UBS AG's decision to acquire PaineWebber Group in a pricey $10.8 billion cash and stock transaction shows just how valuable brokers and branches have become, even in the age of the Internet.
The deal brings to UBS - a global power in commercial and investment banking companies but until now a nonentity in the U.S. retail market - a footprint and name recognition that rivals any in the United States. A short supply of talent makes it almost impossible to assemble a network from scratch, while competitors across financial services are themselves girding for battle for high-net-worth retail customer dollars.
"PaineWebber has the know-how to deliver product," said Bradley Ball, an analyst at Credit Suisse First Boston. "UBS has the product, but it has been relatively unable to market effectively outside of Switzerland. What they lacked is delivery and marketing savvy, and they get that with the PaineWebber deal."
In adding PaineWebber, UBS was quick to note it also gains a valuable customer base populated by wealthy clients who are natural candidates for investment and private banking cross-selling opportunities. PaineWebber, the fourth-largest U.S. brokerage firm with 8,554 brokers in 385 offices, counts 2.7 million high-net-worth clients in the United States.
"This is the first time we've created a truly global franchise" aimed at the high-net-worth market, said Marcel Ospel, chief executive officer of UBS. "The U.S. is the largest and fastest growing market for the affluent. It was inevitable that UBS had to come here."
It is an area several firms have attacked with acquisitions.
The deals have also been cross-border. Last year HSBC Holdings made a bid to expand its presence in the U.S. private client market with a $10 billion acquisition of Republic New York Corp. Another example is this year's combination of Charles Schwab Corp. and U.S. Trust Corp.
"Everyone will be getting into this game. The market [for affluent clients] has been broadly identified as a growth market," Mr. Ball said.
UBS executives said at a press conference in New York Wednesday that having a major network of brokers in the United States has been a strategic priority. Once the deal is completed, UBS said it would be the world's largest private bank, with $1.5 trillion of client assets under management. The percentage of UBS' private client assets coming from the United States would jump from 4% of its total to 49%.
The alliance joins a company that specializes in making products with one that has greater strengths in selling them. Morgan Stanley & Co. made a similar arrangement in 1997 with its $10.2 billion acquisition of Dean Witter. That same year Travelers Group picked up the product capabilities of Salomon Brothers in a $8.5 billion deal and married them with its own retail distribution arm, Smith Barney.
Michael Flanagan, an equity analyst at Financial Service Analytics, said PaineWebber is being acquired "almost exclusively" for its base of individual investors in the United States. UBS has a strong private banking operation in Europe, but lacks a significant U.S. retail presence, he said.
Meanwhile, PaineWebber, which has a good core of asset management capabilities through subsidiary Mitchell Hutchins, will be able to offer more diverse asset management products, he said.
Additionally, the combined firm would have a broader client base among the affluent, analysts said. PaineWebber's typical threshold in the market is $500,000 of investable assets. UBS typically deals in a loftier sphere, in which "wealthy" clients have more than $10 million in assets.
Thomas Marsh, a London consultant at Cerulli Associates Inc., said the proposed merger is also the latest example of firms looking at ways to target the "emerging mass affluent market" by packaging retail brokerage and advisory-based private banking client services under one brand name.
Merrill Lynch, Morgan Stanley, and J.P. Morgan & Co. have also introduced online services that combine brokerage and private client services and that are aimed at the emerging affluent.
"If you were just offering brokerage, you potentially could lose out on a client who, when they hit that critical mass [of money], they say, 'Gee, now I've got to go someplace else,' " Mr. Marsh said.
The deal would also bolster UBS' investment banking presence. For example, the promise of distribution through PaineWebber's U.S. network would be a "strong calling card" for soliciting stock and bond underwriting business in the United States and abroad, said Markus Granziol, chief executive officer of UBS Warburg, the company's U.S. corporate and investment banking hub.
"We will have a distribution capability that is probably unmatched globally," Mr. Granziol said.
In that regard, Steven Eisman, an analyst for CIBC World Markets, said conceptually, the proposal is like the union of Morgan Stanley and Dean Witter, "except that the investment banking side is not nearly as strong."
Though the PaineWebber brand will survive in the United States, the firm is to be folded into UBS Warburg. PaineWebber's private client group will take over UBS Warburg's private client unit and its e-services business. PaineWebber's capital markets group will be merged into the UBS Warburg corporate and institutional clients business.
Joseph J. Grano, who is currently president of PaineWebber, will manage UBS Warburg's combined asset management and private client business. Donald B. Marron will continue as chairman of PaineWebber Group Inc. and will also be chairman of UBS North America.
The companies estimated annual cost savings of $425 million, 55% of which would come from "revenue enhancements" and the rest from cost cutting, would be achieved by 2002. The company will record a $400 million restructuring charge.