This Merger Would Rock The Alps And Beyond

A CS-UBS tie could unleash bank-merger fever in Europe

It had become a kind of ritual for the past several years. In the runup to the annual meeting of the Union Bank of Switzerland each spring, you could always count on a flareup between UBS management and Martin Ebner, the gadfly financier and dissident shareholder intent on making the giant lender more profitable. But even Zurich's most jaded gnomes weren't ready for the bombshell that exploded on Apr. 9. Rainer E. Gut, chairman of CS Holding, announced he had approached UBS about a possible merger. The marriage of the two rivals would create a European superbank whose assets of $670 billion would make it the world's second-largest lender, behind Japan's Bank of Tokyo-Mitsubishi Ltd.

Officials from both banks were quick to point out that no formal merger bid had been made. But it became clear that even if UBS's board turned thumbs down at a meeting set for Apr. 11, the end of independence for the blue-chip banks was a possibility. "CS and UBS are in play," says Matthew Czepliewicz, an analyst with Salomon Brothers Inc. If the banks link up--or find other partners--they could trigger a wave of bank mergers in Europe. A CS-UBS merger could also speed the restructuring of Corporate Switzerland, which has been rocked by the $27 billion tie-up of drug giants Ciba-Geigy Ltd. and Sandoz Ltd.

CAUGHT NAPPING. Each lender could gain mightily from a consolidation of Switzerland's vastly overbanked domestic market. And that the two players entertained the idea of a merger at all acknowledges that even the richest banks in the world are finding the expense of building global investment- banking and trading networks prohibitive. Indeed, a CS-UBS hookup would provide a European response to Japan's melding of Bank of Tokyo and Mitsubishi Bank as well as that of Chemical Banking and Chase Manhattan in the U.S., which took effect on Apr. 1.

A CS-UBS merger would produce a bank with $35 billion in capital and a $47 billion market capitalization, double the size of Deutsche Bank, Europe's largest lender. Moreover, the Swiss megabank would rank in the top five in the world in loan syndications, merger-and-acquisitions advice, and underwriting. It also would be better able to weather the worsening state of the banking industry at home. The strong Swiss franc has made the country "the weakest of the major currency economies--in a big way," figures Jim O'Neill, a partner at Goldman, Sachs & Co. in New York. As a result, real estate losses are rising and profits on loans are dwindling.

To make matters worse, the price of getting a foothold in global investment banking is getting steeper by the day. Both CS Holding and UBS were caught napping last year when Swiss Bank Corp. bought old-line British investment bank S.G. Warburg Group PLC. The move leapfrogged the bank, a perennial laggard, into the top spot in European investment banking. But it's getting harder to keep up with the fast pace of change, and that is clearly punishing earnings at the Swiss banks.

UBS has been spending heavily to build up its investment-banking and trading arms in America, Asia, and Britain--often by offering multimillion-dollar salaries to lure star traders and analysts from CS First Boston. High spending and modest profits may explain why Gut has cited the need for "far-reaching solutions" for the problems Swiss banks face. Another motive, says a former CS executive: Gut, 64, must retire in four years but may want to step down sooner.

POLITICAL BACKLASH? Any merger between UBS and CS would have immense consequences for the Swiss economy. The banks' combined workforce of some 60,000 would be cut by as many as 20,000 in Switzerland alone, figures Mary France Goy of the Swiss Association of Bank Personnel. With Coopers & Lybrand predicting even before the merger talk became public that 60,000 jobs will be lost in the Swiss banking industry within a decade, heavy layoffs by lenders could easily launch a political backlash, especially if they exacerbate the country's 4.6% unemployment rate. But that wouldn't be likely to scuttle any deal between UBS and CS.

As for Ebner, there's no indication he'll retreat from the constant pressure he has applied at UBS since 1991. CS-UBS merger discussions "are maybe the first step that shows the old system has to break up," says an Ebner strategist. "Talking merger like this should be as logical in Switzerland as it is in the U.S." Once upon a time, that would have been unthinkable. But now that the world is closing in on the Swiss, they may have no choice but to join the parade toward corporate marriages.

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