Time Is Running Out For Ubs

The bank tries another revamp. Is a breakup the best option?

When Marcel Ospel, the chief executive of Swiss Bank Corp., engineered a merger with Union Bank of Switzerland in December, 1997, he was hailed for creating one of the world's most powerful money machines. But the truth is, he didn't. The new UBS is a flop, and Ospel is under fire.

Indeed, some investors and analysts in the City of London are beginning to wonder whether UBS should exist at all. Europe actually has too many large financial institutions, they say, and breaking the bank up might be the best strategy. Both the investment and private banking operations are performing poorly. UBS' stock price has declined about 1% since the beginning of 1999. And critics question how well Ospel has been able to integrate the two Swiss institutions. Their cultures couldn't have been more different. UBS was known as the "colonels' bank" because of its connections to the Swiss Army's elite. SBC, on the other hand, tended to cultivate managers who had a less pedigreed background. The infighting at the merged bank was chronic.

`RIGHT DIRECTION.' But it was the shortcomings in private banking that prompted Ospel to unveil yet another reorganization on Feb. 18. The UBS Warburg investment bank will handle the growing business outside of Switzerland, while UBS' Swiss operations will take care of offshore clients who want more secrecy. The head of private banking, Rodolfo Bogni, an Italian who apparently grated on the predominantly Swiss management, has left.

Investors welcomed the changes. A spokesman for the Swiss investor Martin Ebner, who controls about 1.2% of UBS and helped force the 1997 merger, said the recent moves were "in the right direction." But getting UBS back on its feet will be a real challenge, and Ospel doesn't have much time. Franco Catanzaro, an analyst at Bank Sarasin & Co. in Zurich, gives Ospel six months to show progress. Otherwise, he says, shareholders will demand Ospel's ouster, maybe even the bank's breakup.

Certainly, what seemed like golden businesses have failed to shine since the merger. Ospel wanted private banking to be the engine of UBS' future growth. But in the third quarter of 1999, the latest that has been reported, earnings from private banking fell by $397 million from the previous year. Assets under management dropped by 2.6% from the second quarter to $402 billion because of poor investment performance. Catanzaro, for one, thinks UBS' private banking business will probably fall further before it rights itself. He predicts that earnings per share will decline slightly in 2000 from an expected $19.36 last year, and then will rise in 2001.

The constant rumors from Switzerland that the investment bank, UBS Warburg, is for sale haven't helped either. The bank has lost ground to its American rivals in recent years. While it participated in some high-profile deals last year, including Vodafone AirTouch PLC's takeover of Mannesmann, Warburg only finished fifth in the merger league tables in its prime European market. "The value of their franchise has clearly diminished," says a rival banker in London. "We don't see them much anymore." Giving it a money-management arm probably does position it better to compete with American investment banks such as Morgan Stanley Dean Witter and Merrill Lynch & Co., which offer their clients such services. But the Americans will put up a good fight.

Sources in the City of London say that Warburg bankers wouldn't mind working for another owner. Chase Manhattan Corp. is a much-rumored potential buyer, and a merger with Goldman, Sachs & Co. might make sense. If the investment bank finds a home with the likes of Chase or Goldman, perhaps the UBS money-management operations belong with a big insurance company or fund house. And the Swiss retail branch network might complement that of, say, Germany's HypoVereinsbank.

At this point, the giant UBS could be divided up in several ways. And no doubt investment bankers in Europe are hurriedly calculating the possibilities of each one.

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