THE MARKETS HAD been expecting a takeover of Julius Baer since January this year, when the Swiss private bank confirmed a new single-share structure. Based on one share, one vote, this cut the voting power of the shareholder block led by the Baer family to 18% from the 52% it had previously exercised.
Family disagreements became public at the time: head of private baranking Michael Baer left amid differences of opinion about strategy. In spite of the bank's reasonable performance, private-banking clients had been pulling their money out at a steady clip for the previous 18 months: analysts estimate SFr1.1 billion ($870 million) was withdrawn in 2004 and SFr500 million in the first half of this year.
The bank had been forced to give up on its efforts to expand private banking in the US, where it suffered from a perceived lack of products, selling out to UBS at the end of 2004. It found itself struggling with increasing compliance expenses, consequent margin pressures, and a lack of scale over which to spread the cost of its new IT system, Avaloq, and future investment in emerging markets offering better growth. Julius Baer looked overly dependent on its asset management division, particularly the small and very well-paid team in New York, running its highly successful international equity fund. This had to close to new investors in May.
It was just a matter of time, many market participants agreed, before some large, possibly foreign, bank took it over now that market for ownership in Julius Baer was fully open for the first time since the bank's flotation in 1980. "After the unification of our share structure, we were contacted by several banks," Rolf Aeberli, CFO of Julius Baer, tells Euromoney. "We always made it clear that we wanted to stay independent, but there were many discussions and many rumours in the market."
So when the news broke in September that Julius Baer, far from being acquired, will itself acquire the SBC Wealth Management division of UBS, the first reaction was surprise. Julius Baer's share price had steadily risen in the days running up to the announcement as rumours grew that a deal was imminent. Now it stalled.
With a takeover premium already built into its stock price, Julius Baer announced a big purchase of its own in the shape of three Swiss private banks – Ehinger & Armand von Ernst, headquartered in Zurich with roots in Basle and Berne; Ferrier Lullin & Cie, based in Geneva; and Banco di Lugano – plus, most eye-catching of all, GAM, the hedge fund manager and fund of funds provider.
The total price is SFr5.6 billion. Of that, SFr3.5 billion will be paid in cash, partly funded by a SFr2.45 billion rights issue due to be priced before the end of the year. In addition, a 21.5% shareholding in the enlarged bank will be issued to UBS. It is a big deal – it boosts total assets under management by nearly 80% from SFr151 billion to SFr270 billion, propelling Julius Baer past Pictet to be the largest independent private bank in Switzerland. It has had to pay a punchy valuation of 4.7% for those extra SFr119 billion of assets. The acquisition price is greater than Julius Baer's SFr4 billion market capitalization before the deal. Financing it with a large slug of equity will double Julius Baer shares outstanding.
Making a success of the transaction will largely depend on the senior managers coming over from UBS. Johannes (Hans) de Gier, a veteran of the UBS group executive board, a former CEO of SBC Warburg and, more recently, chairman of the SBC Wealth Management division, will become chief executive of Julius Baer. That position had previously been promised to Alex Widmer, former global head of private banking at Credit Suisse. His recruitment had been announced earlier and he is not due to start work at the bank until next year. Instead of taking the CEO spot, he will now become head of the private-banking division. Thomas Meier, who had been recruited as the new head of the private bank, will now oversee its build up in Asia.
It remains to be seen how Widmer will work with the UBS team. Already, before Julius Baer shareholders approve the deal and before they officially take up their new positions, members of the new management team have been rehearsing its benefits to investors. "Unfortunately Alex [Widmer] was not able to join us on the road show," says Aeberli, the sole survivor of the old Julius Baer on the new group executive board, "because he is still on gardening leave." Widmer's contract was signed before the deal with UBS came up. Aeberli says: "Alex Widmer supported the deal from the beginning because he saw the attractiveness from a client's perspective. He has been convinced that this was a great opportunity."
It's not an opportunity that Aeberli himself intends to stick around for. The CFO will be leaving Julius Baer in December to take up the post of chief executive officer at Banca del Gottardo.
Analysts have quickly seized on the fact that the three smaller private banks had run on a cost-income ratio of 55%, compared with 75% at Julius Baer. "The excitement for us is the potential that the new management team will drive Julius Baer's gross margin and cost-income ratio towards that of the independent private banks," Merrill Lynch bank analysts noted in a report on September 13. They proclaim: "Julius Baer is one of the few banks in Europe that offers potential upside via restructuring." Dirk Becker, analyst at Kepler, calls it a "game changing acquisition", and says that the dominance of the target's executive management in the new group "goes down well with investors".
The independent banks might provide a model of good housekeeping – they didn't have much in the way of long-term incentive plans for staff, for example, but, as at Julius Baer, inflows of new money have stalled. Even if delicate management of all the cultural issues prevents any great loss of customer assets at the private banks, it's hard to see them as an engine of growth. More acquisitions may be needed.