On March 19, 2023, the Swiss banking sector saw a historic occasion when UBS Group AG announced an all-share agreement to purchase competitor Credit Suisse Group AG for $3.2 billion. The agreement was negotiated by Swiss authorities in order to restore market confidence and avert a systemic catastrophe caused by the failure of two big US banks earlier this month.
## What led to the deal?
Credit Suisse has been dealing with scandals, losses, and regulatory concerns that had harmed its reputation and profits for years. It had its greatest loss since the global financial crisis of 2008-2009 in 2022. But, its predicament deteriorated this week when it disclosed "serious weaknesses" in its financial reporting methods for 2021 and 2022. This created concerns among investors and consumers about the company's solvency and liquidity.
The bank's problems were exacerbated by the failure of two significant U.S. banks, Silicon Valley Bank and Signature Bank, which raised concerns about a wider financial system contagion. Credit Suisse's share price fell by 25% last week, as investors withdrew billions of dollars from its investment funds and depositors withdrew more than $10 billion each day from its accounts.
On Thursday, the Swiss National Bank (SNB), the country's central bank, attempted to calm the situation by granting Credit Suisse up to $108 billion in liquidity assistance loans. But, this did not stem the bleeding, and Credit Suisse was on the verge of bankruptcy.
## How was the deal structured?
The Swiss government stepped in to assist with a private-sector solution that would ensure financial stability and defend the Swiss economy. They approached UBS, Switzerland's largest bank and Credit Suisse's primary rival, with a buyout proposal.
Credit Suisse's board of directors rejected UBS's initial bid of $1 billion as too low. Following a weekend of heated discussions, UBS decided to pay $3.2 billion (or 3 billion Swiss francs) in an all-share transaction. This constituted a significant discount to Credit Suisse's Friday closing market value of $5.3 billion (or 4.9 billion Swiss francs).
Credit Suisse shareholders will get one UBS share for every 22.48 Credit Suisse shares they possess, according to the terms of the agreement. This means they will incur large losses because their owners will be diluted by around 96%. The transaction values each Credit Suisse share at $0.82 (or 0.76 Swiss francs), compared to the company's Friday closing price of $2.01 (or 1.86 Swiss francs).
The merger will result in a banking giant with more than $5 trillion in total invested assets. UBS intends to save $8 billion over the next four years by eliminating personnel, branches, and overlapping operations[1 ][4 ].
## What were the challenges and implications of the deal?
In many respects, the transaction was unusual, and it faced a number of hurdles and repercussions.
To begin, it required exceptional cooperation from the Swiss government and authorities, who waived various legal and regulatory barriers to hasten its completion[1 ].
[ ^4 ^][ ^5 ^]. As an example:
- The government modified the rules to allow UBS to acquire such a huge company without seeking shareholder approval[5 ].
- The SNB granted up to $108 billion in liquidity support loans to both banks until their merger process was completed[1 ].
[ ^2 ^].
- The Financial Market Supervisory Authority (FINMA) has allowed several exemptions from capital requirements, disclosure duties, and antitrust restrictions for both banks until their integration plan is finalized[2 ].
Second, it generated worries about competition and concentration problems in Switzerland's banking industry, which will be dominated by a single massive operator with strong market power across many areas such as wealth management, investment banking, and retail banking[5 ]. Several experts have expressed concern that this might diminish