UBS: The Man in the Arena

„As a shareholder, I am of course delighted with this dream deal“

– Joe Ackermann, NZZ Standpunkte, 17.04.2023

March 19, 2023.

A shotgun wedding took place.

And Alfred Escher turned in his grave.

It marked the end of Credit Suisse. The disaster had been brewing for a long time. In the 1990s, the roots were handed over to American investment bankers and the course was set for a death by a thousand cuts.

It was our 167-year-old historic bank, which Escher had founded in 1856 as Schweizerische Kreditanstalt (SKA) to finance the construction of Swiss railroads. We can only hope that Escher's legacy, with his great influence as founder or leader of further institutions rich in tradition such as the ETH, Swiss Life and the Swiss Northeast or Gotthard railroads, will not suffer more of the same fate.

The Swiss-orchestrated takeover of UBS has created the fourth-largest bank in the world, with 120,000 employees and $5 trillion in assets under management.

UBS has received a gift, or as Joe Ackermann called it: “a dream deal". Behind it lies a huge task, because the new giant will be "too big to fail" for Switzerland.

To meet the big challenge, the UBS Board chose the only real person who came into question.

Someone who knows the bank well.

Sergio Ermotti.

Chart 1: The Schweizerische Kreditanstalt (SKA) in Zurich, 1895

Call of Duty

The return of Sergio was music to my ears.

Not only for me as a co-investor in my own strategy, but also for the companies I buy into, I want people to bleed for their company, their product and their vision.

The best word to describe this is “Skin in the Game”. It is very powerful.

Ermotti was already CEO of UBS from 2011 to 2020 and was praised for leading the company out of the financial crisis.

During that decade, he laid the foundation for UBS's distinctive edge. Beyond its renowned global wealth management leadership, there is untapped potential in the Americas. The merger amplifies capabilities in both Investment Banking (Leveraged Lending) and Asset Management (greater AuM), adding a fresh dimension to their diversified business model.

As successor to former CEO Hamers, who wanted to turn UBS into a "Netflix of wealth", he showed commitment from the start. "Coming back to manage this situation is a challenge, but also.... I felt a call of duty," he said.

It was a responsibility for Switzerland as a business location that he, as a Swiss, could not avoid.

Embracing the challenge aligns with his earlier aspirations. He had drawn up plans to take over Credit Suisse three or four times during his earlier tenure at UBS.

Or, in UBS Chair Kelleher's words, "the best person to execute this merger".

Now Ermotti steps into the arena.

Chart 2: From left, Ralph Hamers, Sergio Ermotti and Colm Kelleher (Chairman)

It is not the critic who counts

The title is iconic.

It is the beginning of a passage from a very inspiring speech by Theodore Roosevelt entitled "Citizenship in a Republic." The remarkable passage from that speech is called "The Man in the Arena."

And that man will now be Sergio Ermotti. He faces the biggest challenge of his career.

He will oversee a mega-merger in the banking sector and he will have to withstand the political pressure and the many critics that come with it.

I mean, think about it for a minute.

Coming out of retirement at the age of 62 was not a given. His other option was to drink an Aperol Spritz and enjoy the sun on Lake Lugano.

What would have been your decision?

For now, with yesterday's release of UBS's results and the decision to forgo the $10 billion government support measure, the firm has made it clear that it has a plan.

A plan is all well and good, but execution is what matters.

Chart 3: “Citizenship in a Republic” speech given by Th. Roosevelt, Sorbonne, France 1910

5% plan, 95% execution

At arvy, we seek organic growth in companies, though acquisitions can be acceptable if proportionate. Big takeovers, we usually dislike.

Why?

After all, execution matters. And the beloved, well-advertised synergies often fall short after the initial euphoria.

I take the well-known startup formula to hand. As a founder, you will encounter so many obstacles and unknowns that your plan will end up being only 5% of the equation. 95% is just your own execution and your will to get things done.

Every single day.

It begs the question. Is the Credit Suisse acquisition big or small?

On the one hand, with a price tag of $3.25 billion, it is probably very small or a bargain in the end. The Credit Suisse Swiss (CSS) unit alone is valued at 18 billion. On the other hand, the number of employees, the "bad will" and the legacy could easily make up for the difference.

I think exceptions confirm the rule. A “Good Story” is in the making.

Remember, we prefer companies with a “Good Story” (Fundamentals) & “Good Chart” (Price Behavior).

Another interesting happening?

The UBS stock price.

A base. A very long base. 15 years and counting.

A “Good Chart” is in the making, too. The adage is buzzing in my head.

“The Longer the Base, the Higher the Space!”

Chart 4: UBS Group since 1996

arvy's takeaway: Sergio Ermotti's return to UBS is a call of duty. Facing the colossal task of merging two financial giants amid intense scrutiny, he embodies Theodore Roosevelt's "The Man in the Arena". With a plan at hand, execution is paramount, and Ermotti's willingness to tackle this challenge head-on is a testament to his commitment to Switzerland. As he strides into the arena, we are reminded that it is not the critics who count but those who dare greatly.