UBS - Credit Suisse: The Art of Successfully Managing a High-Risk Acquisition

In recent weeks, UBS shares have been trading at over 28 CHF – the highest level they have ever reached in a post-Subprime crisis economy.

This performance is all the more remarkable as it comes just over a year after the rescue-acquisition of Credit Suisse.

Almost compelled by Swiss authorities, this operation had all the makings of a potential trap.

A look back at one of the greatest financial feats of recent months.

Annus Horribilis

Following Russia’s invasion of Ukraine on February 24, 2022, all banks anticipated an imminent rise in interest rates to contain the subsequent inflation shock.

All except Credit Suisse, which was unable to secure its positions and accumulated losses.

The 2022 financial year can be summarized in three words (crisis of confidence) or two figures: 7.3 billion Swiss francs in operating losses (another post-Subprime record) and 230 billion francs in capital withdrawn from the bank.

The scandal broke publicly with the announcement of the annual results in mid-March 2023: the share price plummeted by 30% in a single session, the accuracy of previously reported results was called into question, the main shareholder of Credit Suisse – the Saudi National Bank – refused to increase its stake, and the Swiss National Bank was forced to provide a last-resort loan of 50 billion francs.

The market inevitably interpreted this last-resort loan as confirmation of Credit Suisse’s severe difficulties, causing the share price to drop another 15%.

Moreover, these difficulties reinforced preexisting legal actions against Credit Suisse for mismanagement in recent years.

Notably, the bank was ordered to pay over 900 million dollars in damages to Mr. Bidzina Ivanishvili in May 2023, and Mr. Vitaly Malkin pursued ongoing litigation against the bank for a loan issue involving 500 million dollars in damages.

New significant legal actions were also initiated, notably under the aegis of the Swiss Association for Shareholder Protection (SASV), which gathered 1,000 aggrieved shareholders during the summer of 2023.

The Rescue Acquisition

To avoid a high-profile bankruptcy, the Swiss Confederation requested, as early as March 2023, that UBS acquire its historical rival as quickly as possible.

For UBS, one of the two major challenges of the transaction was to assess and cover the legal risks associated with taking over Credit Suisse in the short term.

After specific due diligence, UBS estimated this risk at 9 billion Swiss francs (three times the acquisition cost) and managed to have it guaranteed by the Swiss Confederation.

To date, this 9 billion coverage has fully covered the hidden costs of the acquisition.

The second challenge, ensuring sufficient liquidity during the transition phase, was addressed by the provision of an additional 100 billion francs by the Swiss National Bank.

In a nutshell:

You don’t need the scale of Credit Suisse – UBS for an acquisition to be blocked by the presence of skeletons in the target’s legal closet, whether they are ongoing litigations or potential future disputes.

This is especially true as some risks cannot be insured, such as potential labor disputes arising from employee exposure to asbestos, for example.

Therefore, at Outmatch, we have decided to combine our expertise in M&A advisory and damage assessment to offer risk (legal) evaluation services in the context of transactions.

These risk assessments can serve to both (i) remove barriers to an acquisition by allowing a risk to be integrated into the GAP, and (ii) negotiate the price up or down.

 

 

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