Credit Suisse Takeover Fears Can Be a Good Thing

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Credit Suisse Group AG’s franchise has proved indestructible through one crisis after another for decades. Its latest mess looks particularly bad. The Swiss bank faces parallel calamities in investment banking and asset management with the same cause — poor risk control — at a time its rivals are performing well. The case for a takeover is strong in principle. The list of realistic buyers is short.

Executives fear a hostile bid or activist assault, Reuters reported on June 25. So they should. A deal could make sense for shareholders and regulators by imposing stronger management on an entrepreneurial culture that has a tendency to drift into freewheeling. The latest examples are the $5.5 billion of losses tied to the collapse of family office Archegos Capital Management and client losses in asset management on exposure to Greensill Capital’s failed supply-chain finance operation.

A straight takeover would deliver a complete leadership overhaul and cultural shift. Combined with the savings created from eliminating overlaps, Credit Suisse’s operations might then perform better, have more resources to invest and pose less risk to the financial system. A share of that upside could be paid to shareholders in a premium.

But the mooted European pairings come with flaws. Credit Suisse has a market value of 26 billion Swiss francs ($28 billion). An acquisition by cross-town rival UBS Group AG, capitalized at 55 billion francs, would generate substantial savings. Divestments could solve the oft-cited antitrust obstacles in Swiss retail and corporate banking. They would also mitigate the problem that Switzerland would be backstopping an even bigger single financial institution. But it’s still questionable whether Swiss financial supervisors would stomach the creation of such an entity.

Above all, a 100% Swiss deal would be a huge gamble on management’s ability to pull off a complex combination of global investment banking and wealth management businesses. UBS Chief Executive Officer Ralph Hamers spent most of his career in Dutch lender ING Groep NV, a very different animal to the Swiss firms. Before becoming CEO of Credit Suisse, Thomas Gottstein was in roles focused on the Swiss market.

A deal with Deutsche Bank AG would meld together two firms with historic lapses related to culture and risk. The German lender has mulled the combination, Bloomberg News reported last month. With comparable market values — Deutsche Bank is capitalized at 23 billion euros ($27 billion) — and similar trading valuations (roughly half of book value), the temptation would be a merger rather than a takeover. Again, the question arises of the leaders who could assuredly make such a union a success. CEO Christian Sewing’s turnaround strategy has returned Deutsche Bank’s share price to levels last seen in 2018. Still, an integration on this scale would be a huge test of relatively new bosses.

In any case, the better fit for Deutsche would be a deal with UBS, given their complimentary strengths in fixed income and equities, respectively.

The more credible owners for Credit Suisse would be found among the much bigger Wall Street firms, for whom the Swiss bank’s wealth management business would be the primary draw. There would be no doubt whose culture would dominate, and it would be easier to have confidence the integration wouldn’t go awry. While it’s hard to imagine an outright hostile bid succeeding, a generous offer could put extreme pressure on Credit Suisse’s board to talk.

The issue here is not so much capability as appetite. It could be simpler for U.S. rivals to cherry-pick Credit Suisse’s best wealth managers, bankers and clients without going through the rigmarole of a full takeover, let alone striding headlong into the political minefield of a U.S.-Swiss deal in financial services.

Creating a national champion just to forestall a foreign takeover is no justification for a Credit Suisse-UBS tie-up. Credit Suisse’s best defense under new Chairman Antonio Horta-Osorio would be to evolve into a less risky institution. Even if that meant pulling back from some of its investment banking businesses, investors would surely put a higher multiple on what remains. Still, it’s good if the firm is worried about a bid. The specter of an unwanted takeover helps to keep managers on their toes. The problem in banking is the shortage of precedents to make that threat credible.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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