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The Swiss government orchestrated one of the largest mergers in recent history between competing firms UBS and Credit Suisse, drastically reshaping the landscape of Swiss finance. While this historic deal may have averted the nation's looming economic crisis, it is bound to produce far-reaching consequences for clients, employees, and the cultural dynamics within the banking world.
By Dylan Thompson
Edited by Rushil Yelma
Save of the Century
Historically, mergers and acquisitions aren't a new concept—purchasing a target company to increase an acquirer's value is an idea that dates back to the late 19th century when the integration of companies across adjacent industries (known as horizontal mergers) dominated the oil, steel, and mining sectors. The underlying financial motivations behind companies' buy and merge decisions can vary, with some being economies of scale, expanding their geographic market, or acquiring more customer and distribution channels. However, mergers in some sectors are infrequent in global M&A markets, especially the ones where the synergies of the merger become fuzzier. For instance, when a bank acquires another bank during a national emergency, the dynamics driving the merger, as well as its implications, become important and thus necessitate a closer examination.
In June 2023, Switzerland's banking giant, UBS, acquired its smaller rival, Credit Suisse. In the $3.2 billion deal, one of the largest bank acquisitions within the past decade, the licensed Switzerland group of UBS would merge with Credit Suisse's group under one consolidated entity. Arranged and backed by the Swiss government, the merger came to be seen as a "shotgun wedding" effort to restore confidence in the nation's markets. UBS Chairman Colm Kelleher announced that "this acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue." As the banks scrambled to restore confidence in the Swiss economy, it is critical to examine the winners and losers of this deal and who would likely emerge triumphant in the long run.
The Swiss Cheese of Banks
Like nation neutrality and Gruyere fondue cheeses, institutional banks are an important component of Switzerland's economy. In addition to this historical, reputable system of confidentiality, the Swiss franc's reputation as a safe-haven currency made it alluring for overseas and domestic investors to inject capital and store their wealth in the small country of snow-capped Alps.
The mystique surrounding the secrecy of hidden wealth in Swiss banking culture is not unfounded, either. In recent years, Credit Suisse has repeatedly acknowledged shortcomings in its risk management practices. For example, in 2021, the firm was forced to freeze $10 billion of investor funds trapped in the now-defunct supply-chain financier Greensill Capital. The company had spiraled into crisis after solvency issues arose in failing to secure insurance for its operations. The following year, regulators fined Credit Suisse $350 million for its role in selling $2 billion worth of government bonds to its global investors, ostensibly funding state-owned tuna fishery companies in Mozambique. However, a large proportion of the funds were embezzled by Mozambique officials and former Credit Suisse employees, triggering an economic crisis for the country as it defaulted on its interest payments on the bond. From its oversight in risk management to hidden debt scandals in so-called "tuna bonds," Credit Suisse's share price has drastically declined and wiped billions of assets of the bank's bond holders. The string of controversies affected the financial sector and eroded Credit Suisse's credibility to serve investors globally; it undermined the trust and confidence that investors and the public placed in financial institutions' service offerings. The sequence of events exposed the weaknesses in Switzerland's banking regulatory frameworks and emphasized the need for stricter oversight to prevent future consequences.
Winners & Losers
After this debacle, rescuing the Credit Suisse bank from financial uncertainty was no small feat. In a strategic maneuver by the Switzerland government, UBS and Credit Suisse merged. While this averted a larger crisis in the banking sector, it transformed conditions within the industry that would eventually create winners and losers of acquisition.
From a buyer's perspective, it's hard to ignore the attractiveness of the merger for UBS. The Swiss giant reported its highest profit for the second quarter of the year, where net earnings stood at $29 billion—almost all of it attributable to a "bad will" accounting gain; this adjustment arose because the purchasing price for Credit Suisse was far lower than the actual book value of their assets. As a result of the merger, UBS will manage around $5.5 trillion in client-invested assets.
Apart from its private banking and wealth management division, Credit Suisse also operates an investment banking arm. The acquisition by UBS led to cutbacks on Credit Suisse's investment banking services, which, for bulge bracket firms of Wall Street, corresponds to one less competing firm in the investment banking industry. UBS's resilience in spite of the fall of its competitor Credit Suisse and the subsequent merger reshaped the competitive landscape in the industry, allowing for the concentration of power towards one dominant firm in the Swiss banking sector.
However, the celebratory air for UBS in Switzerland's banking rescue dissipates when looking at the challenges faced by Credit Suisse. The institution, once a formidable banking rival for UBS, led its clients and shareholders to bear the brunt of its financial upheaval. At the time of the deal's announcement, the Swiss Financial Market Supervisory Authority (FINMA) decided to wipe Credit Suisse's $17 billion worth of Additional Tier 1 (AT1) bonds, composed of Swiss francs, US dollars, and Singapore dollars. According to FINMA's regulations, in the event of a "Viability Event," such as a bank's failure, AT1 bonds—which serve as a high-yield debt instrument—are written down as equity to provide enough capital to meet regulations to prevent bankruptcy. In other words, these bonds act as a lucrative investment with a bomb attached to it, which is triggered when a bank faces troubles. Under these contractual obligations, the effects of this merger result in lighting the fuse that leaves these shareholders the last in line for any kind of payout—in this case, nothing.
Credit Suisse's offices and its clients find themselves among the losers, grappling with challenges that cast shadows over its financial standing. But these woes extend far beyond the corporate name, reaching the very individuals who dedicate their professional lives to the bank: their employees. UBS announced late this August it expects to shed around 3,000 jobs in Switzerland—an effort to save approximately $10 billion in overhead costs. Additionally, this mass layoff has extended to its global offices. Following the official announcement of the merger, 70% of Credit Suisse's securities-based research unit in Hong Kong was cut following their office's absorption by UBS as of late September.
Amidst the large workforce restructuring, it is unsurprising to observe parallel job cuts in the broader context of historical bank acquisitions. Examining the largest bank acquisitions within the last five years reveals that there was approximately an average reduction of 4.7% of employees when comparing the target company's headcount a year prior to the official closure by the buying firm. Furthermore, the elimination of employees is a recurring trend when looking at the six largest bank acquisitions that have taken place in the last two decades, where the employee reduction rate showed a staggering 8.5% on average.
The Future of Banking: Clients, Employees, and Everything in Between
The intricate details of the UBS and Credit Suisse deal shed light on the underlying complexities and structural adjustments that are required to bring it to fruition. However, as the deal proceeds, lingering uncertainties remain regarding the challenges for both beneficiaries and those who may be adversely affected.
While the repercussions for assets lost by investors persist, it may cast a shadow that could impact the fortunes of those who reaped the rewards. Although the financial strength of Switzerland's markets was rescued by a government-brokered deal, it ultimately affects the fate of their market and those that help drive it. Since the acquisition, the Saudi National Bank lost over $1 billion invested in Credit Suisse in an endeavor to enter new foreign markets as an oil powerhouse. Furthermore, UBS has since announced that the regulatory approval process will be delayed for additional countries, including South Korea, India, and Ireland. Other major shareholders who were affected come from sovereign wealth funds in Qatar and Norway. Because of this, the merger's effects seem to put a significant dent in a future investor's desire for risk.
According to Simon Fentham-Fletcher, Chief Investment Officer of Freedom Asset Management, there will be "a pullback in all risk appetite as confidence has just taken a severe beating, and this combined with the apparent upending of the capital structure rules will undoubtedly make people pause." The consolidation of the banks certainly benefits UBS, what with its newfound access to a wider range of product offerings and financial services, but there may also be significant drawbacks for potential clients. Moreover, this acquisition may impact future lending practices of how financing or loan terms are—yet another layer of complexity amid lowered investor desire of risk appetite in an uncertain Swiss market.
So what does this mean for future job prospects? Looking into the complexities of the merger even further, the looming specter with far-reaching effects on entire banking divisions is the cultural clash between the two offices—a measure examined more qualitatively.
Culture can be an asset to a firm, namely in how employees interact with each other and their clients daily. It's the underpinning for decisions and priorities that affect financial performance. From advisors on the executive board to associates on deal teams, everyone has a part to play in the game. However, a firm's performance and track record of its product offerings make it susceptible to dying out. In short, a firm's liabilities always stay, but its assets and its people can always be removed, either by choice or proxy.
With the Swiss bank merger, disparities in organizational cultures come into focus where a firm's employees may not align with the acquiring entity and have no use for them as a result. According to the Financial Times, the most uncertain aspect of Credit Suisse's services is its investment banking division— a unit responsible for most scandals and losses. Therefore, anything the UBS management deems too risky, such as leverage finance and structured credit services within that division, can be reduced or outright cut—a move that can result in as many as 17,000 Credit Suisse bankers losing their jobs throughout the absorption process. While retaining some bankers in different coverage areas—such as pharmaceuticals or technology—can be added to UBS talent, the deal showcases how easily an entire division involving thousands of workers can be dissipated in a buying firm's interest to cut costs and retain cultural fit.
In a statement released by the Swiss Bank Employees Association, an affiliate of the UNI Global Union Federation, it demanded conditions where "the 37,000 employees of the two institutions in Switzerland are treated fairly and equally in the integration process." While UBS CEO Sergio Ermotti acknowledged that job cuts are expected to take place over the next few years, he stated that the necessary financial support and placement resources will be provided to help the thousands of affected employees stay active in the workforce—a beginning of efforts to tackle the potential uncertainties from the results of the deal.
As the dust begins to settle from the strategic maneuver by UBS with the merger anticipated to reach its full completion by next year, it highlights a transformative shift of sentiments toward the primary operating markets of Switzerland and its strength held previously. Moreover, it serves as a broader reflection and discussion of the complex effects that a deal in the M&A landscape creates. They are effects that significantly impact the necessary groups whose hands are clinging onto the helm: clients, employees, and the culture as the glue between them, all in a combined effort to keep a global market afloat.
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