Acquisitions by major Swiss banks in the US have been turning points in their development. Often with ambivalent experiences. Here we go again.
With the acquisition of the US financial institution First Boston, Credit Suisse established itself on Wall Street, at least for a while, in the 1990s as an investment banking player under the acronym CSFB.
Soaring costs and subsequent losses, however, proved to be so high that Credit Suisse is now in the process of shutting down the unit. The bank plans to announce exactly how this will be done at an investor day at the end of October.
Value Adjustments Ad Infinitum
Credit Suisse took on a hefty mortgage in 2000 when it acquired US competitor Donaldson, Lufkin & Jenrette (DLJ). At the time, the cost of around $20 billion proved far too high, considering the never fully realized synergies.
Instead, the bloodletting of many of DLJ's key executives never paid off, leading to goodwill write-offs and value adjustments that continue to this day, as finews.com also reported.
Attack on Swiss Banking Secrecy
Credit Suisse competitor UBS did not fare much better. With its takeover of PaineWebber in 2000, UBS acquired a US broker that should have boosted UBS's wealth management business in the state. The costly acquisition, turned out to be a dud, as it resulted in a mixing of onshore and offshore business.
The upshot is that it provided the US authorities with a free pass to crack down on Swiss banking secrecy as a means of tax evasion. This inflicted lasting reputational damage on the Swiss financial center by forcing UBS to send reams of confidential client data across the Atlantic. The rest is history.
The Latest Surprise
Last weekend, UBS wrote another chapter in this saga. In a complete surprise, announcing it had called off the $1.4 billion acquisition of US digital wealth manager Wealthfront announced to great fanfare in January.
UBS has yet to provide any reason for this, so we can only speculate. What is certain, however, is that the withdrawal is a bitter setback, especially for UBS CEO Ralph Hamers and his digital team.
Trendsetter UBS
In the fall of 2020, Hamers embarked on a mission to emphatically bring UBS into the digital age, as he had already done with Dutch bank ING.
And this initially worked out quite well. Despite its supposedly unwieldy size, UBS proved to be a true trendsetter in many areas and services, be it asset management, investing, or real estate. Its tools continue to set new standards.
Tarnished Crown
The deal with Wealthfront was to have been the crowning achievement of UBS's digital strategy. After all, the Swiss bank succeeded in landing one of the really big US providers in this space, and thanks to its client structure it held out the prospect of the highly sought-after segment of young clientele, Generation Z.
In January, it said the California-based company, which offers virtual wealth management via apps and digital tools, had about 470,000 clients and managed about $27 billion in custody assets. The acquisition, priced at $1.4 billion, would have taken UBS a lot further.
Valuation too High
What almost no one could have foreseen at the beginning of 2022, was the stock market crash, particularly among tech stocks in the wake of war breaking out in Ukraine, soaring inflation, and central banks exiting easy money to combat it. Against this backdrop, Wealthfront's valuation suddenly proved to be far too high, and too rich even for UBS's deep pockets.
Given these developments and the potential for an impending recession along with cautious clients, the need for the deal in its original form no longer existed.
Low-Cost Wealth Manager
Swiss entrepreneur and fintech expert Adriano Lucatelli stressed the point to finews.com that Wealthfront has yet to make any money. The company is pursuing a low-price strategy with a management fee of 0.25 percent of invested assets, he said, with the $27 billion in client assets translating into revenues of just over $67 million. But the question is what is the cost of generating that particular revenue.
What that means is that «UBS was getting ready to buy a loss-making asset manager that, with its low-cost culture, was a foreign body in the Swiss banking DNA of the big bank and whose long-term prospects for success were built solely on rapid growth in clients and client assets. A typical Silicon Valley startup,» concludes Lucatelli, who himself runs robo-advisor Descartes.
Abrupt Termination
Maintaining a stake of just under $70 million in Wealthfront via a convertible bond-like construct, UBS may still want to keep a hand in the US company and save it from further devaluation. But to be sure, the actual deal has fallen through.
The decision must have been an abrupt one. As recently as the end of July, Hamers assured the company the takeover was proceeding according to plan while awaiting a green light from the authorities. Iqbal Khan, now the sole head of UBS wealth management, is also certain to be affected by this after his long-time co-head, American Tom Naratil recently announced his intention to retire after nearly four decades at UBS.
Double Challenge for Khan
Khan, a dual Swiss-Pakistani citizen, now faces a dual challenge. First, as wealth management CEO where the Wealthfront project was to have resided, and secondly now without the energetic support of veteran Naratil.
