Corporate Governance’s Korea

Case 3

To: Swiss Bank Corporation Board of Directors and Shareholders

From: SBC Financial Team: Laura Woodroof, Loan Nguyen, Nghia Le, Dang Nguyen

Date: April 3, 2016

Re: Merger of UBS and Swiss Bank

Merging two companies is not an easy task. Both companies must closely analyze all mergers’ motivations prior to the merger; its potential impact on the market they do business in and their incremental benefits to both companies. This deal not only would change drastically each firm, but together they would create such synergy capable of changing the financial industry worldwide (Bruner, 2004).

Together both firms would create USB AG and it would be the largest asset Management Company and private bank in the world. For ex-UBS the idea of becoming the largest private bank is motivation enough for merging with SBC. For SBC, USB’s large capital base would help it recover from its capital shortage due to its acquisition growth strategy (Vision 200) and previous severe loan losses (Bruner, 2004). Among the merger’s objectives cited on page 11, by merging these two financial entities; USB AG would attain global leadership in many lines of business and create substantial shareholder value by reducing cost and increasing revenue and shareholders’ equity (Bruner, 2004, pg. 11).  

As USB AG they could better response to the aggressive growth and competitions from the other financial service institutions. Together, their synergy would help USB AG to efficiently and effectively face FSI’s globalization and expansion strategies, market integrations, government deregulation, technical innovations, demographic changes, and customers increasing sophistication and expectations (Bruner, 2004, pg. 3).    

In the end, after a lot of talking, what caused these two firms that built themselves through the process of acquisitions to merge was their synergy potential, their cultural similarities, and small banking investment overlap (Bruner, 2004, pg.9).

Assumption: Risk Free rate (Rf) is taken from the Yields on Swiss Government Security (Exhibit 21), because the new firm UBS AG was forecasted in term of next four years, we choose the Rf = 2.487% (the rate of security in Switzerland in term four years). Beta: according to the Exhibit 20, the SBC’s Beta is 1.00, the ex-UBS’s Beta is 0.91 and the Switzerland Average is 1.03. Therefore, the Switzerland Average Beta should be possible for the new firm (UBS AG). Risk Premium is assumed to be 6%.

We use CAPM model to calculate the rate of return; and it is 8.85%.