UBS expects to complete its takeover of Credit Suisse “as early as June 12,” creating a massive Swiss bank with a $1.6 trillion balance sheet.
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Company: UBS Group AG (UBS)
Business: UBS Group AG is a Swiss-based holding company. It conducts its business activities through UBS AG and its subsidiaries. The company operates as an asset manager with a focus on asset management and investment banking. UBS consists of four business divisions: global wealth management, retail and corporate banking, wealth management and investment banking.
Market value: $106.9 billion ($30.89 per share)
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UBS shares YTD performance
Activist: Cevian Capital
Percentage ownership: 1.3%
Average cost: n/a
Comment from activists: Cevian Capital is an international investment firm that acquires significant stakes in listed European companies where long-term value can be enhanced through active ownership. Cevian Capital is a long-standing, hands-on owner of European listed companies. Often referred to as a “constructive activist”, it is the largest and most experienced dedicated activist investor in Europe. The company was founded in 2002. Cevian's strategy is to help its companies become better and more competitive in the long term and to achieve returns by increasing the real long-term value of the companies. His work in companies is typically supported by other owners and stakeholders.
What happens
On December 19, Cevian Capital announced that it had built a stake of approximately $1.3 billion in UBS Group AG.
Behind the scenes
Cevian has been a true pioneer in international activist investing for more than 20 years. The company is considered the gold standard for activism in Europe. Cevian often takes large positions and has a very long-term investment horizon. The company will be an active shareholder, but will also hold board positions in many of its core portfolio positions. Currently, Cevian professionals serve on the boards of ten portfolio companies in six different countries.
UBS is the largest global asset manager with unique market positions and financial strength, but is viewed and valued by many as an ordinary bank. The largest part of its business is wealth management, which accounts for 60% of its global revenue. It is one of the largest asset managers in the United States, but by far the largest asset management firm in the world, with three times as much assets as the second largest company. Additionally, 55% of the wealth management business is outside America. Twenty percent of UBS revenue comes from Swiss private and corporate banks, where the company is No. 1. Another 20% of sales come from investment banking. But unlike many of its competitors, investment banking at UBS primarily serves to support asset and asset management. It is not a high-risk business. Accordingly, only 25% of UBS's tangible equity comes from investment banking, compared to 70% for Morgan Stanley. In other words, Morgan Stanley is a bank with an asset management business, while UBS is an asset manager with a banking business. One would expect the steady, predictable, and lower-risk earnings of an asset manager to trade at a higher multiple than that of a banking firm. Yet UBS trades at 1.2 times tangible book value, while Morgan Stanley trades at twice tangible book value.
In general, banks in Europe are currently trading at very attractive valuations – at a 50% discount to the market. UBS is an extremely undervalued but high quality company with significant room for improvement. First, the bank has been in the midst of a restructuring since its merger with Credit Suisse, which is not attractive to short-term investors but represents an opportunity for long-term investors like Cevian. Second, UBS's performance could be improved: the company has a return on tangible equity of 14%, compared to 20% for Morgan Stanley. The integration of Credit Suisse and the optimization of performance create a very attractive investment for long-term investors. Cevian believes this could see UBS shares trading at $58 today, up from $30.89.
This is a big position for Cevian: $1.3 billion, nearly 10% of the $14 billion the company manages. Given the company's philosophy and history, Cevian likely spent several months building this position, during which time it worked constructively with management. The company has not indicated that it is currently seeking a board seat, meaning it is not currently seeking a seat. However, Cevian is not the type of activist who asks for a seat on the board just for his own sake. If Cevian is not asking for a seat on the board, it means that the company is currently aligned with management and is having constructive discussions with them on issues such as profit potential. Cevian will continue to speak with management. If at some point in the future the Company believes it can add value at the Board level, it will discuss the composition of the Board with the Company at that time. The activist company was invested in the ABB Group for about two years before Cevian founder Lars Forberg joined the board. More than six years later, he is still on the board. If Cevian takes a seat on UBS's board of directors in the future, the activist investor will bring with him the experience and track record gained at other banking companies, such as his current position at Nordea Bank.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of 13D activist investments.