UBS rescued rival Credit Suisse from a liquidity crisis sparked by the collapse of the Silicon Valley bank, in what was billed as its best deal in a decade and announced extraordinary second-quarter results.
UBS chief executive Sergio Ermotti revealed that the bank’s net profit reached a staggering $29 billion, a 14-fold increase thanks to the emergency acquisition alone.
“We’re very proud to see clients trust us and really believe in our story,” he said, citing wealth management clients who said they were keeping more money in banks despite the confusion surrounding transactions.
The big gain in the second quarter, however, was the paper gain from the deal’s “negative goodwill” — a terrible-sounding term but actually a sign of astute negotiating skills.
Typically, when a company buys another company, it pays a premium above the market price, creating an intangible asset called goodwill that represents the difference between the target company’s perceived value and the purchase price.
In most cases, less goodwill is considered beneficial to investors because too much goodwill can lead to large impairment charges if the assumptions behind the transaction fail.
Probably the most famous example is AOL Time Warner. After merging at the height of the dot-com bubble, the new group wrote down nearly $100 billion in goodwill on the deal in 2002, resulting in the largest loss in the company’s history.
In contrast, UBS has created negative goodwill go through pay less Credit Suisse. Credit Suisse’s share price was trading well below its book value when the “shotgun wedding” took place, while UBS insisted to the federal government that it would only support a takeover if the deal came at a lower price.
In the end, they agreed to end Credit Suisse’s 166-year history for just 3 billion Swiss francs ($3.4 billion).
Distraction is now the No. 1 integration risk
Today’s quarterly results revealed the huge discount the franchise is getting.
Under the negotiations of chairman Colm Kelleher, UBS created nearly $30 billion in value for its shareholders in one fell swoop.
Without the windfall, the lender’s net profit of $2.1 billion the previous year would have been a small loss for the period.
However, there is also a downside. The deal could result in up to $28 billion in additional costs, including a $4 billion exposure to litigation. But the company’s estimate could be the worst-case scenario.
However, the merger of the two giants of the Swiss banking industry presents an entirely different problem.
The new giant’s balance sheet totals $1.7 trillion, roughly twice the size of the Swiss economy.
This has raised concerns that UBS bankers, like their colleagues at Credit Suisse, may be taking too much risk knowing the institution is now absolutely too big to fail.
To assuage concerns at home, Kelleher said his management team would screen Credit Suisse’s famously freewheeling investment bankers to ensure no bad apples made it through the ongoing integration process.
Earlier this month, UBS assured Swiss citizens that it did not need SFr9 billion in taxpayer funds to cover losses from Credit Suisse’s derivatives exposure and had returned all support to the SNB.
The Swiss, who was involved in the deal for political reasons, said he wanted the Credit Suisse merger and the restructuring process of the combined entity to take a backseat to employees to prevent any disruption to their day-to-day work. Day tasks.
“Everybody wants to talk about it, but the reality is what we need to do is continue to be very close to our clients and manage our current business at UBS and Credit Suisse,” he said before speaking about the integration. “Second priority.”
