Finance: Assessing Mergers

Question 1

Synergy in mergers is the additional value created by the merger. The argument is that the performance and value of the merged companies will be more than the sum of separate value and performance metrics (Fich, Nguyen & Officer, 2015). Synergy is often the driving force behind mergers.   Firms can merge to generate more revenue than any of the individual firms could manage alone. In this case, there is increased value in the merger.  In the case of UBS and Swiss Bank merger, the estimated synergy value to be created was CHF 20-25 billion. The source of the new value is broken down to be from;

  • Cost saving to the value of CHF 3.5 billion per year. Cost is to be saved through the reduced workforce, infrastructure, branch networks, and infrastructure.
  • Accelerated revenue growth of over 10 percent per year. A merger would lead to market growth in private banking and a high position in the investment-banking sector.
  • Redeploying the excess capital of CHF 11-13 billion.  By closing the redundant facilities and selling the assets, more capital was to be gained. This capital when invested could earn return on equity of between 10-20 percent.

Present value of contemplated synergies




Question 2

As shown in exhibit 17, the implied discount has a margin of 0.82%. This is not such a big margin but it is significant when it comes to margin. The discount premium indicates that SBC is selling at a less value to the market value. Financially, since SBC is still operational and profitable, it would not be financially profitable to sell at a discount.  However, there are other factors to be considered in such a case. The value is based on negotiations between the two organizations and facts such as which organization brings more value to the negotiation.

Considering the deal is a merger, the benefits to be realized with its success include cost synergies, higher growth, and redeployment of capital. In financial terms, UBS is the larger firm. It has larger assets bases and capitalization. The two firms have comparable revenues and employees. With the merger, there is a cost saving valued at CHF 3.5 billion every year. This is due to reduction in duplicate activities, infrastructure and branch networks. Both firms operating together will reduce the operating costs. The accelerated revenue growth is also estimated to be above 10 percent per year since there will be a growth in private banking and a better position in the investment banking. The Excess capital of CHF 11-13 will be deployed to investment and earn return on equity targeted to be about 20%. All the benefits will accrue to both the firms but UBS will benefit more since it is the less efficient firm. As a result, higher value should be appropriated to UBS. This is in line with exhibit 2, which shows that value is being appropriated in the ratio of 60% to UBS and 40% to SBC.

Another significant reason for SBC could sell at a discount was that UBS registered shareholders with no voting rights. In mergers, the final decision lies with the Boards of the two firms (Bainbridge, 2012). However, with the merger, the shareholders of UBS have reduced powers since they have no voting right. The reduced power has to be compensated for in the negotiations. This can explain why the value was appropriated in the ratio of 60% to UBS and 40% to SBC.

Question 3

A merger occurs when two firms come together to form a larger firm. Mostly, mergers are usually voluntary and involve stock swap and cash payments. A merger of equals occurs when two equal firms in size combine to form a single firm (Bainbridge, 2012). In this form of merger, the shareholders of both firms forfeit their shares and in return receive securities issued by the new company. In the case of UBS-SBC merger, the power was distributed between the shareholders of the two firms. Payment was in the form of stock. For UBS, Registered shares were paid in the ratio of 1 UBS AG share for each registered share. For Bearer shares, the ratio was 5 UBS AG shares for each bearer share. For SBC, the ratio was 1 SCB share for SBC 1.0769 UBS AG shares. The board of directors of the new firm was made of ten members with each five being represented by equal members. This shows that the merger terms distributed the board of directors’ powers to both firms equally. The chairman of the board came from USB, which had been, appropriated a higher value. The three vice chairmen came from both firms with SBC gaining two slots.

The management was also appointed from both firms. The SBC CEO became the CEO of the new company while the CEO of UBS became the chairperson in the new company. The powers were evenly distributed based on the value each company was placing on the deal. The senior management was based on competencies and experience. However, negotiations also played a bigger role to avoid any risks that might be involved such as some leaders resigning for being in the lower management of the new company. This was a merger of equals. The shareholders from both sides surrendered their shares and received securities issued by the new company. In takeovers, the acquiring company assumes the control of the target company mainly by acquiring a majority shares. When a takeover goes through, the acquiring company takes full control of the operation and makes an offer for the outstanding shares. So the of UBS-SBC case was an equal merger and not a takeover. Both companies merged to form a new company known as UBS AG. A payment to the shareholders was inform of stock and the powers of the board and management were shared between the two mergers.

Question 4

As a shareholder of ex-UBS, I would vote for the merger. First, the business environment had changed. Globalization has been integrated in the business environment and large organizations were expanding to foreign countries. Competition was no longer only domestic but global. Competition was intense and a merger would give the new company a competitive advantage locally and internally. The business environment was demanding for a greater scale in order to capture more market share and increased profits. In the year 1966, both firms made losses due to lack of real growth locally. There have been economic bubbles from the years 1990-1997. The merging of the two firms would create economies of scale in costs and production thus allowing the consolidated firm to venture in new global markets. The major aim of a shareholder is to ensure that the organization makes profits so that the shareholders can receive dividends. When a company makes losses, the shareholders receive nothing and if the company goes bankrupt, the shareholders lose their investment. Thus, it is in the interest of the shareholder to protect the company from losses.

Another reason was that new technological advancement was straining the capital base of the two banks. Innovations in the financial market were also threatening the older market with substitutes of low cost. Advancement in computing, telecommunication, and trading systems required huge costs, which could only be managed by a larger firm. Failure to adopt the new technologies advancements would affect UBS negatively. However, the bank did not have enough capital bases to integrate the technological advances into its operations. A merger was in need to provide a larger capital base for the acquisition of technological advances.

The timing was right for UBS to enter into a merger. In the year 1966, the company made a loss of SFR 197 millions. In addition, it was facing a potential hostile takeover from Suisse. For a shareholder a takeover would mean that the new management makes an offer for the shares. The offer can be lower than the market value and the investor makes a loss on the investment. However, in a merger, the shareholder gets securities from the new company and continues to earn interest. The firm was also facing challenges with its operational strategy. An active investor had already mounted legal challenges to the firm and opposed the Robert Studer as the nominated chairman. With such challenges, the firm was bound to lose investor confidence thus lowering the market value of shares. A lower market value is a loss to the shareholders.

For SBC, the timing for a merger was also right. After conducting a strategic assessment, the company realized the following challenges;

  • In the commercial banking sector, a larger scale was required to incorporate the innovations in retail banking services. A merger presented a chance for rational pricing.
  • In the private banking sector, aggressive growth and acquisition was required in North America, Europe, and Asia to cover the sophisticated higher growth and customers in the global private banking.
  • In the investment-banking sector, the SBC was looking to be the leading company in Europe but this objective was threatened by American banks by going global and entering Europe. The market share for SBC in this sector thus was affected and a merger would allow the new firm to go global to increase its market base.

However, there are risks involved in this merger. First, the merger involves the some of the largest banks in the world. The implementation risk of the merger was high. Besides, the incorporation of technological platforms of both firms was quite difficult. Another risk was the unique cultures of both firms. Both banks had unique cultures, which would be hard to fit. Both of the banks had grown through acquisitions and this presents reasonable questions unto how they will merge. It is imperative that a merger meant massive layoffs. About 7000 people would lose their jobs, which could negatively affect the new company publicly. This would have a negative impact on the new company.

It is true that here are advantages and disadvantages of the merger. The risks involved without the merger are high than the risks of a merger to the shareholder. The shareholder is concerned with the survival and profitability of the company to continue earning on the investment. Without the merger, UBS was making losses but the merged company would be better placed to face the global environment. The global environment presented a larger customer base, which is better to venture in, rather than staying local and being taken over by foreign companies.



Bainbridge, S. M. (2012). Mergers and acquisitions. New York, NY: Foundation Press/Thomson Reuters.

Fich, E. M., Nguyen, T., & Officer, M. S. (2015, March). Large wealth creation in mergers and acquisitions. In AFA 2013 San Diego Meetings Paper.

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