Investors Bet on Consolidation as PaineWebber-UBS Deal Ignites Rally
Brokerage PaineWebber Group’s agreement Wednesday to a takeover by Swiss financial giant UBS sparked another broad rally in U.S. brokerage shares, as investors bet on more consolidation to come.
The UBS deal, details of which were first reported by London’s Financial Times, was confirmed Wednesday as the Swiss banking firm said it will pay $73.50 a share for PaineWebber, half in UBS stock and half in cash.
The $10.8-billion transaction is the biggest foreign takeover so far of a U.S. securities firm. PaineWebber, the No. 4 U.S. brokerage, saw its shares zoom $16.94 to $66.88 on Wednesday.
UBS’ shares on the New York Stock Exchange fell $13.56 to $135.19. PaineWebber holders will get 0.495 UBS share for each PaineWebber share, and the rest in cash.
Analysts said the reaction of UBS stock reflected some investors’ disappointment that UBS, Europe’s No. 3 bank and a major global investment bank, didn’t buy a brokerage with a stronger U.S. investment banking business.
UBS is an also-ran in U.S. equity underwriting compared with European rivals such as Deutsche Bank and Credit Suisse Group, which owns First Boston.
“This isn’t the deal many people had been hoping it would make,” said Jeremy Knight, a fund manager at Legg Mason Investors in London.
PaineWebber is primarily a retail brokerage catering to mostly affluent clients. The firm has about 8,000 brokers worldwide.
UBS Chief Executive Marcel Ospel, who initiated the deal by contacting PaineWebber Chief Executive Donald Marron, said the acquisition would combine PaineWebber’s “leading position in the U.S. market for the affluent” with the bank’s international reach.
Although Ospel is known as a cost-cutter, UBS said it plans to set up an $875-million pool to help retain PaineWebber employees. The payments in stock and cash would be made over three years, the company said.
“This acquisition gives UBS a very large retail distribution system,” said Steve Eisman, an analyst at CIBC World Markets. “There are very few retail systems this large.”
Major commercial banks have increasingly moved into the securities business in recent years, as government barriers to mergers have fallen.
“We had a decision to make,” said Marron, 65, who has long resisted merger overtures. “We decided if we could move globally, that would be a fine thing to do but only if we could do it with a partner who could add value to our clients,” he said.
Expectations that other U.S. brokerages will attract bids from foreign or domestic banks sent most brokerage stocks higher Wednesday. Merrill Lynch, long rumored to be a target, jumped $2.56 to a record $131.56.
Gainers among smaller firms included Legg Mason, up $2.13 to $56.69, and Bear Stearns, up $2.06 to $46.63.
When the UBS deal is completed, Joseph Grano, PaineWebber’s president, will manage the company’s combined private client and asset-management businesses.
Marron will continue as chairman of PaineWebber Inc. and will assume a new role as chairman of UBS North America.
UBS was formed in June 1998 by the merger of Union Bank of Switzerland and Swiss Bank Corp.
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How Other Brokerages Fared
Shares of most other brokerages gained Wednesday on news that PaineWebber agreed to a takeover by Swiss banking giant UBS. A sampling of the stocks, including each company’s market capitalization (stock price times shares outstanding) and the number of retail brokers employed at the end of 1999.
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Ticker Wed. close Mkt. cap. No. of Brokerage symbol and change (blns.) brokers Merrill Lynch MER $131.56, +$2.56 $51.0 18,100 Morgan Stanley D.W. MWD 95.50, +0.63 108.1 13,072 Salomon S.B. C* 66.88, unchg. NA. 11,333 Charles Schwab SCH 36.25, +1.50 49.4 8,165 PaineWebber PWJ 66.88, +16.94 9.7 7,576 A.G. Edwards AGE 45.94, +3.19 3.9 6,682 TD Waterhouse TWE 18.19, +0.75 6.9 2,307 Legg Mason LM 56.69, +2.13 3.6 1,181 Ameritrade AMTD 12.44, +0.88 2.2 648 Bear Stearns BSC 46.63, +2.06 5.0 484 DLJ Securities DLJ 50.63, +3.19 6.5 425 Goldman Sachs GS 101.94, +3.44 46.3 327
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* Salomon Smith Barney is a part of Citigroup. NA=Not applicable
Source: Securities Industry Assn.
