By Ayushman Mukherjee, Divy Dayal, and Matthew Liu (University of Cambridge), Gonzalo Riera-Ripoll, Felix Hooper and Rafi Glass (Durham University), Athean Myat, Ana Almeida, Angelina Gart, Coby Lai, and Michelle Liu (Cornell University)
Photo: cmphoto.com (Unsplash)
Overview of the deal
Acquirer: UBS Group AG
Target: Credit Suisse Group AG
Total Transaction Size: CHF 3bn ($3.3bn)
Closed date: By EOY 2023
Target advisor: Centerview Partners (Financial), Cleary Gottlieb Steen & Hamilton LLP (Legal)
Acquirer advisors: J.P. Morgan, Morgan Stanley (Financial), Davis Polk & Wardwell LLP, Freshfields Bruckhaus Deringer LLP (Legal)
On 19th March, the Swiss investment bank UBS announced its intention to acquire its longstanding rival – Credit Suisse – for 3 billion CHF in an all-stock deal. The deal was brokered over the course of the preceding weekend by the Swiss Federal Department of Finance, the Swiss National Bank, and the Swiss Financial Market Supervisory Authority (FINMA). Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares, equivalent to CHF 0.76/share. Roughly 16 billion CHF of Credit Suisse additional tier-one (AT1) bonds are to be written down to zero.
The deal was brokered to ensure continued financial stability after a string of losses and scandals at Credit Suisse, and rocked sentiment as the U.S. reeled from the collapse of SVB and Signature Bank. To shore up confidence in the deal, the Swiss National Bank offered a CHF 100 billion liquidity line, and the Swiss government guaranteed losses of up to CHF 9 billion over the short term.
According to UBS, the deal will create a “focused Investment Bank remaining committed to UBS’s model.” Strategic, asset-light Global Banking businesses are to be retained – with most Credit Suisse markets positions to be moved to non-core. Key decision makers have lauded the creation of a new “leading global wealth manager” with over $5 trillion of invested assets (creating the world’s third largest asset manager after Vanguard and Blackrock) – and a pre-eminent Swiss universal bank, with 30% of total deposits in its home market, double the next largest player’s share.
“Bringing UBS and Credit Suisse together will build on UBS’s strengths and further enhance our ability to serve our clients globally and deepen our best-in-class capabilities. The combination supports our growth ambitions in the Americas and Asia while adding scale to our business in Europe, and we look forward to welcoming our new clients and colleagues across the world in the coming weeks.” - Ralph Hamers, Former CEO (UBS)
Company Details (Acquirer - UBS)
UBS is a financial services company headquartered in Zürich, Switzerland. Founded in 1998 by the merger of Union Bank of Switzerland and Swiss Bank Corporation, the company operates through four divisions: Global Wealth Management, Personal & Corporate Banking, Asset Management and Investment Bank. UBS is the third largest bank in Europe with a market capitalisation of $63bn, considering it as one of the eight global “Bulge Bracket Banks”. The company has a global footprint, providing financial services in over 50 countries.
Founded in 1998, headquartered in Zürich, Switzerland
CEO: Sergio Ermotti
Number of employees: 74,022
Market Cap: $65.7bn (19/04/2023)
LTM Revenue: $34.4bn
LTM EBT: $9.5bn
LTM P/E: 9.1x
LTM P/BV: 1.1x
Company Details (Target - Credit Suisse)
Credit Suisse is a financial services firm and global investment bank headquartered in Zürich, Switzerland. The group is organised across four divisions including Wealth Management, Investment Bank, Swiss Bank and Asset Management. Credit Suisse operates across four geographic regions, namely Switzerland, EMEA, Asia Pacific and Americas. The firm has a market cap of $3.6bn.
Founded in 1856, headquartered in Zürich, Switzerland
CEO: Ulrich Körner
Number of employees: 50,110
Market Cap: $3.6bn (19/04/2023)
LTM Revenue: $16.0bn
LTM EBT: ($1.7bn)
LTM P/E: n.m.
LTM P/BV: 0.1x
Projections and Assumptions
Some analysts see the deal as a bold move that solidifies UBS’s position as the world's leading wealth manager. Others, however, are more sceptical, questioning whether UBS is overpaying for the business and if the deal will truly be accretive to earnings. Given the far-reaching implications of this acquisition, it is prudent to consider its immediate impact both on the combined entity – and on greater financial stability.
UBS shares remain 10% lower than their peak immediately before the transaction in early-March, reflecting investor unease in the shot-gun wedding between a healthy wealth-manager and a highly nebulous investment bank. Sergio Ermotti, the firm’s longest serving CEO, has been restored to his former position. Ermotti is widely credited with executing UBS’s turnaround by scaling down its investment banking operations after a series of scandals that nearly caused the bank’s implosion. Ermotti’s immediate concerns will lie in achieving immediate synergies in support functions, and winding down the non-core unit. Whilst Credit Suisse had already achieved an 8% cut in headcount before the takeover, the combined entity may reduce its 120,000 staff by 20-30%.
In the immediate term, the demise of Credit Suisse is likely to push other banks to lower their risk profile. European banks have already started to turn to bespoke deals with investors to offload the risk on multi-billion-euro loan portfolios through “significant risk transfer” (SRT) transactions. Moreover, although the ECB and Bank of England have clarified that junior creditors should bear losses only after equity holders have been wiped out – lenders’ funding costs remain elevated after the jolt to AT1 bondholders. Together, the potential implications are significant – banks will make fewer loans, making it harder for central banks to keep raising benchmark rates. Indeed, rates futures pricing suggests that the hiking cycle is already over, and that the Fed will cut rates by 75-100 basis points by the end of the year.
The acquisition may be seen as a way to stabilise Credit Suisse's struggling business and restore confidence in the wealth management industry, although it could also be viewed as a sign of weakness in the industry. The ultimate impact on the broader economy remains to be seen, but investors and analysts will likely closely monitor the acquisition process.
UBS’ Credit Suisse acquisition will provide significant long-term upsides for the Swiss giant. By downsizing Credit Suisse’s Investment Banking arm and focusing on integrating its former competitors' asset and wealth management divisions into its existing business, UBS will add more than $1.5 trillion to its existing $4.4 trillion in Assets Under Management, creating the third largest asset management company globally after BlackRock and Vanguard and the largest manager in Europe, with a total AUM of over 7 times Switzerland's GDP.
With a cumulative $3.4tn of wealth management assets alone, UBS will become the second-largest private bank in the world after Morgan Stanley. Indeed, due to geographic and product synergies, this acquisition allows UBS to strengthen its position in the global market as the largest wealth manager in South-East Asia and the Middle East, with a strong footprint in key Latin American geographies such as Brazil. Credit Suisse brings its strong presence in Asia and a solid reputation for serving high net-worth clients, enabling UBS to offer these clients a wider variety of products and services, including access to its extensive investment banking capabilities.
The acquisition will also grant UBS access to Credit Suisses’ coveted domestic bank, long considered one of the Swiss lender's key businesses. Hence, while providing short-term headwinds, the acquisition will ultimately allow UBS to inorganically expand some of its most profitable businesses and cement its position as one of the leading asset and wealth management firms globally.
Furthermore, while the deal's extraordinary turnaround time constrained the due-diligence process, the Swiss National Bank SFr100bn ($110bn) liquidity line and the Swiss government's loss guarantee of up to SFr9bn ($10bn) will likely limit the short-term detrimental financial impacts of Credit Suisses potential future losses, allowing UBS’ management to focus on implementing a long-term strategy for Credit Suisses existing businesses.
From a macroeconomic perspective, the deal will also help prevent contagion in the banking system and avoid an economic downturn in Switzerland. The merger is expected to generate more than $8bn annual run-rate of cost reductions by 2027, and will further reinforce the standing of UBS as the largest and most important bank in Switzerland with key connections to banks in the United States and other countries.
Risks and Uncertainties
The acquisition of Credit Suisse by UBS poses many risks and uncertainties, reflecting the expedited transaction speed and potential integration difficulties.
Swiss authorities prevailed upon UBS to complete the acquisition prior to Asian financial markets opening on Monday 20th March 2023; an implicit acceptance that the acquisition could unsettle global markets. The short negotiation period – which involved only 48 hours of due diligence, an insignificant amount given the immensity of the transaction – resulted in limited discussion of how to handle Credit Suisse’s troubled investment bank, potential antitrust issues, and shareholder anger. Indeed, this latter point proved to be particularly contentious, with Credit Suisse’s shareholders excluded from the decision, lamenting the ‘banana republic’ state of Swiss governance which arbitrarily changed the law to permit the transaction. Past ‘shotgun weddings’ have a rocky history; for example, J.P. Morgan’s acquisition of Bear Stearns and Washington Mutual during the 2008 Financial Crisis resulted in $19 billion of fines and settlements.
Integration of the two financial behemoths could prove to be challenging. Credit Suisse’s investment banking arm has a turbulent history, contributing significantly to Credit Suisse’s collapse. Repeated scandals – including the collapses of Archegos Capital Management and Greensill Capital in 2021 – have tainted the brand image and could pose legal difficulties for UBS which will be shouldered with Credit Suisse’s legacy issues. Similarly, other aspects of Credit Suisse’s business are permeated with difficulties. The wealth management business has suffered from persistent rumours regarding significant outflows – asset outflows which may well continue to weaken UBS - unaided by Credit Suisse’s auditor PwC flagging concerns over financial reporting controls. Winding down these operations could be very costly and could result in mass unemployment, putting thousands of jobs at risk, especially those which overlap in both organisations.
“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue. We have structured a transaction which will preserve the value left in the business while limiting our downside exposure. Acquiring Credit Suisse’s capabilities in wealth, asset management and Swiss universal banking will augment UBS’s strategy of growing its capital-light businesses.” - Colm Kelleher, Chairman (UBS)