Why UBS agreed to acquire its rival Credit Suisse
UBS, Switzerland's largest bank, has agreed to buy its ailing rival Credit Suisse. The deal worth 3 billion Swiss francs was engineered by Swiss authorities to prevent the struggling financial sector from falling into more despair. Credit Suisse has been losing the trust of its customers and investors for a while. Last year was the lender's worst since the 2008 global financial crisis.
Credit Suisse was hit by the collapse of American banks
The collapse of two American banks (Silicon Valley Bank and Signature Bank) has put the banking sector under immense pressure, with Credit Suisse being one of the worst affected. The takeover was negotiated in hastily arranged crisis talks over the weekend. Considering the bank's systemic importance to global finance, the Swiss authorities jumped in to avert any further crisis.
Depositors and other banks have been moving away
Apart from SVB's fall, Credit Suisse's acknowledgment of "material weakness" in its bookkeeping also added to its fall. Last week, depositors withdrew from the lender en masse, while other banks unwound deals with it. It became apparent that without a takeover by the Swiss government or UBS, Credit Suisse's operations would reach an unceremonious end sooner than later.
UBS was the only viable suitor
UBS is far from the largest bank in the world. There are other banks in the world that could have acquired Credit Suisse. However, UBS was the only viable buyer. Even after the negotiations reached an impasse after Credit Suisse's board rejected UBS' $1 billion bid. That's because the Swiss government was ready to offer special protective terms to only a Swiss institution.
Investor confidence has been low for a long time
Credit Suisse has been engaged in an ambitious restructuring plan for months now, focusing on shrinking the firm. However, the cracks within the bank ran deeper than imagined. Investor confidence was already on shaky grounds, and SVB's fall added to that. Even the bank's announcement it would get a $54 billion lifeline from the Swiss National Bank did not stop the inevitable.
The deal undervalues Credit Suisse
UBS' takeover of Credit Suisse is the end of a banking icon. The deal's extraordinary nature is clear from the fact that it will not need the approval of shareholders. The deal undervalues Credit Suisse but there is nothing anyone can do to stop it. The lender's shareholders will receive one UBS share for every 22.48 Credit Suisse shares held.
