Credit Suisse Acquisition Proposal: Pros, Cons, and Impact.
UBS's proposed acquisition of Credit Suisse has garnered significant attention in the financial industry due to its potential to create a global wealth management powerhouse with over $5 trillion in total invested assets.
While the consolidation could lead to a stronger market position for UBS and generate significant cost reductions, the impact on the broader Swiss economy is unclear. Additionally, the deal’s valuation, which amounts to a significant discount for Credit Suisse shareholders, has raised questions about its true worth. This article will investigate deeper the potential benefits and drawbacks of the acquisition and examine its impact on Middle Eastern shareholders of Credit Suisse, who have suffered significant losses due to the bank's recent struggles.
UBS’s acquisition of Credit Suisse could create a significant global wealth management business with over USD 5 trillion in total invested assets. This consolidation may strengthen UBS’s position in the market and generate cost reductions of more than USD 8 billion by 2027.
Shareholders of Credit Suisse will receive 1 UBS share for every 22.48 Credit Suisse shares held, in other words, at 0.76CHF per share or a total consideration of 3 billion Swiss Francs (to be discussed further), with additional downside protection and access to liquidity from the Swiss National Bank. It is important to note that mergers and acquisitions can be complex, and it is crucial to conduct a thorough analysis before making any investment decisions.
The consolidation of the banking industry in Switzerland could have positive and negative effects on the economy. On the positive side (given the current downfall of Credit Suisse), a larger, more stable bank could be better positioned to weather economic downturns and support lending to businesses and consumers. It could also streamline operations and reduce costs, potentially leading to greater efficiency and profitability. Economies of scale will be one of the greatest advantages the combined bank will enjoy.
On the negative side, consolidation could also lead to reduced competition in the banking sector, leading to higher fees and fewer consumer choices. It could also lead to job losses if the combined bank were to reduce duplication and eliminate redundant positions. This will set a precedent in the courts for future mergers and acquisitions that might lead to eliminating the competition in the market.
This is a massive discount for the valuation of 0.76 CHF per share. The stock was trading at 2.76 CHF on the first of March 2023. At the end of October 2022, the stock was trading at 4.51. This means it’s a discount of 72.5% and 83.1%, respectively. The bank is being sold at a valuation of 3 billion CHF; its previous valuation was 11 and 18 billion CHF, respectively.
Is it really worth this discount?
The Middle Eastern shareholders of Credit Suisse Group AG, who collectively own around 20% of the Swiss bank, have suffered significant losses amid the recent upheaval that resulted in UBS Group AG acquiring the struggling lender at a substantial discount. This includes Saudi National Bank, which holds the largest stake in Credit Suisse and has seen its investment lose approximately $1 billion in value over just a few months.
Meanwhile, the Qatar Investment Authority, a long-term supporter of Credit Suisse, has also experienced a sharp drop in its 6.8% holding value, despite increasing its stake as recently as January. Following the UBS offer, the 9.9% stake held by Saudi Arabia's largest lender is now worth roughly 304 million francs ($329 million), according to estimates from Bloomberg. Unfortunately, the value of shares in the Saudi lender has also dropped significantly, losing more than $25 billion in market value, or about one-third of its total value, over the same period.