth $21 billion after four days of negotiations.

Groenink's response: (paraphrased) 'I wouldn't be prepared to buy something valuable that I don't own after four days of due diligence. But I would be prepared to sell something I do own and know the true value of.'

I think he can make a fair argument he knew _ or thought he knew _ what he was doing, even if later events prove(d) him wrong. At least he got a sane price for LaSalle, even if it enraged shareholders and brought a legal hell down around the company.

It's noteworthy that the CFO jumped ship very, very soon after this decision was made, and the board stepped in to handle future negotiations _ essentially putting Groenink on the sidelines.

After Friday's court ruling, the shareholders rights group VEB complained bitterly that the law allowing management to make major strategic decisions without shareholder consent ought to be changed.
Under the current system, management is expected to inform shareholders about its general intentions, but in the end it can generally do what it likes. Shareholders' only recourse is to throw the bums (well, the bums supervising the bums) out if they disagree.

I've heard impassioned arguments on either side of the argument as to whether that structure should be changed.

Et Tu?
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