It took just 72 hours for Swiss regulators to fast-track a $3.25bn rescue of Credit Suisse by its rival UBS.
Now executives at the two banks face a painful few years as they integrate the businesses. Thousands of jobs will be lost, entire data systems transferred and tens of billions of dollars’ worth of assets wound down. But insiders said the biggest fear within UBS was how to protect its carefully restored values from what one senior figure at the bank described as a “rancid” culture in parts of Credit Suisse.
“Where we find evidence of bad culture, examples will be made ‘pour encourager les autres,’” said a second senior UBS figure, referring to the French writer and philosopher Voltaire, who coined the phrase. Credit Suisse will be made to adjust to UBS’s way of doing things, not the other way round.
Culture can be an asset to an organisation, but it can also be a risk. It dictates how employees interact with each other and clients, the decisions they make and what priorities a business has — all of which affect financial performance. From the board and executive team to compliance, risk and ethics functions, everyone has a part to play.
Thomas Roulet, an associate professor at the University of Cambridge’s Judge Business School, said corporate culture can explain “competitive advantage” within industries. But when two companies cannot align after a deal, it is dangerous. “There might be so much divergence they cannot agree on the way forward, and there is clear animosity to the point the two [sides] spend their energy trying to get rid of each other rather than paving a route forward for the merged group.”
Before the 2008 financial crisis, the two big Swiss banks were both viewed as fairly hard-charging institutions. But after UBS was bailed out by the state and became caught up in scandals including a highly sensitive US tax dispute and $2bn of losses by a rogue trader, it changed course. The bank curtailed its racier activities, cleaned itself up and rebuilt as a more conservative wealth manager. Credit Suisse, which did not have to be rescued in 2008 and is known for its leveraged financing business, only pushed harder into classic big-risk, big-reward investment banking, hiring aggressively and expanding fast.
One dealmaker who spent years working at both institutions said this division was at the heart of the culture clash and difference in how the banks’ staff behaved. “UBS has always been a very friendly, collegial, team-oriented culture. When I say friendly, I mean, they actually like each other . . . Investment banking was never a part of the DNA of UBS,” he said.
“Credit Suisse might be the opposite in that each individual was very sharp-elbowed. Basically at Credit Suisse you were told to take advantage of the balance sheet and got paid a massive bonus, that was the game. And it was the game for 30 years. And there was no sense of being in it together,” he added.
One former UBS employee said investment banking was viewed akin to gambling inside the lender. Credit Suisse’s domestic bank is considered attractive, but for a “not flashy, keep your head down” culture like UBS’s, the asset management arm and investment banking division are more problematic.
When news circulated last week that the Swiss regulators had pledged a liquidity lifeline to Credit Suisse, a group of the company’s investment bankers and their clients were in a corporate box at the John Mayer concert in Madison Square Garden in New York. The bankers “started high-fiving”, according to one person present.
The 160-year old UBS, which has taken a long time to feel secure about its current business culture, now has to carefully weave in the riskier parts of Credit Suisse’s operations.
At the press conference announcing the deal, UBS chair Colm Kelleher made a pointed remark, saying the bank would curtail Credit Suisse’s investment bank where the losses have escalated, to align it more with “our conservative risk culture”.
The most immediate consequence for staff — as with any big takeover — will be job losses. Headhunters said Credit Suisse employees were already on the frantic hunt for new positions, with tens of thousands likely to be sacked.
Those that stay will have to adapt.
UBS has teams trawling through Credit Suisse HR files for “evidence of cultural slippage”, said one of the senior figures at the bank. A priority is identifying those who have committed regulatory infractions, people who are heavily motivated by pay and are “holding the firm to ransom” and those who were forgiven for past transgressions or dealt with “softly”. This behaviour will be “rooted out”, he said.
Timothy Galpin, senior lecturer of strategy and innovation at Saïd Business School said culture mismanagement could cause “heartburn” after a deal, even with two willing participants, let alone those hastily forced together.
“I predict there will be a lot of problems,” he said. “UBS is not acquiring a small regional bank where you absorb a few retail branches. This is a much bigger organisation so everything will have to be negotiated.”
He added that senior UBS executives would need to ensure they had a firm grip on a series of levers including corporate values, recruitment, communication strategies, pay and the organisational structure.
“Everything is happening at an incredible pace. They are changing the tyres while going 60 miles an hour down the road. Assessment, planning and implementation is happening on an iterative basis and doing all this simultaneously and at pace, will mean it is chaotic unless it is managed tightly,” he said.
Prior examples of banking deals in times of crisis can provide lessons for Swiss regulators and executives. While the Chase acquisition of JPMorgan can be regarded as a success — where both businesses retained their own identities and clientele, the JPMorgan 2008 transaction for Bear Stearns is viewed differently by some. “Their [Bear Stearns’] best people went off and created Guggenheim Partners, and other key people from Bear Stearns went elsewhere,” said one top M&A lawyer.
Bank of America’s acquisition of Merrill Lynch in 2008 is another example where cultures clashed. “Merrill Lynch was always very much the old line broker-dealer, investment banker, they were not commercial bankers at all. Bank of America was very much a commercial bank.” Again the result, the lawyer said, was that some of Merrill Lynch’s best people left.
He added that acquiring a financial institution was unlike other companies as assets were “illusory”. Customers can move their deposits and their business elsewhere rapidly. “To sum it up: liabilities stay, assets and people move. That’s really the risk when you’re taking over a failed or failing institution.”
UBS has made clear it is on the offensive and is loath to allow in forces that could disrupt a delicate and hard won equilibrium. “UBS will not risk its own future or culture after all the tough times it went through,” said Chris Roebuck, a former UBS employee who was tasked with helping to integrate the company in the years after the 1998 merger of Union Bank of Switzerland and Swiss Bank Corporation.
“This is a forced marriage by the regulators to avoid a disaster and now everybody at UBS is going ‘oh my god’. How do we make this work in a way that is financially viable, culturally viable and does not kill off UBS?”
Additional reporting by Ortenca Aliaj in New York
Source: Financial Times