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Meet the banking CFO who says the subprime crisis would be easy to handle — if only he didn't have to oversee the integration of a €24 billion takeover.
Tim Burke, CFO Europe Magazine
July 7, 2008
Buying a company without an integration plan is like driving a car with the handbrake on: you might reach your destination eventually, but the journey will be longer, tougher and will probably damage your vehicle. With a rock-solid plan, however, even a tough acquisition can quickly show signs of success. That was the hope, at least, following last year's takeover of Dutch bank ABN Amro by Fortis, Royal Bank of Scotland and Banco Santander. A bevvy of Dutch, Belgian, Spanish, Scottish and English bankers made M&A history as the first hostile, multinational consortium break-up as well as the sector's largest cross-border deal. (See "Big Money.") But the buyers now face the challenge of ensuring it delivers value while the industry is in turmoil.
Nine months after the takeover, the subprime crisis is in full swing, making ABN's €70.4 billion price tag look steep. When RBS launched a rights issue in April, chairman Sir Tom McKillop admitted to analysts it was "very unfortunate" that the consortium closed the deal when valuations were much higher. "You could call it misjudgment," he said.
Delivering the expected value hinges on how quickly and competently the buyers pull ABN apart and integrate its businesses with their own. Other deal-making CFOs will be keen to see how the finance chiefs of Fortis, RBS and Santander handle the task.
Breaking Up Is Hard to Do
For ABN, February 2007 marked the beginning of the end. When TCI, a hedge fund, criticised the group's "terrible" record of shareholder returns and encouraged it to sell assets or find a suitor, it seemed clear that the Dutch institution — which traces its roots back to 1824 — would not survive in its current form. ABN responded two months later by announcing a €67 billion merger with Barclays, a British bank. But the bid by the RBS-led consortium scuppered that marriage proposal.
The Dutch did not give up without a fight. ABN sold LaSalle, its US subsidiary, to Bank of America against RBS's wishes, leading to a legal spat which dragged on for months. The subprime crisis eventually helped draw the deal to a close — as banks' share prices were battered, Barclays' equity-based bid looked increasingly weak. It withdrew its offer for ABN in October, clearing the way for the multinational consortium.
The way Fortis CFO Gilbert Mittler tells it, deciding how to divide the spoils among the three consortium members was not as complicated as it might have appeared from the outside. From the start, he explains, each member knew what it wanted from the deal. ABN's North American, European and Asian wholesale businesses went to RBS. Spain's Santander would keep most of the Latin American franchises, while Fortis would take most of the Dutch commercial and retail businesses as well as the global private-banking and asset-management divisions. Other assets would be sold, the bidders agreed, with the proceeds shared between the three.
Mittler also describes as straightforward an April meeting in London at which the three CFOs — Mittler, RBS's Guy Whittaker and Santander's José Antonio Alvarez — settled on the valuation of ABN's assets. Even when ABN pushed through the sale of LaSalle a few months later, the consortium agreed to forge ahead with the offer after a quick conference call. "All the energy was kept for two things," Mittler says. "Fighting to get the deal done and working on the separation and integration from that date."
Despite the scale of the acquisition — ABN was a sprawling business with €17 billion in income and more than 100,000 employees — much of this is familiar territory for each of the consortium's members. Between them, they have acquired more than 100 companies over the past 15 years, including RBS's purchase of NatWest in 2000 and Santander's acquisition of Abbey National in 2004. Fortis has made more than 25 deals in the past three years alone. Again, Mittler admits that convincing the market of the validity of its integration was easy. "They believed us because we'd done it before."
Experience does count. "Active acquirers have a better record of post-merger integration than a very infrequent, episodic or first-time acquirer," says Robert Bruner, a professor at the University of Virginia's Darden School of Business and the author of Deals from Hell (Wiley, 2005). "It's a learned skill, a set of competencies that you build up with every new deal." Mittler's favourite example from his bank's track record dates back to 1998, when it integrated seven Benelux banks acquired in previous years, including Belgium's Générale de Banque. The board targeted synergies of €675m from the Générale de Banque deal, and improved that figure by nearly 30%, the CFO says, although over four years, rather than the initially anticipated three.
Analysts agree that Fortis's track record makes it well placed to succeed with ABN. Last year, WestLB analyst Ralf Breuer told The Financial Times, "If someone needs a lesson in integrating businesses, Fortis would be one of my major examples on how to manage it, and be financially successfully at it as well."
But there's a lot to digest. In bringing ABN's assets under its umbrella, Fortis has become the third-largest private bank in Europe, and a market leader in financial services in the Benelux. ABN also significantly boosts its global capabilities in asset management and bancassurance. The enlarged group now has more than 10m retail banking clients, up from 6m; 900 more retail branches, bringing the total to 2,500; and 145 business centres across the continent, compared with 116 previously. If the ABN deal delivers, it will be a coup for its chief executive, Jean-Paul Votron, who outlined a growth strategy centred on European expansion in his first meeting with analysts as CEO in 2005.
From Finance to Fluffy Stuff
A Belgian whose career has been shaped by Fortis's transactions, Mittler was already a company veteran by the time Votron arrived at the bank. When the group was formed by a three-way, Belgian-Dutch merger in 1990, Mittler moved from one of the businesses — Belgian insurer Group AG — to become finance director of the combined group. He later took director roles in several acquired companies until the late 1990s, when the group integrated its banks under the Fortis brand. In 2001 he was appointed CFO and joined Fortis's executive committee.
Today, Mittler's approach to post-deal management could be called relaxed — focus on one task at a time, and even the biggest deal is easy to handle. "Integration is a big word for a large number of small projects," he says.
In the case of ABN, the integration projects started early. The process was helped along, says Mittler, by the fact that Fortis had a lot of background knowledge on ABN, having already sat across the dealmaking table from each other. In 1997, Fortis bought MeesPierson, a private-banking subsidiary of ABN, and a year later won a bidding war against ABN for Générale de Banque. So despite the size of the deal, Mittler says ABN's integration should go more smoothly than some smaller takeovers he has handled in less familiar markets such as Turkey and Poland. In those cases, getting to grips with a new business during due diligence often pushed post-deal planning down the list of priorities. That's not the case with ABN.
And like CFOs of other major M&A deals, Mittler will be thinking about more than just the numbers. According to Marco Boschetti, a principal at HR consultancy Towers Perrin, alongside the traditional focus on risk and cost management, acquisitive finance executives need to target areas outside their traditional remit — notably, making sure the company retains key staff after a deal is done. "Employee engagement is the kind of soft and fluffy stuff that you'd imagine a CFO wouldn't care about," Boschetti says. But all CFOs should.
In the case of Fortis's senior management, staffing and cultural issues are big concerns. "Some mergers and acquisitions fail because of a lack of cultural sensitivity," wrote Votron in the bank's 2007 annual report. "That's a fatal mistake we are determined not to make." To that end, Mittler and Votron have hit the road, meeting with employees as part of a programme designed to keep staff informed about the integration's progress.
The centrepiece of Mittler's communications with both staff and investors is the clear timetable of post-deal events. Many decisions have already been taken. Even in the case of an ABN business unit not becoming part of Fortis until the end of next year, the board has agreed on a management team and made other choices about personnel and how key posts will be filled.
IT — another critical area in M&A integration — is also covered. Each division has had to decide to use either ABN's or Fortis's IT system rather than cherry-picking parts of each to form a new system. (In a nonchalant aside sure to endear him to IT officers everywhere, Mittler says, "it's not a big bang. It's a migration. That's easy — CIOs do that each year a number of times.") Yet more decisions on aspects such as product lines, branding and operating models have also been made.
As for his own department, Mittler has about 100 members of the finance team working on the integration. It's been a heavy workload, he admits, but he's sure his colleagues have relished the challenges of working on "one of the biggest acquisitions, largest financings and very complex integrations in the industry." In terms of divvying up newly acquired staff, some ABN teams have been assigned to consortium members, while other employees were given access to a central job market where vacancies at RBS, Fortis and Santander are posted.
But no matter how the work is divided up, the sheer complexity of breaking up ABN Amro is daunting. Each part of the transition plan drawn up by the consortium and ABN's management has to be approved by the Dutch National Bank, adding another layer to an already complex process. And there are still decisions to be made on a string of assets which Fortis has to sell to satisfy competition authorities. Last November, Anne Drummond of Linklaters — an adviser to the consortium — told CFO Europe that taking apart ABN would take years.
In terms of the integration, Karel de Boeck, former risk officer at Fortis and now a vice chairman on ABN's managing board, told the Belgian press that from the outside the integration "could be called impossible." De Boeck should know. He's helping to oversee 15 steering groups, which are handling 125 integration programmes, comprising more than 1,000 projects.
Following regulatory approval in the Netherlands in March, ABN's asset-management business was demerged and brought into Fortis the following month. The break-up and integration of the other businesses will be staggered until the end of 2010. Activities due for completion this year include demerging ABN's factoring and leasing divisions and several of its private banking units. The demergers of private banking in Jersey, Belgium, Gibraltar and Taiwan are scheduled for next year, with the Dutch businesses to go after those.
All told, Fortis expects €1.3 billion in synergies by the end of 2010, with more to follow. More than 80% of that figure will come from cost synergies in areas such as merging branches where the banks have outlets on the same street.
Unfortunately for Fortis, these well-laid plans must contend with the messy reality of the credit crunch. Last year, Fortis's banking profit dropped 44% due to subprime impairments, and in the first quarter of this year its banking division incurred further impairments of €366m, two-thirds of which were linked to subprime assets. In June, Fortis shares were trading at around €13, compared with more than €20 when the ABN deal was agreed and almost €30 in early 2007. (See "Don't Look Down" at the end of this article.)
Although the price the consortium paid for ABN looks less reasonable by the day, Mittler dismisses the idea that the bidders should have renegotiated. "That was the price at the time," he says. "We're convinced that the quality of the assets we bought is high." By way of justification, he points out that ABN's 2007 results were above Fortis's forecasts.
A recent study by the Boston Consulting Group should add to Mittler's confidence. It concludes that deals made during economic downturns are twice as likely to produce long-term shareholder returns of more than 50% as deals made in a boom. But Fortis's exceptionally large deal amid exceptionally turbulent credit markets could still come unstuck. "I would be surprised if those [multibillion-euro deals] that were carried out in the last year or so manage to capture the synergies they planned," says Boschetti at Towers Perrin. "They certainly have a steeper hill to climb."
If Mittler shares these doubts, he does a good job of hiding it. "Let's face it," he says. "It would have been easier and substantially less exciting for me if I only had [to deal with] ABN Amro or the subprime and liquidity [issue]. One of the two is easy to manage. The two together is a challenge."
Helping to meet that challenge, the bank completed a €13 billion rights issue in September to finance the ABN deal and placed various instruments since then for much of the remainder of its €24 billion payment. But in a recent research note, analysts at Dresdner Kleinwort expressed concern over Fortis's financial flexibility given the share of hybrid debt on its balance sheet after the deal. Fortis, meanwhile, is preparing for a rockier road ahead. In late June, the bank said it wants to "accelerate" its solvency plan, cancelling an interim dividend and announcing a €1.5 billion equity raising, a sale-and-leaseback real estate deal, asset disposals and the issuance of new instruments such as preference shares, all raising an expected €8 billion. But its shares fell fast on the news.
Mittler concedes that Fortis will "consume capital" in 2008 and 2009 to grow the business, service dividends and cover €1.5 billion in integration costs. After 2010, he expects to have excess capital and be in a position to pay down debt.
A clear, long-term focus is key to the success of any integration plan, says Michel Driessen, an integration specialist at Ernst & Young, who describes a CFO as the "architect and custodian" of a deal's synergies. Lingering too long on the cost-cutting and restructuring components risks losing support among the investor community, who "want to see that you've bought something to grow it," he says.
Mittler reckons Fortis will soon be ready for the next step, beyond cost-cutting and restructuring. When the economic situation improves — in late 2009, he predicts — "We'll be able to show the market that we have synergies, that the story is not a dream, not a promise, but a reality," he says. The market will be waiting.
Tim Burke is senior staff writer at CFO Europe.