Acquisition of Credit Suisse by UBS facts for kids
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| Initiator | UBS |
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| Target | Credit Suisse |
| Type | All-stock full acquisition |
| Cost | CHF 3 billion (US$3.2 billion) |
| Initiated | 19 March 2023 |
| Completed | 12 June 2023 |
On March 19, 2023, a big Swiss bank called UBS Group AG agreed to buy another large Swiss bank, Credit Suisse. The deal was worth CHF 3 billion (about US$3.2 billion) and involved exchanging company shares. The government of Switzerland and the Swiss Financial Market Supervisory Authority helped make this deal happen.
The Swiss National Bank (Switzerland's central bank) supported UBS by giving it over CHF 100 billion (US$104 billion) in extra money to keep things running smoothly after the takeover. The Swiss government also promised to cover any losses UBS might have, up to CHF 9 billion (US$9.6 billion), for a short time. Also, special bonds worth CHF 16 billion (US$17.2 billion) were cancelled, meaning their value became zero.
Credit Suisse was a very important bank for the global financial system. Its investment banking part had faced several big problems recently. A banking crisis in the United States made investors around the world worried, leading to panic about other banks that might be in trouble. Credit Suisse's share price dropped sharply after its biggest shareholder said they wouldn't invest more money due to rules. The deal was quickly agreed upon and announced just before Asian markets opened on a Monday morning. This was done to stop a "market shaking" panic in global financial markets. Soon after, central banks worldwide announced plans to provide US dollar funds to calm the markets and prevent a bigger banking crisis.
UBS officially completed the purchase on June 12, 2023.
Contents
Why the Banks Merged: A Look Back
Credit Suisse's Journey and Challenges
Credit Suisse started way back in 1856. For the next 150 years, it grew to be one of the top Swiss banks. These banks, sometimes called the "gnomes of Zurich", helped fund Switzerland's growth. Later, Credit Suisse bought an American company called First Boston and became a major global investment bank, competing with giants like Goldman Sachs.
The 2007–2008 financial crisis didn't hit Credit Suisse as hard as some other banks. While the Swiss National Bank had to rescue its rival, UBS, Credit Suisse managed to raise money privately from investors to strengthen its finances.
After that crisis, Credit Suisse's investment bank kept taking big risks to compete with large US banks. Many US banks and UBS, however, chose safer strategies and sold off their risky investments.
Rules called Basel III were put in place to make banks safer. But some people thought these rules might encourage banks to find ways around them. They argued that markets often don't make big banks keep enough money or make smart investment choices. The bigger a bank is compared to its country's economy, the more likely it might take too many risks.
In Switzerland, people used to joke that "UBS and Credit Suisse merging" was something that would never happen. Swiss authorities preferred having two large banks. However, a merger between UBS and Credit Suisse had been talked about for a long time. As Credit Suisse became weaker, UBS executives started planning how they might buy their rival and what help they would need from the government. To avoid using public money again if a big bank needed help, Swiss authorities planned to cancel the value of its shares and bonds if necessary.
Problems in Credit Suisse's Investment Business
Credit Suisse chairman Axel Lehmann said in April 2023, after his company's collapse, that "After the financial crisis we were named the 'Best Bank Globally'. The years since... that is the bitter reality". From 2008 to 2023, Credit Suisse's investment banking part didn't do well. It made the bank less profitable and caused big losses.
The bank faced many scandals and poor management. For example, it lost money because of the collapses of investment firms like Archegos Capital and Greensill Capital in 2021. In October 2022, rumors on social media about the bank's problems led to clients taking out CHF 111 billion from its wealth management business in just three months. The bank's own auditor, PwC, also pointed out problems with its financial reporting controls from 2020 to 2022.
Banking Worries in March 2023
After some US banks failed in March 2023, shares in banks around the world dropped sharply. This caused more worry about how rising interest rates from central banks were affecting the banking sector.
Saudi National Bank (SNB) was Credit Suisse's largest shareholder, owning almost 10% of the bank. On March 15, 2023, the SNB chairman was asked if his bank would invest more in Credit Suisse. He said "absolutely not" because of rules that would kick in if they owned more than 10%.
This comment made investors panic. Credit Suisse's bonds and stock prices fell sharply that day. Even though the SNB later said their only reason was to stay under 10% ownership, the damage was done. Credit Suisse's chairman quickly returned to Zurich.
The bank decided to buy back some bonds, but it needed help. Swiss authorities decided they had to step in to prevent a global panic, even though they had planned not to use public money again. That day, the Swiss National Bank gave Credit Suisse an emergency loan of 50,000,000,000 Swiss francs ($55 billion). Despite this, clients still withdrew over 10,000,000,000 Swiss francs in deposits later that week.
Because people were angry about the government saving UBS in 2008, a similar rescue for Credit Suisse wasn't possible. While publicly saying Credit Suisse was healthy, the loan was meant to give Swiss authorities time to find a buyer. They told UBS to plan an acquisition as the only way to avoid the government taking over Credit Suisse. Regulators from different countries believed Credit Suisse wouldn't have been able to open for business on March 19 without being saved or bought by another bank.
In April 2023, it was reported that Credit Suisse had lost about CHF171.2 billion in client money since October 2022. Meanwhile, UBS gained CHF25 billion in new deposits during the first three months of 2023.
How the Deal Happened
Talks about the takeover started on March 15. Swiss authorities insisted that a deal had to be made before Monday, March 20, to stop panic from spreading worldwide. During the short talks, they discussed things like UBS not wanting Credit Suisse's less profitable investment bank, concerns about one company becoming too big, how much government support would be given, and whether to skip a vote by shareholders. The head of the Swiss National Bank led the talks, mostly keeping Credit Suisse's management out.
Credit Suisse's management was upset about being left out. They warned that their three largest shareholders, who owned a quarter of the company, didn't like the deal. UBS only wanted Credit Suisse if the price was low and if the Swiss authorities protected UBS from any past problems at Credit Suisse.
On the morning of March 19, UBS offered 0.25 Swiss francs (about $0.27) per share, valuing Credit Suisse at around $1 billion. This price angered the big investors, and Credit Suisse's board rejected it. The investors offered to put in $5 billion themselves, but Swiss authorities told Credit Suisse that it had to sell to UBS. Credit Suisse tried to find another buyer, but there wasn't enough time.
That afternoon, UBS offered 0.5 Swiss francs (about $0.55) per share, valuing Credit Suisse at just over $2 billion. Swiss authorities threatened to remove Credit Suisse's board if they didn't accept. UBS agreed to increase its offer with more financial support from Switzerland. The final deal to buy Credit Suisse for CHF 3 billion ($3.2 billion) was accepted by Credit Suisse's board before Asian markets opened on Monday morning. Credit Suisse shareholders received 1 UBS share for every 22.48 Credit Suisse shares, which was worth CHF 0.76 per share. This price was only 1% of Credit Suisse's highest value ever in 2007.
The Takeover Details
The Swiss government, along with the Swiss National Bank and FINMA, managed the takeover. In an emergency meeting on March 19, 2023, the Swiss Federal Council used special emergency powers. This allowed the merger to happen without needing approval from shareholders. It also gave Credit Suisse extra financial help, protected against bankruptcy, and backed by a government guarantee.
The Federal Council also promised UBS a guarantee of CHF 9 billion ($9.6 billion) to cover possible losses from the deal. As part of the agreement, special bonds called Additional Tier 1 bonds (AT1) worth CHF 16 billion ($17.2 billion) were cancelled, meaning their value became zero. This was the largest cancellation of AT1 bonds ever. This decision meant that bondholders lost more money than shareholders, and it was done to calm international investors who couldn't vote on the deal.
The President of Switzerland, Alain Berset, Finance Minister Karin Keller-Sutter, and the head of the Swiss National Bank, Thomas Jordan, announced the takeover at a press conference on March 19, 2023, along with the chairmen of UBS and Credit Suisse. The government said that the risk to them was low and that the takeover was necessary to keep financial markets stable in Switzerland and worldwide. Keller-Sutter stressed that "This is no bailout. This is a commercial solution".
UBS Chairman Colm Kelleher said that UBS didn't start the talks, but he thought the deal was "financially attractive for UBS shareholders." He also called the deal an "emergency rescue." Sergio Ermotti, who used to be the CEO of UBS, was appointed to lead the group again starting April 5, 2023. Kelleher estimated that combining the banks would take up to four years.
UBS Group AG was expected to make a large profit of up to CHF51 billion ($57 billion) in the second quarter of 2023 because of the deal. This is due to something called "negative goodwill," which happens when a company is bought for less than the value of its assets. The Swiss part of Credit Suisse alone was said to be worth "multiple times" what UBS paid for the whole bank.
On June 12, 2023, the Swiss government and UBS signed the final agreement. The government agreed to pay UBS up to CHF9 billion ($9.9 billion) if the Credit Suisse takeover resulted in losses for UBS (UBS would cover the first CHF5 billion).
However, just two months later, on August 11, 2023, UBS announced that it no longer needed the CHF9 billion government guarantee or the CHF100 billion loan from the Swiss National Bank. According to Swiss Finance Minister Karin Keller-Sutter, "Swiss taxpayers no longer bear any risk relating to the rescue of Credit Suisse."
Reactions to the Deal
Financial authorities in Europe and the United States approved the takeover. Experts called the acquisition a "shotgun wedding" because it was forced by the Swiss government. Credit Suisse CEO Ulrich Körner said at a meeting in April 2023, "We didn't succeed. We ran out of time. This fills me with sorrow."
Some experts noted that Credit Suisse had been having problems for several years. They said that because the bank was almost unaffected by the 2008 crisis, its management might have thought it didn't need to change, which led to its decline and the 2023 collapse.
In Swiss politics, some parties approved the government's action with regret, while others were angry. They called it "cronyism" (favoritism) and demanded that those responsible be held accountable. Finance Minister Keller-Sutter said that without the takeover, Credit Suisse "would not have survived Monday." She added that without a solution, payments in Switzerland might have stopped, and wages and bills couldn't be paid. She warned of a possible worldwide financial crisis.
The Swiss government used a special part of the Swiss Constitution that allows emergency action to prevent serious problems. Skipping the shareholder vote angered Credit Suisse's big investors. One investor from the Middle East said, "You make fun of dictatorships and then you can change the law over the weekend. What's the difference between Saudi Arabia and Switzerland now?"
A survey in March 2023 found that 54% of Swiss people disagreed with the emergency rescue plan. Many would have preferred the government to take over Credit Suisse completely and sell it later. Most Swiss people wanted UBS to separate Credit Suisse's Swiss business to avoid too much risk for one bank.
In April 2023, the Swiss Attorney General's office started an investigation. They wanted to see if any officials or bank executives had done anything wrong related to the takeover. The results of this investigation will be kept secret for 50 years.
About the AT1 Bonds
Some experts worried that cancelling the AT1 bonds (worth CHF 16 billion) could make the banking crisis worse, not better. These bonds are unusual because they can be completely cancelled instead of being turned into company shares. Both the Bank of England and European authorities said that shareholders should lose money before bondholders.
A former head of the European Central Bank said the Swiss decision on AT1 bonds was a "mistake with consequences" and could lead to many lawsuits. However, the Swiss financial regulator FINMA said the cancellation followed the rules of the bonds. These bonds state they can be cancelled if the bank receives special government support.
About the Sale Price
Because the emergency takeover on March 19 reduced the value of Credit Suisse shares, shareholders are claiming in court that the bank should have been sold for a much higher price (anywhere from CHF7.3 billion to CHF35 billion).
What Happened Next
UBS's Kelleher said the deal would take a few weeks to finalize. He also said UBS plans to make Credit Suisse's "tricky businesses" less risky. Credit Suisse was expected to operate normally until the merger was complete, and it was unclear what the impact would be on its employees. As part of the deal, UBS will close down Credit Suisse's investment bank.
Credit Suisse's largest shareholders, including SNB and other big investment funds, are expected to lose a lot of money from the takeover.
Other Swiss banks hoped to become the country's second-largest bank after Credit Suisse's collapse. The stock of Julius Baer Group, which became the second-largest bank by assets, rose by 13% the week after the UBS acquisition.
The takeover led to $17 billion of Credit Suisse's AT1 bonds being cancelled as worthless. This made people question the financial strength of the newly combined bank. Property rights were also seen as weaker in Switzerland because the deal happened without shareholder approval.
The takeover is expected to affect many jobs in Switzerland, with estimates of 9,500 to 12,000 jobs at risk. Most job losses are likely to be in support roles like legal, marketing, and human resources. Some UBS and Credit Suisse bank branches are also very close to each other. In August 2023, UBS announced that about 3,000 jobs would be cut in Switzerland.
Based on government guarantees, if the merged bank were to go bankrupt, every person in Switzerland could be responsible for up to CHF 12,500 ($13,500).
The chairman of SNB resigned a week after the takeover, saying it was for personal reasons.
It was reported that some Credit Suisse executives received large profit-sharing deals in the years before the bank's collapse. The Swiss Parliament is also looking into new rules to limit big bonuses for banks that are considered "too big to fail".
On June 14, 2023, Switzerland created a special parliamentary group to investigate the collapse of Credit Suisse.
According to Citigroup, the new combined bank will handle a large part of Switzerland's banking business: 35% of domestic deposits, 31% of company loans, and 26% of home loans. UBS will keep Credit Suisse's Swiss business but will stop using the Credit Suisse brand. UBS plans to cut costs by $10 billion. UBS also announced in August 2023 that money withdrawals from Credit Suisse had stopped. UBS reported a record profit of nearly $30 billion in the second quarter of 2023 after buying Credit Suisse.
See Also
Images for kids
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A Credit Suisse sign in front of the Swiss National Bank in Bern
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A Credit Suisse branch sited across from the Federal Palace, seat of the Swiss government, in Bern
