Ing Hits A Speed Bump

Its talks to buy Aetna have stalled, but the insurer has a Plan B: Look for fast internal growth--and other deals

ING Group's Ewald Kist is in surprisingly good humor for someone who has just learned that his bid for the financial services and international units of U.S. insurer Aetna Inc. is in real trouble. On June 16, the Hartford-based underwriter--which had been negotiating exclusively with ING--decided to open talks with other potential buyers because it thought ING's offer was lowball. If ING loses Aetna, its goal of breaking into the ranks of the top 10 U.S. insurance underwriters will be delayed. And its hope of quickly becoming a financial powerhouse in North America as well as Europe could suffer, too.

Kist, who took over as chief executive on May 2 after 31 years at the company, seems to be unbothered by the news even though ING has been rebuffed by Aetna once before. In February, the insurer turned down an offer of about $10 billion from ING and WellPoint Health Networks Inc. for the whole group, claiming that it was worth considerably more. Although neither side will disclose precise figures, Kist is said this time to have offered $8.1 billion for the parts he wants. After looking closely at Aetna's books, he apparently lopped off some $600 million.

BIG BLOW. The setback should be all the more galling to Kist because it comes just two months after his predecessor, Godfried van der Lugt, lost out to Britain's HSBC Group in a race to take over French bank Credit Commercial de France. Buying CCF would have pushed the insurance, fund management, and banking conglomerate--which had $495 billion in assets at the end of 1999--a long way toward achieving another strategic goal: transforming itself into a truly pan-European financial player. "Losing CCF must have been a big blow," says the head of retail banking at a rival financial institution in Amsterdam. "If Aetna now slips through ING's fingers, shareholders could be forgiven for wondering whether its acquisition-driven strategy really makes sense."

But Kist, 56, a keen sportsman who played field hockey for Holland in the 1968 Olympics, has a Plan B. "We wanted CCF, and we want Aetna, but only at a price that boosts shareholder value," he says over afternoon tea in his airy office on the edge of Amsterdam. "If we can't have them, there are alternative ways of achieving our goals."

In Europe, ING's geographical gaps can be covered by ING Direct, the group's online bank. ING in March unveiled plans to spend up to $2 billion on Internet-related projects over the next three years; some $800 million of that will be devoted to ING Direct's expansion. The online bank already operates in France, Spain, and Canada as well as the Benelux countries. It will launch in the U.S. this fall. "Our capital surplus allows us to make these sorts of investments even though they may initially lose money for several years," Kist says.

When it comes to the U.S., Aetna is not the only insurance company worth buying, he says. Indeed, there are already rumors that ING is considering Philadelphia's Lincoln National Corp. and Jefferson Pilot of Greensboro, N.C. And once he has consolidated ING's position in the U.S., Kist says he might think about buying a bank there, too.

Kist will have no problem bankrolling his ambitions. Chief Financial Officer Cees Maas figures that ING has a treasure chest of about $7.5 billion. Analysts say the amount could be twice as much. The group--which was formed in 1991 when Holland's largest insurer, Nationale-Nederlanden, merged with the country's third-biggest bank, the Postbank group--has most of its billions invested in other financial and industrial companies. Thanks to Dutch law, ING won't face any tax bill if it cashes out of some or all of them. On June 20, ING announced it would sell its 6.6% stake in Dutch insurer Aegon for $3.29 billion to help cover its $6.1 billion purchase last month of Minneapolis life insurer ReliaStar Financial Corp. "We're definitely not short of resources," Kist says.

No wonder medium-sized banks across Europe dread a telephone call from ING. It could snap half of them up tomorrow if it wanted. For now, though, Kist says he is only interested in acquiring the 51% of Frankfurt-based Allgemeine Deutsche Direktbank ING doesn't already own. But he could easily afford to buy either Dresdner Bank or Commerzbank, two German banks that are discussing a merger.

OVERSTRETCHED. While cash may not be a problem, ING's overstretched management could be. Some analysts are worried that senior executives at ING, which has made nine major acquisitions around the world in the past five years, are spread too thin. ING still needs to finish meshing its North American businesses into an integrated whole and to rationalize the administrative overlaps of some of its European operations.

That's why Martin Lees of Standard & Poor's, like Business Week a unit of The McGraw Hill Companies, put the insurer on credit watch when it bid for Aetna. "They're right to want to build in the U.S. because the growth opportunities are huge there," he says. "But they're wrong to want to do it right now when they have so much else on their plate."

Besides, financial industry experts doubt whether ING's devotion to what's called bancassurance--when a single financial institution provides both banking and insurance services--makes economic sense. "From a shareholder's point of view it doesn't work at all," says BNP-Paribas analyst Tom Bennett. "Banc-assurance destroys value rather than creates it." He says that banks and insurance companies don't need to be integrated in order to sell each other's products. He reckons that ING would be worth up to 30% more than its current market capitalization of $61 billion if it were split up.

Kist, naturally, denies that ING's management is overstretched. He says that by now senior executives are well practiced in absorbing new businesses and that they can meet the group's financial targets at the same time. Each unit is supposed to achieve net profit growth of at least 10% a year--excluding acquisitions--and to make a net return on shareholders' equity of at least 12%.

He argues that ING is successfully cross-selling insurance and banking products too. "The figures speak for themselves," he insists. "More than 15% of the insurance policies we underwrite are sold through our banking outlets. And profits have grown by an average of 27% year-on-year since the group was formed." ING even has an incentive plan for its 200 senior managers that links their bonuses to their success at exploiting cross-selling opportunities. And it moves managers around to heighten their awareness of potential synergies. Kist also says that ING can exploit other big economies of scale between the insurance and banking sides--by rationalizing back-office computer systems, for example.

Analysts and competitors question ING's strategy, though. "If they're only selling 15% of their insurance policies through their banks, I'm not very impressed," says a senior official at a rival insurance company. "We do that and we don't own a bank."

Still, Kist may be able to manage ING's expansion. At the very least, he's got stamina. He ran the 1999 New York marathon in just four hours and 15 minutes. With that, plus a considerable amount of leadership, he might just make a success of Plan A or B.

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