How The Ubs Deal Changes Banking
The blockbuster merger forming the world's second-largest bank was three years in the making. But the creation of United Bank of Switzerland, with $632 billion in assets and $59 billion in stock market capitalization, will set off shock waves for years to come.
The monster bank born of Swiss Bank and Union Bank of Switzerland will give new oomph to CEO Marcel Ospel's audacious strategy: Build a worldwide money manager and investment bank that can take on the likes of Merrill Lynch & Co. and Morgan Stanley, Dean Witter, Discover & Co. worldwide. Feeling the heat, competitors may now kick off a transatlantic feeding frenzy in a quest to remain in the game. Other European banks may rush to bulk up by buying the few remaining independent Wall Street firms, including Lehman Brothers Inc. or privately owned Goldman, Sachs & Co. And European banks may also go after one another (table). Says London-based J.P. Morgan & Co. analyst Stuart Graham: "Suddenly, size is no barrier to doing a deal, and nobody's too big."
The virtues of size will only increase when Europe adopts a single currency on Jan 1, 1999. One reason: It will take bigger banks to handle the volume of mergers across all industry lines that are expected to take place. When the euro makes its debut, the dealmaking will reach an even greater frenzy. "We expect a very significant restructuring and privatization wave to go through Europe," Ospel says.
European monetary union will also create a new wave of euro products for banks, insurers, and money managers to sell. Already, bankrupt state pension systems are giving way to private retirement plans investing in securities markets. European mutual-fund assets have nearly tripled since 1991, to $1.8 trillion at midyear, figures Lipper Analytical Services Corp. That's largely because investors, worried about their pensions coming up short, are pouring money into stocks. As interest rates converge, investors hungry for higher returns are also becoming more willing to take on risk, creating a market for junk bonds. And securitization of bank debt is becoming common.
STOCK HIKE. Increased competition is also driving banks to merge to cut costs. The new UBS plans to ax 13,000 of its 55,474 employees worldwide. Some 7,000 of the cuts will come in Switzerland, where the partners have overlapping branch networks. The reductions will save UBS $2.75 billion by 2001 and help make the bank more attractive to investors, who have taken a dim view lately of laggard lenders. The anticipated savings are the main reason United Bank's and SBC's share prices have jumped sharply since news of the deal first surfaced on Dec. 5.
It was pressure from Swiss shareholder-rights activist Martin Ebner, who owns 25% of Union Bank of Switzerland's shares and has long sought better returns, that helped spark the deal with SBC. In August, Zurich rival Credit Suisse had announced its $9.8 billion acquisition of insurance giant Winterthur, a deal largely engineered by Ebner. That, in part, touched off a number of European financial mergers and left Ospel and Union Bank CEO Mathis Cabiallavetta with little choice. Says Ospel: "We were in danger of becoming marginalized in major business areas, and that was not an attractive prospect."
Some European banks have already reached that marginal state. Britain's Barclays Bank and National Westminster Bank have had to drop out of investment banking. Big Continental players, including Deutsche Bank, Dresdner Bank, and Societe Generale, to say nothing of Union Bank itself, have had trouble keeping up without expensive new acquisitions. "There's an argument that you have to have size to make it in investment banking," notes Deutsche Bank board member Ulrich Cartellieri. "Whether you're No.1 or No.10, the costs are enormous."
The new UBS will have the heft to manage these costs. With $920 billion under management, it will be the world leader in asset management. But the bank is still far from global. Bank Julius Baer & Co. analyst Hans Kaufmann figures about 50% of its business comes from Switzerland, 25% from Britain and Europe, and just 10% from the U.S.
The bank's real profit generators are its private-banking unit, which provides sophisticated investment services to the wealthy, plus investment banking and institutional money management. These businesses will produce 83% of the astounding $7.5 billion in profits UBS projects it will earn by 2002, which will give it a leg up on European rivals. Analysts see huge potential in private banking, where the new bank has nearly $400 billion under management. "It's a very hot market, and UBS is very well positioned," says Michel Bonacker, a McKinsey & Co. partner.
In investment banking, the going may be tougher. In 1995, Swiss Bank paid $1.3 billion for British investment bank S.G. Warburg, which will still be the main source of the new bank's strength. UBS will be a major force in bond issuance in Europe and is No.1 in European mergers and acquisitions. But UBS is now facing swarming competition from American rivals Morgan Stanley Dean Witter Discover; Goldman Sachs; J.P. Morgan; and Merrill Lynch. And the bank's plans to cut 6,000 investment-banking jobs could destabilize the operation for months.
SWISS COUP. The big question now: When will Ospel start to use his war chest to make more acquisitions--especially in the U.S. He won the top job at SBC last year partly by engineering key takeovers, including Warburg. The 47-year-old Ospel is the dominant force in the new organization. Not only did he get the CEO title despite SBC's smaller size but his team has nearly all the key jobs. Peter Wuffli, 40, a former McKinsey consultant, will be chief financial officer. SBC's heads of investment banking, private banking, and asset management will also get the same jobs at United. The bank's organizational structure will be similar to SBC's.
Recently, Ospel paid out $600 million to bolster SBC's weak position in investment banking in the U.S. by buying Dillon, Read & Co. He also launched a major joint venture with Long-Term Credit Bank of Japan Ltd. as part of an effort to strengthen the bank's position in Asia. Still, the combined SBC and UBS lag in global M&A, with only $112 billion in deals this year, vs. market leader Morgan Stanley's $234 billion. But the new bank's enormous capital base will give it the ability to "finance any deal, anywhere, anytime," Kaufmann says.
Ospel's merger still faces potential glitches. UBS's restructuring of its Swiss operations will draw the ire of unions and possibly Swiss Trade & Industry Minister Jean-Pascal Delamuraz. Still, says Kurt Schiltknecht, a top Ebner lieutenant, "we think the bank now will have a good chance to benefit from the opening up of financial markets" in Europe and elsewhere. In time, it will cause major upheavals as other banks try to keep up with its bold moves.