The acquisition of Credit Suisse by UBS for over $3 billion, marks the end of an era in Switzerland as the rivalry between the two banks concluded on Sunday.
The repeated scandals and trading losses at Credit Suisse in recent years spooked investors and customers, leading clients to withdraw $10 billion one day last week, according to the Wall Street Journal.
DON'T MISS: UBS Acquires Credit Suisse for More Than $3 Billion
The deal was finalized on Sunday, before Asia's stock markets opened, as Switzerland’s President Alain Berse announced it. The rivals had been reluctant to merge.
A sign that the deal was driven by the government was that the government officials took center stage in the press conference announcing the transaction. UBS Chairman Colm Kelleher and Credit Suisse Chairman Axel Lehman were placed at the far end of the table.
“With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation,” the Swiss National Bank said in a statement.
'Many Thousands'
The deal comes after three days of intense talks, which saw UBS and Credit Suisse very reluctant to tie the knot. The former felt that the bank was doing well and did not need to be saddled with a deal that could only bring problems. The latter felt that its turnaround plan would be enough to recover. But the Swiss authorities feared that the crisis of confidence suffered by Credit Suisse would intensify and, above all, that it would spread to other banks.
Kelleher said the plan by UBS includes a contraction of Credit Suisse’s investment banking business. This strategy would help it mesh with the "conservative risk culture” of UBS, he said.
He said it was unknown at this point how many job cuts would be needed.
The acquisition "supports financial stability in Switzerland and creates significant sustainable value for UBS shareholders,” Kelleher said.
Swiss officials worked on the deal to avoid a riskier outcome.
“This is a commercial solution and not a bailout,” said Karin Keller-Sutter, the Swiss finance minister. “Bankruptcy would have been the highest risk.”
Since both Credit Suisse and UBS have operations in the U.S., the Federal Reserve had worked with the Swiss National Bank, its counterpart, on the merger.
“We welcome the announcements by the Swiss authorities today to support financial stability. The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient,” said a statement Sunday by Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell.
Keller-Sutter said she had discussions with Yellen and U.K. Chancellor Jeremy Hunt. Keller-Sutter said "many thousands” of Credit Suisse employees will be impacted, pointing to future layoffs.
Credit Suisse had already planned, last October, to lay off 9,000 people. The bank had 50,000 employees through the end of 2022, with 16,000 employees in Switzerland. Its balance sheet amounted to half a trillion dollars.
The investment banking units are located in London and Singapore. In the U.S., Credit Suisse's investment banking offices are located in Boston, Chicago, Houston, Los Angeles, New York and San Francisco.
Credit Suisse has an operations division near Raleigh, N.C., with thousands of employees who work in its technology division in Poland and India.
The headcount at UBS is much higher, with 74,000 employees globally. The balance sheet of UBS is $1.1 trillion in total assets.
Emergency Backstop for UBS
Once the deal is completed, the size of UBS’ balance sheet will be larger than its competitors Deutsche Bank and Goldman Sachs.
The merger between UBS and Credit Suisse is also the first major global banking operation since the 2008 financial crisis that devastated the global economy and nearly brought down the financial system.
It comes after a crisis of confidence in banks, sparked by the sudden collapse of California-based Silicon Valley Bank on Mar. 10, after interest rate bets went wrong. The crisis of confidence crossed the Atlantic and hit Credit Suisse, a bank weakened by scandals, trying to turn itself around since last October.
The Swiss authorities granted a loan of almost $54 billion to the bank on Mar. 15, but this was not enough to reassure the investors, who continued to sell off Credit Suisse shares to the point where the bank's market value fell to $7.3 billion on Mar. 17.
The transaction, which is an all-share deal, is valued at 3 billion Swiss francs, equivalent of $3.24 billion. Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares held, equivalent to CHF 0.76/share.
The Swiss government has also responded favorably to a request from UBS for a financial guarantee in the event that Credit Suisse's legal problems return in the form of fines or lawsuits. It will provide a $9 billion backstop to the bank for the risks it is undertaking.
"In order to reduce any risks for UBS, the federal government is also granting UBS a guarantee in the amount of CHF 9 billion to assume potential losses arising from certain assets that UBS takes over as part of the transaction, should any future losses exceed a certain threshold," it said in a press release.
The Swiss National Bank will also provide more than $100 billion of liquidity to UBS, to help facilitate the deal.
