Topline
Swiss banking giant UBS on Tuesday said it was pressured into buying its ailing rival Credit Suisse for much more than it initially bargained for, warning investors it stands to lose billions in legal and regulatory costs from the rushed deal and illuminating the backstage workings that drove one of the banking world’s most consequential deals in decades.
UBS bought struggling rival Credit Suisse in an emergency deal brokered by the Swiss government.
Key Facts
UBS said it had a very limited time to conduct due diligence for the Credit Suisse takeover in March due to the “emergency circumstances” driving the merger, according to documents filed with the U.S. Securities and Exchange Commission.
The short time span—less than four days—was motivated by a desire to stabilize markets following Credit Suisse’s troubles and head off the incipient instability rippling through financial institutions around the world, with the Swiss government deciding a decision needed to be made before markets opened after the weekend.
UBS admitted the pressured nature of the deal limited its ability to “thoroughly evaluate” its national rival and fully plan for a potential takeover, adding that it may have “agreed to a rescue that is considerably more difficult and risky” than anticipated.
The deal, orchestrated and backed by the Swiss government, was also much more costly than UBS initially bargained for, the filing showed.
Over the course of the brief negotiations, the sum trebled from around $1.1 billion (1 billion Swiss francs) to roughly $3.3 billion (3 billion Swiss francs).
What To Watch For
UBS on Tuesday also released new details about the likely impact of the merger on its accounting books, though it noted the figures are estimates and are likely to change as the dust settles. The Swiss bank said it has set aside around $4 billion to cover possible legal risks and regulatory costs associated with the takeover and expects to lose an estimated $13 billion in writing down assets. The group does, however, estimate a one-off windfall of $34.8 billion from negative goodwill, a situation where something is acquired for less than it is worth (Credit Suisse was believed to be worth multiples of what UBS paid). On paper, such a gain stands to be the biggest ever reported by a bank in a single quarter, according to Bloomberg, noting that investors will likely view it as more of an accounting quirk than a sign of strength.
News Peg
Due diligence procedures for deals of this magnitude typically last months and involve a thorough examination of the target’s books. UBS staff are now working to make up ground, figure out how to merge the businesses and close the deal in the coming weeks or months. The merger was announced in March amid fears Credit Suisse, a storied institution with a 167-year history and considered by many too big to fail, was careening toward failure and threatened to bring the entire financial sector down with it.
Further Reading
UBS Buying Rival Credit Suisse In $3.2 Billion Rescue Deal (Forbes)
UBS revamps leadership as it prepares to complete Credit Suisse deal (FT)
Source: https://www.forbes.com/sites/roberthart/2023/05/17/ubs-braces-to-lose-billions-after-rushed-credit-suisse-rescue/