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?

MORE

ABN Amro / Groenink / The Last Supper

I went on a little trip to Rotterdam today. A bittersweet moment for Rijkman Groenink, CEO of ABN Amro, no doubt. Presumably his last appearance as chairman of an independent ABN Amro, unless the spinning coin of fate somehow lands on its edge.

Here's a video of him discussing his future.
What's interesting is the degree of confidence with which he talks about what the consortium is going to do once it wins. Remember, Barclays bid is still on the table, and he's said he still prefers it.

Well, at least his head won't be displayed on a spike after the barbarians storm the gate. And at least he can still laugh...

A RBS victory was predictable and predicted.

Here's a smaller clip, with him giving his explanation of the board's neutral stance on the bids.(in Dutch, transcript below).

"Our conclusion, is it can't be denied ... the offer of the consortium is much superior for shareholders. That's just the way it is. So that's in fact, an Anglo Saxon recommendation for shareholders. Only, if we take everything (waves arms) into consideration, we can't come to a recommendation."

If you're American and mystified as to what he's saying: In the U.S. and British systems (which he calls "Anglo-Saxon"), shareholders are king. But in the 'continental' system, managers are supposed to take all 'stakeholders' into account, including customers and employees.



What remains something of a mystery to me, is why exactly he thinks the consortium bid is worse for other 'stakeholders'. More jobs will be lost under the Barclays merger, and Groenink says himself there's little doubt the consortium members will be able to create value and continue to grow and improve ABN's businesses.

Does he think bank customers are going to get the shaft from Fortis more than they would from Barclays (or more than they already do from ABN Amro?) Am I just too cynical about banks generally?.

Anyhow, I think shareholders, executives, employees, bidders, reporters, spokespeople, and most of all people stuck watching this evolve on the nightly news for the past 6 months can all agree we'll be glad when *whichever* deal is finally done.
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