UBS holds the keys as it acquires Credit Suisse
Something that many have considered unthinkable happened with UBS’s buyout of Credit Suisse, but this mega-merger is not without its own, very real risks.
Over the weekend, UBS acquired arch-rival Credit Suisse — something that has always been unthinkable given the size of both institutions. It brought back memories from 1997 and my early professional years at Swiss Bank Corporation (SBC), the firm that is the true DNA of what we call UBS today. Back in the day, SBC was the third-largest bank in Switzerland and a very modern, Anglo-Saxon institution, while Union Bank of Switzerland (the old UBS), was the second-placed and a rather old-school Swiss bank.
Only through the merger of SBC and Union Bank of Switzerland did UBS overtake Credit Suisse as the biggest Swiss bank. From the vantage point of 1997, it would have been difficult to believe that in just 25 years, the smallest of the three, back then based in Basel, would have absorbed both of its larger, Zurich-based rivals.
Even today, it is difficult to believe that there is only one truly international, universal bank left that calls Switzerland its home base.
While UBS gets a steal of a deal at the agreed valuation, it was very hesitant to tie the knot. It only knows too well that the risks that could surface from the Credit Suisse books could be hefty and cause a real threat to its own business, especially as UBS had very little opportunity to do proper due diligence on Credit Suisse. And UBS knows from its own history only too well how quickly unforeseen risks can pop up. Only a few months after SBC took over the old UBS, the Long-Term Capital Management (LTCM) hedge fund blew up and everyone was caught surprised by how big the old UBS’s exposure really was.
Recent weeks have taught us only too well that trust in a financial institution can be lost in a matter of weeks. UBS was very smart to get guarantees from the Swiss National Bank and Swiss government for some of these risks.
The second big risk for UBS is the time it will take to merge the two entities. It took SBC and the old UBS more than three years to consolidate systems and truly settle into a new organisational structure that included a new one-bank brand. It can be assumed that the Credit Suisse name will largely disappear and the stellar UBS brand will be the one used for the new entity. It is also safe to assume that UBS’s modern technology infrastructure will be the platform of the merged entity.
While this might make the process somewhat faster, the recent example of the Charles Schwab/TD Ameritrade merger has shown that despite largely retaining the Schwab systems and brand, the integration effort has already taken three years. This will be a huge distraction for UBS’s well-oiled machinery and in today’s fast-paced and turbulent market, taking the eye off the ball could really backfire.
The third big implication of this weekend’s merger announcement is the most important: the people working at both institutions.
Credit Suisse is full of talented individuals as the recent outpour on LinkedIn has shown. But the Swiss financial services market has just shrunk by one of its big employers. It can be expected that only some of Credit Suisse’s 50,00 staff will find their place in the new organisation. While this is a huge opportunity for smaller financial institutions to get their hands on top talent, it can be expected that the overall number of people working in the financial services industry in Switzerland will decrease due to this announcement.
Last, but not least, while UBS is now the last man standing of the three big Swiss banks, it loses a much needed home-town rival. Most of the financial services staff in Switzerland — past and present — earned their stripes at one of the two institutions and identify deeply with their firm. This goes well beyond competition in a business sense. It almost has an air of two sports teams located in the same town (think Manchester United versus Manchester City). It is hard to imagine that a Zuericher Kantonalbank or Julius Baer can take Credit Suisse’s place in this regard. It is the end of an era.
Given the many risks and drawbacks, it is no surprise that UBS did not jump for joy at the opportunity to acquire its arch-rival. While the lure is clear of further cementing its position as largest wealth manager in the world, the risks are substantial, and UBS will have to be careful not to lose its focus and positive momentum.
After all, who would be left to rescue UBS, if it should fail?
Alois Pirker is founder & CEO of Pirker Partners
