Ubs And Paine Webber: "A Match Made In Heaven"?

The giants fit together neatly, but Wall Street is unconvinced

It was another lap in the race for bulge. On July 12, under crystal chandeliers in the Empire Room of the Waldorf Astoria hotel in New York, PaineWebber Inc. Chairman and CEO Donald B. Marron and UBS President and CEO Marcel Ospel sealed a deal to unite their forces to create a preeminent global investment-services colossus.

In one bold stroke, UBS picked up an impressive American private-client franchise from PaineWebber for $10.8 billion. At the same time, PaineWebber gained access to UBS' European research and global reach. "It's a match made in heaven," proclaimed Ospel.

Perhaps. But Wall Street didn't seem to see the synergy. Merrill Lynch & Co. downgraded UBS to "neutral" from "accumulate." And although acquirers' stock prices generally slide, UBS' stock tumbled 9% in one day, to 135. Since UBS agreed to buy PaineWebber at 73, a 47% premium, its stock rose 34%, to 67. "It's all up to execution," says Michael L. Mayo, an analyst at Credit Suisse First Boston. "It clearly creates the potential to increase revenue growth. But at the same time, it magnifies risks that are cultural, operational, and financial."

Wall Street did, however, believe the deal could usher in more acquisitions. The stock prices of Bear Stearns, J.P. Morgan, and Lehman Brothers all rose on takeover speculation.

PaineWebber and UBS are just the latest in a recent series of transatlantic financial partnerships. It's still too soon to know if any of them will demonstrate real staying power. In January, Citigroup bought Schroders PLC for $2 billion. And Chase Manhattan Corp. will soon close its deal for London-based Fleming Securities for $6.9 billion.

The Deutsche Bank-Bankers Trust merger has started to pay off, with Deutsche Bank posting first-quarter earnings of $860 million, up 50% over the previous year. But that's only after a year of culture clashes that resulted in Bankers' CEO leaving, with many staffers.

Analysts don't think the PaineWebber-UBS merger will be as painful since there's less overlap. UBS needs PaineWebber's American reach. PaineWebber stands to benefit from UBS' prowess on the Old Continent.

But they don't count on the partnership propelling UBS and PaineWebber into the major leagues of investment banks such as Morgan Stanley Dean Witter, partly because of PaineWebber's relatively weak investment-banking, institutional, and asset-management units. "The UBS/PaineWebber deal seems to pose little risk to major bulge-bracket U.S. securities firms," wrote Merrill analyst Judah S. Kraushaar in his report.

Is that bad? PaineWebber has successfully competed with Merrill Lynch and Morgan Stanley for affluent private clients so far. "What's changed is the need for technology and the need for global products," says Ray Soifer, chairman of Soifer Consultants. As the world's largest private bank, with $1.1 trillion in client assets under management, UBS' deep pockets should help.

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