News > International
PaineWebber a UBS buy
July 12, 2000: 12:42 p.m. ET

Swiss bank eyes wealthy U.S. investors, offers $10.8B for brokerage house
By Staff Writers Tom Johnson and Jamey Keaten
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NEW YORK (CNNfn) - Switzerland's UBS AG, the third-largest bank in Europe, made its move to cash in on the well-heeled American investor Wednesday, agreeing to purchase U.S. brokerage house Paine Webber Group Inc. for about $10.8 billion in cash and stock.

The deal fills a gaping hole for UBS (UBS: Research, Estimates), which has been on the prowl for a strong U.S. private banking operation to complement its investment bank UBS Warburg, and brings the firm significantly closer to its goal of becoming a global financial powerhouse.

graphic CNNfn's Susan Lisovicz reports on the proposed merger.
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For PaineWebber (PWJ: Research, Estimates), the No.4 U.S. brokerage firm, the merger will close the book on a prestigious 121-year run, which saw the company develop into to one of the nation's top independent brokers to deep-pocketed U.S. investors.

The combined entity will rank as the world's top private banking organization with $422 billion in private client assets. Approximately half of its private client business will be drawn from high net worth and affluent clients in the United States. Total client assets will exceed $1 trillion.

"It was inevitable that UBS must come here" to the United States, said Marcel Ospel, UBS' chief executive officer. "PaineWebber was without question the most attractive acquisition for us in developing a position in the U.S. private client business."

Terms of the deal call for the Swiss company to pay $73.50 per PaineWebber share, split evenly between cash and stock. The price tag represents a premium of 47 percent over the company's closing price Tuesday of 49-15/16 and is a multiple of 18.1 times the company's estimated 2000 earnings.

UBS also will assume $4.3 billion in debt, but said the deal is expected to enhance its earnings per share by next year and generate financial synergies of $425 million per year by 2002.


Though a steep price, analysts largely hailed the deal, which gives UBS instant access to the U.S. market it covets and the institutional knowledge it needs to handle the changing needs of wealthy European investors.

"I think it's an excellent strategic fit, the pricing is fair, and if you look at other institutional-retail combinations like Morgan Stanley Dean Witter, the synergies are there," said John Leonard, a London-based banking analyst at Salomon Smith Barney, who has an "outperform" rating on UBS shares.

"This doesn't make them a Merrill Lynch in the U.S. - the main difference is that PaineWebber doesn't have an investment bank," Leonard said. "But this brings in the wealthy client."

PaineWebber shares jumped 16-13/16, or more than 33 percent, to 66-3/4 in late morning trading Wednesday following the announcement. UBS' American depositary receipts (ADRs) fell 14-3/4 to 134.

The need to go global

The merger comes at a time retail brokerages such as Merrill Lynch (MER: Research, Estimates), PaineWebber and Morgan Stanley Dean Witter (MOR: Research, Estimates) have come under increasing pressure from the emergence of Internet-related brokerages, which can tempt cost-conscious customers away from the blue-blood Wall Street firms.

"Revenue has been under pressure as these Internet options become available," Leonard said. A host of online brokerages such as e-Trade Group (EGRP: Research, Estimates), Ameritrade (AMTD: Research, Estimates), Datek and Suretrade have sparked a price war, providing trades in some cases for less than $10 per transaction.

Still, PaineWebber has stoutly defended its independence in recent years, even as Wall Street became increasingly skeptical of its future and the future of other second-tier U.S. brokerages. PaineWebber's focus on its retail brokerage business also left it struggling in recent years to keep up with its more diversified rivals, pushing the company toward a sale it had once resisted.

graphic"Strategically, it's been very, very difficult for PaineWebber to gain or maintain share in anything other than its main retail business," said Guy Moszkowski, an analyst with Salomon Smith Barney. "What they probably hope is by getting together with a more global firm that they can turn that around."

Meanwhile, UBS was experiencing its own troubles. Born out of the marriage of Union Bank of Switzerland and Swiss Bank Corp. in 1998, the company has struggled to keep up with larger investment banks, particularly in the United States, where its lone presence stemmed from its purchase of Dillon Read in 1997.

Hoping to generate some currency for a U.S. acquisition, UBS listed its company's stock on the New York Stock Exchange in late May. Shortly afterward, Ospel approached Donald Marron, his counterpart at PaineWebber, about a possible combination. Several meetings later, Marron found a price and a suitor to his liking.

"In 1990, we said the '90s were going to be the decade of the individual," said Marron, who will remain chairman of PaineWebber and run the combined company's North American operations.

"We think, though, this decade is going to be the decade of the global individual," he said. "From our point of view, we had a strategic decision to make. We decided that if we could move globally, that would be a fine thing to do."

Catering to wealthy clientele

The addition of PaineWebber solves several problems for Ospel. The brokerage house will bulk up the UBS in equity research, securities sales and trading in the United States.

Perhaps more importantly, the Swiss bank gains significant institutional know-how on wealthy clientele. In recent years, few have done as good a job catering to Americans' new-found wealth than PaineWebber, which boasts an average account size 40 percent higher than its closest U.S. competitor.

"PaineWebber is an attractive target for a few reasons," Amy Butte, a brokerage analyst with Bear Stearns, said. "Most importantly: the high net worth business. Second, it does have institutional presence. And third, you have very little crossover, meaning it is easy to find synergies in this type of a transaction."

"UBS gets one of the top-flight U.S. high net worth distribution systems. PaineWebber gets a global platform, by which it can continue to pursue its high net worth retail business," Butte added.

Still, while the merger shores up UBS' worldwide private banking operation, on a global scale analysts said the company still lags such brokerage titans as Merrill Lynch and Goldman Sachs, both of which have made strong inroads into the European merger and acquisition advisory business.

"Warburg has been taken by surprise by the strength of Morgan Stanley, Merrill and Goldman in M&A underwriting in Europe," Moszkowski said.

But analysts and company officials said the merger will allow UBS to better react to the changing needs of European high net worth individuals, whose needs are moving from wealth protection to wealth increase, as the American investor did during the last decade.

"We will literally be able to export our leading wealth management techniques that have served us well in the United States," said Joseph Grano, president of PaineWebber.

To do that, however, UBS will have to prevent the so-called "brain drain" that typically accompanies brokerage mergers. To combat that potential problem, UBS has set aside $875 million in cash and stock to serve as incentives for key PaineWebber personnel to stay for at least three years. Marron, for one, has agreed to stay for at least that period.

Terms of deal

As part of the deal, the Swiss company is offering 0.4954 of a share for each PaineWebber share, giving the U.S. company's shareholders the choice of receiving payment in cash or shares.

PaineWebber's board has approved the deal, which also has the support of General Electric Corp. (GE: Research, Estimates), which owns a 22 percent stake in PaineWebber, and Yasuda Mutual Life, which owns an 8 percent PaineWebber stake.

UBS was jointly advised by UBS Warburg and Wasserstein Perella, while PaineWebber was jointly advised by Blackstone Group and Goldman Sachs & Co.

PaineWebber will continue to operate under its current brand name, although it will operate under the UBS Warburg Dillon Read umbrella. The deal carries a $370 million break-up fee and will require a host of U.S. and European regulatory approvals, although company officials said they anticipate no problems.

Separately Wednesday, PaineWebber reported a smaller-than-expected drop in second-quarter profit, earning $146.3 million, or 95 cents a diluted share, excluding special charges.

UBS also reported Wednesday that its second-quarter net profit came in at 2.16 billion Swiss francs ($1.3 billion), more than double the 926 million francs a year earlier, although the latest quarter fell short of the 2.21 billion francs UBS earned in the year's first three months. Back to top


Paine Webber beats earnings forecasts - July 12, 2000

UBS revamps asset arm - March 2, 2000




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