Leading the Largest Banking Deal in History: Where Failure is Simply Not an Option
UBS CEO Sergio Ermotti embarks on an unparalleled banking feat with monumental implications for the global financial landscape The pressure to succeed is immense, as he navigates an unconventional path towards the deal of a lifetime
The morning after the shocking announcement in March that UBS would acquire its struggling local competitor Credit Suisse to prevent a worldwide banking crisis, Sergio Ermotti received an unexpected call from UBS Chairman Colm Kelleher. Just three years prior, Ermotti had departed from UBS and was currently serving as the chairman of a Swiss insurance company.
"I was completely caught off guard by the phone call," Ermotti shared with CNN at a conference in Geneva last month. "When he reached out and suggested that we meet...I knew it had to be something extremely important."
UBS had approached Ermotti to resume his position as CEO and guide the urgent acquisition of Credit Suisse – a deal that his previous employer had reluctantly accepted under pressure from Swiss authorities, despite facing resistance from certain shareholders and local legislators.
Ermotti willingly agreed to come back and take on a significant and risky task with no previous examples: merging two globally important banks known as "systemically important banks." This exclusive group of 30 banks includes big players like Bank of America (BAC), JPMorgan (JPM), and HSBC (HSBC). These banks are considered crucial, as their collapse could lead to a global financial crisis.
Anke Reingen, a banking analyst at RBC Capital Markets, warned that if the merger fails, it could negatively impact confidence in UBS, potentially causing instability in the larger financial system.
While there are multiple challenges to overcome, including IT system migrations and cultural disparities between the banks, the main concern is that the integration process might excessively divert management's attention from business growth. Nevertheless, Reingens remains optimistic about the deal, and RBC anticipates better returns from UBS compared to its competitors. This positive outlook is also shared by investors, as evidenced by the stock's remarkable 30% surge since the announcement of the deal.
Despite its merits, the merger has sparked controversy in Switzerland due to Credit Suisse's troubled past, marked by scandals and losses that led to the loss of customers and investors. This merger holds significant importance for the country since it now hosts a combined bank with assets twice the size of its annual economic output. Such is the pressure on Ermotti to succeed that he is regularly approached by strangers in Switzerland who wish him luck, thank him, or offer their opinions on the merger.
If the deal fails, not only will it tarnish Ermottis esteemed financial career, but it will also result in a highly publicized personal failure for him. The outspoken banker is reputed to be as renowned in Switzerland as tennis legend Roger Federer, and now, possibly, even more prone to scrutiny.
The deal of a lifetime
Ermotti took his time to consider the significant responsibility before deciding to take it on. His decision to return was motivated by a sense of duty to Switzerland, loyalty to the bank, and his desire to fulfill a deal he had long envisioned during his previous role as CEO. "Back then, I always had the intention to take on a transaction like this," Ermotti stated during the press conference announcing his return. "It would be contradictory for me not to accept the job and not to carry out what I believed was the right next move for UBS."
The appeal is clear. The deal has instantly made UBS the second-largest wealth manager worldwide, trailing only Morgan Stanley (MS). Ermotti claims that this acquisition has brought in seven years' worth of new client funds all at once.
Moreover, the deal can be considered a bargain in certain aspects. UBS paid 60% less than the heavily devalued price of Credit Suisse shares just before its last-minute rescue occurred over a weekend.
However, there are certain conditions to consider. UBS is entering into a venture with a bank that Ermotti recently characterized as being "structurally loss-making." Additionally, there is a considerable number of unresolved legal cases stemming from numerous scandals and failures to comply with regulations. As of September, UBS had allocated over $4 billion to address litigation and regulatory concerns, which is 50% higher than the amount designated during the same period last year.
Even if Credit Suisse were devoid of any of these burdensome issues, the merger itself would be a monumental endeavor due to the sheer magnitude of the two banks.
In terms of financial history and required financial engineering, the significance of this deal cannot be overstated," stated Kelleher, the chairman of UBS, in March. "The integration of these businesses poses a tremendous amount of risk."
The headquarters of UBS and Credit Suisse in Zurich, Switzerland's financial hub, couldn't be any closer.
Michael Buholzer/EPA-EFE/Shutterstock
According to several ex-colleagues, Ermotti is the one who can get the job done. In discussions with CNN, they portrayed him as a confident leader with an impressive intellect, guided by a sharp intuition that aids in making the correct decisions.
Katrin Koch, who served as Ermotti's chief of staff during his initial term at UBS, stated, "What truly distinguishes him is the clarity with which he leads." She emphasized that Ermotti does not hesitate to make difficult choices and takes full responsibility for his actions. "He never makes excuses... and I believe this is uncommon in today's world."
His skill in motivating others to take on difficult tasks is just as important for the job. Tom Naratil, the former chief financial officer at UBS during Ermotti's previous tenure, expressed that Ermotti has the unique ability to bring out the best in people. "If I had to create the ideal job description, he would be the only candidate... He is absolutely perfect for the role," he stated in an interview with CNN.
An unconventional path
Ermotti's determination to pursue a career in finance was evident from a young age. Abandoning his aspirations of becoming a professional soccer player, he embarked on an apprenticeship at a bank in his native Lugano, located in the Italian-speaking region of Switzerland.
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The initial intention was to acquire work experience while pursuing studies to become a sports teacher, as a fallback option in case the football dream did not materialize. However, upon joining the bank, Ermotti swiftly developed a keen interest in financial markets.
"I came to the realization that being a sports teacher was no longer my fallback plan... my new alternative plan was to become a trader," he explained to CNN. "Since I wasn't skilled enough to be a football player, I embraced my plan B."
Ermotti spent more than ten years at Cornèr Banca in Lugano before transitioning to Citi and eventually joining Merrill Lynch at the young age of 27. He gained extensive experience during his 16-year tenure at Merrill Lynch, where he took on the role of co-head of the global equities business and developed his critical analytical and decision-making abilities.
These skills would later prove to be invaluable during his time as deputy CEO at Italian bank UniCredit, where he played a pivotal role in navigating the global financial crisis. They also proved to be essential during his previous nine-year tenure at UBS, which shares significant similarities to the challenges he currently faces.
Sergio Ermotti left school at age 15 with dreams of becoming a professional soccer player.
Stefan Wermuth/Bloomberg/Getty Images
Like before, Ermotti's sudden appointment to the highest position occurred during a challenging period. In September 2011, while serving as the head of the Europe, Middle East, and Africa division, he unexpectedly found himself in Singapore, attending crucial meetings with the bank's top executives.
UBS faced a crisis when it discovered a $2.3-billion loss from unauthorized trades by an employee. As a result, then-CEO Oswald Gruebel resigned and Ermotti took his place, despite having joined the bank just five months earlier. Ermotti then had to quickly prepare to address shareholders in New York, who were concerned about the group's strategy and its struggles after the 2008 crisis.
Before the rogue trading scandal, UBS had decided to downsize its investment bank due to declining trading revenue and stricter post-crisis regulation. The bank's focus shifted towards expanding its more profitable wealth management division. Ermotti was highly committed to this objective and was willing to make unpopular and risky choices to achieve it, even if it resulted in short-term revenue loss.
Analysts and shareholders initially expressed skepticism regarding the plan. "What they are attempting to achieve has never been accomplished before," stated Christopher Wheeler, then an analyst at Mediobanca. In an interview with the New York Times in October 2011, he explained, "Their intention is to deliberately downsize the investment bank, meaning they need to unwind (trading) positions without incurring losses and gradually reduce their holdings while simultaneously maintaining staff morale."
Huge pressure
The shift, while significant, proved to be highly successful, and by the end of Ermotti's nine-year term, UBS had become one of the most profitable European lenders.
However, Ermotti considers his greatest achievement to be the opportunity to contribute to the resolution of Credit Suisse. "Being invited to be part of the solution for Credit Suisse was the ultimate measure of success," Ermotti stated in an interview with CNN.
How will he measure success this time round? "When I know that our people and our clients are proud to be associated with us, I know that, then, we are going to have success."
The tie-up of UBS and Credit Suisse has caused controversy in Switzerland and leaves the country exposed to a bank with assets twice the size of its GDP.
Fabrice Coffrini/AFP/Getty Images
Ermotti faces immense pressure as he acknowledges the intensity of the challenge. He expresses excitement despite recognizing it as the most demanding period of his career. "We are confronted with an enormous level of complexity. It arises from the integration and the responsibility of running the bank and serving clients."
After the completion of integrating its former rival, UBS faces the question of its future direction, which is likely to be settled by the end of 2026. Looking ahead, Ermotti envisions a bank that not only completes the integration but also proactively works towards growth. His aim is to establish a unique and lasting legacy for UBS, ensuring that this generation leaves behind a solid foundation for the bank's next chapter, rather than a mere historical event.
