Accelerated Growth

2005 was a busy year for Fortis. Among other assets, it acquired Turkey's seventh largest privately held bank, Dişbank, it bought Dryden Wealth Management from Prudential Financial in the US, and in Germany it acquired Von Essen Bank. A team also spent some time in Bucharest, looking very carefully at buying Banca Comerciala Romana (BCR) in advance of its privatisation, before abandoning the opportunity.

Dexia was also reportedly interested in BCR, the largest of the Romanian banks. Fortis apparently has a bulging war chest, including the €1.2bn proceeds of its highly innovative convertible April 2002 issue. The Floating-Rate Equity-linked Subordinated Hybrid (FRESH) was, as Fortis planned, treated as equity, not debt, and was both Europe's first undated and first floating-rate convertible.

Though clearly proud of this deal, which protected what he insists are Fortis' all-important ratings, CFO Gilbert Mittler says that when it comes to mergers and acquisitions, the biggest challenge is finding them, not funding them.

'That is why we are concentrating on organic growth,' he says, 'because that way, we are the only ones who decide what it is we do and where and when we do it. You can always dream of buying activity B in country A, but it is probably not available, and if it is, it may well be too expensive, or the partnership is not what you want.'

A PERFECT MATCH

A case where Fortis found what it was looking for at the right money, and with the right people, says Mittler, is Dişbank, bought from a Turkish media group last April and now re-branded as Fortis. The $1.2bn deal has given Fortis 171 retail branches and 12 business centres in a fast growing market.

'We decided we wanted to be in Turkey, but it was not easy to find a good vehicle,' he explains. 'We did not want to become a partner of an industrial group for which a bank was just a financial vehicle. There is nothing wrong with that, but it did not fit in with our strategy. Then we discovered Dişbank and were excited about the quality and pragmatism of the management team.'

Fortis had to take part in a beauty contest with French and Italian banks who were also bidding, which is why analysts noted that at 1.9 times book value, the price seemed a bit high. Mittler, however, is certain that it was a good deal and notes, 'The sale process was very well organised, and that in itself gave us a very good insight into the business.'

SOLID BUSINESS PLANNING

The acquisition methodology for Dişbank was typical of Fortis' style. 'I have a small M&A team, and no special team 100% devoted to due diligence,' states Mittler. 'If I want to look at medium-sized enterprise credits in Turkey, I need to get people who are involved in that market, day today. We invited the top Dişbank management to Brussels. We needed to understand how these people were making money. My concern is not the net asset value - I wasn't trying to get it lower for negotiation purposes - my concern is to be able to have a solid business plan after due diligence.'

Not only do Mittler and his team need to know how the target acquisition is making profits, they also want to find out how much better the target is than its competitors in the same market. 'This is particularly the case in Turkey, as the market is growing at over 30% a year. You have to be sure that you can be better than the market, so it's important to identify the resources you will need to ensure that you can.'

A REVIVING TURKEY

In Turkey, Fortis seems to have bought in at the right moment. A country of 70 million has emerged from a long period of inflation and is relearning how to invest and save. The insurance and mortgage markets are extremely underdeveloped.

Though Mittler thinks that, due to legal developments, it might take some time before the market fully launches, he clearly believes that Turkey's new Fortis bank will be in a prime position to distribute the company's credit and insurance products. The plan is clearly that these new Turkish assets will start to contribute strongly to the Fortis bottom line before 2009.

The strategy announced for the whole group at a big presentation to analysts in London in June 2005 is that it should have a Compound Annual Growth Rate (CAGR) of at least 10% a year until then. 'We also said that we wanted to be more important outside of our local Benelux markets,' says Mittler. 'At the end of

2004, 15% of our profits were made outside Benelux. The objective in 2009 is that that proportion will be 30%, from what will also be a larger profit.'

The major contribution is likely to come from organic growth from existing Fortis business units. 'We are well known in terms of cost cutting and cost management,' explains Mittler, 'and we are going to continue to be very, very tough on costs, but we will allow investment, using our operating leverage, which is the difference between revenue and cost growth. We have said to all Fortis businesses that there is no green light for investment if you cannot prove that you will have at least 250 basis points of operating leverage. We are creating the ability to grow, but also establishing a very disciplined approach to profitable growth.'

'PERFORMANCE COMMUNITY'

The 'performance community', which Fortis introduced in October 2004, is responsible for monitoring the reality of that growth. 'We have done something which is unusual in a large organisation,' claims Mittler. 'Normally, you have a headquarters with controls and then the businesses with financial people. With that structure you start on 1 January and end on 31 December, with plenty of fighting between them about the reality of the figures, about sandbagging and about target-setting.

'So we replaced these layers with one performance manager for each of our six businesses, a manager who is the only owner of the financial information, not just of the accounting but of the leading and lagging indicators as well - everything you need to be able to challenge, to report and to prepare targets.'

Every 30 days these performance managers, together with the businesses' CEOs, report to the overall CEO, Jean-Paul Votron, to Mittler and to Fortis Chief Operating Officer, Herman Verwilst. This COO function was created in October 2004 to manage all the resources of the entire group from a single desk. His responsibilities include IT, HR, facility operations, risk and legal and compliance.

'I have had discussions with some of my peers,' says Mittler, 'who think it was courageous to organise such a system and break down the walls between business centres.' He believes, however, that the system is working. 'We can challenge what is happening based on a scorecard, and we have two-way communication, from bottom to top and top to bottom with only one person, who will always tell the same story. We have thus become very quick at acting and reacting.'

A FUTURE IN ASSET MANAGEMENT?

In April 2005 it looked as if Fortis was planning to shed its asset management business, either completely or partially, when reports circulated that Merrill Lynch had been given the sale mandate. Fortis denied any outright sale, but Mittler admits that its asset management business, while profitable, is still of medium size in an industry where the big players are becoming very big.

As Fortis merged with and acquired new banking businesses, its asset management activities were immediately folded into Fortis Asset Management. The focus was on its internal distribution networks - the thousands of branches throughout the group.

Even initiatives to win third-party business developed well. 'Nevertheless, last year,' says Mittler, 'we made a strategic analysis and decided that if we wanted to further strengthen our position in Europe, if we wanted to attract the best people, to be an industrial asset manager, able to design products swiftly and reduce their time-to-market, we needed size to pay for the investment in processes and IT.'

'We don't want to buy that size. There are a few opportunities on the market, but we don't consider paying between 5% and 10% of assets under management to be a reasonable proposition. So we recognised that one possible way to grow is to team up with someone else who has the same strategic view. It will take time. We are not in a hurry. As it is, our asset management business is making a nice return on equity and is growing quite well.'

SUCCESSFUL INTEGRATION

Ever since a Dutch bank merged with a Dutch and Belgian insurance company in 1990 to form Fortis, the company has used some 40 acquisitions and joint ventures to expand its position in the marketplace. 15 years of deals have taught Fortis how to make acquisitions work.

'It makes no difference,' avers Mittler, 'whether the company is big or small. From day one of the acquisition, the new people are part of your organisation and you have to integrate them. It is one of the key elements of the analysis we do on any potential acquisition. How easy will it be to integrate? Will it destroy the culture of the target or of our own company?'

Fortis has reached its present size as a €40bn business over 15 years, with an adroit mix of structural modification via M&A and generic growth, first in its home Benelux markets and then beyond. But in global banking and insurance markets, with consolidation still to come, one way or another, Fortis is not going to be standing still.