There are no easy mergers, as Dresdner Bank proved again last month in its failed link-up with Commerzbank. But both this attempt and that between Dresdner and Deutsche Bank were particularly difficult, and their failure ought to be no surprise. Both were defensive deals, aimed at cutting costs and exiting unprofitable businesses – not least retail banking.
The benefits of the deals for expansion were not put forward because there were so few. All three banks are similar entities in virtually the same markets; all that differs is scale. And all three are proud of their role in Germany’s development over the past 50 years. With few obvious new business opportunities being created by these two failed mergers, it was inevitable that they would focus on what they would lose rather than where they were going.
The takeover of Austria’s leading bank, Bank Austria, by HypoVereinsbank, Germany’s third-largest bank by market capitalization, ought to fare better. The deal expands Hypo’s retail presence as well as bringing a strong investment-banking presence in central and eastern Europe. It also allows Bank Austria to retain its name and nominal independence. But both institutions spring from recent messy mergers. Their executives and shareholders would do well to look to the US, where First Union and Bank One are but two examples of banks suffering from too much M&A too soon.
Ironically, the US is the setting for one of the canniest financial acquisitions. Initial reaction to UBS buying PaineWebber to add to its investment-banking division, UBS Warburg, was surprise and even incredulity. Warburg, said some, needs a heavy hitter, not a failed investment bank such as PaineWebber. For despite denials from CEO Donald Marron down, PaineWebber had tried to build a bulge-bracket investment bank in the 1980s, and even a specialist house in the mid-1990s when underwriting tech deals was a main aim.
But UBS did not buy PaineWebber as an investment-banking play. It is more of a private-client play, and its inclusion in UBS Warburg stems directly from UBS’s February reorganization into UBS Switzerland, UBS Asset Management (see cover story), and UBS Warburg. As part of that, Warburg became more than just the investment bank, taking on all private equity and onshore private banking businesses (UBS Switzerland covers offshore).
Distribution of product had become Warburg’s bailiwick, and the obvious gap was in the US, where the client base is limited to institutional accounts. PaineWebber adds to that institutional base but, more important, through 8,000-odd brokers, gives access to the upper end of the affluent private-client market: the average PaineWebber client has just under $200,000 to invest, 40% more than Merrill Lynch’s average. At a stroke the deal makes the US the largest single market segment of UBS’s affluent and high net worth customer base, going from 4% to 49% of the total.
And there is the added benefit of the experience Paine Webber can bring to UBS outside the US. Marron has dubbed the coming years “the decade of the global individual” and others agree. Three months ago HSBC and Merrill Lynch teamed up to target mass affluent investors outside the US. On their own UBS Warburg and Paine Webber were only second-tier contenders. Following the merger they will be much better placed.
What helps in this deal is that there is virtually no overlap, so turf wars will be minimal – all of PaineWebber’s management committee has pledged to stay. Marron, PaineWebber’s figurehead, is to become chairman of UBS North America. Joe Grano, PaineWebber’s president, will be CEO of UBS Warburg’s private-client business (as well as of the small asset management business PaineWebber brings to the deal).
What the deal clearly does not do is to solve UBS Warburg’s US investment-banking conundrum of how to build sufficient scale to be a top player. CEO Markus Granziol appears relatively unconcerned, pointing to global strengths. That in itself is an admission of relative weakness in the US. In US secondary trading and bringing new non-US issues to the US, Warburg is strong and has been hitting targets year after year. But in capital raising and M&A the firm is weak.
This has been UBS Warburg’s US task since SBC and the old UBS merged. Three acquisition candidates stand out, Bear Stearns, JP Morgan and Lehman Brothers. None would solve Warburg’s needs, and the integration issues both in and outside the US might prove too painful to contemplate. Granziol is hoping PaineWebber’s distribution power will become a handy calling card, and that’s hardly unrealistic. But it will not be able to compete on all fronts with Merrill Lynch, Morgan Stanley Dean Witter or Salomon Smith Barney
For now UBS has deftly side-stepped this challenge, concentrating on broadening its revenue mix and base of experience with minimal interference in day-to-day business. Its European neighbours would do well to take note: defensive deals and cost-cutting are all very well in the short term, but nothing can beat a merger built around growth.
