Swiss deal prompts frenzy of bank bid speculation

Swiss banking giants UBS and SBC are to form the world's second largest bank in a multi-billion pound merger, with the loss of 3,000 jobs in London alone. The City is already speculating about the next victims of the `merger mania' affecting the financial services sector.

Following a week of feverish speculation, the Union Bank of Switzerland (UBS) and the Swiss Bank Corporation (SBC) confirmed yesterday that they planned to merge. About 3,000 of the 13,000 world-wide job losses will be in London - more than previously anticipated. "The people most likely to be hit are in equities and corporate finance," commented one analyst.

Under the terms of the deal, UBS will be folded into SBC. The new bank, to be called the United Bank of Switzerland, will be second in terms of asset size only to the Bank of Japan-Mitsubishi (see table), with combined assets of pounds 358bn. It will also be the world's largest money manager, with 1.32 trillion Swiss francs (pounds 555bn) in assets under management.

The link-up was prompted by the desire not to lose out in the ongoing consolidation in world financial services. SBC/UBS said: "Ongoing globalisation and deregulation of the international financial markets, tougher global competition and the resulting world-wide wave of consolidation in the financial services industry have made size an increasingly critical factor."

Marcel Ospel, currently SBC's chief executive and chief executive-designate of the new bank, was keen to dispel any notion that he was out to shut down UBS's London operation. After the merger, the new bank will have a combined London staff of around 3,000, about half the current total. But Mr Ospel stressed that there would be redundancies on both sides. He said: "We will take the best people. It is not a question of going to zero on one side."

Mr Ospel also denied that large chunks of UBS, notably the equities business, were now up for sale. Though he admitted that the bank would consider serious offers, he said: "It [the sale of parts of UBS] is not part of the integrated strategy we have on the table today." UBS's equities division has been linked with a variety of potential bidders, including US investment bank JP Morgan.

Recruitment specialists yesterday advised worried UBS and SBC employees not to panic. Peter Newton, director of the LNI Group, an IT and recruitment consultancy, said: "The labour market is relatively buoyant at the moment, and these are both top-tier investment banks, with a high calibre of people."

But further, widely anticipated, consolidation in the financial services sector could lead to "blood on the streets". Mr Newton warned: "If we see more mergers or more bank failures.... it would become a buyer's market."

UBS/SBC said yesterday it was "conscious of its social responsibility to its staff members and will handle these redundancies as sensitively and fairly as possible". The banks have set aside pounds 2.5bn Swiss francs (pounds 1.05bn) for redundancy costs.

Most analysts yesterday subscribed to the view of UBS/SBC that big was beautiful, but also felt that difficult domestic conditions in over-banked Switzerland lay behind the decision to merge. John Leonrad, banking analyst at Salomon Smith Barney, said: "We see two primary drivers - cost savings in the over-banked Swiss branch banking market, and the search for critical mass in the global investment banking sector."

Switzerland has one bank per 2,000 people - around twice the ratio in the US. Post merger, up to 400 Swiss bank branches will shut. Pieder Signorell, the secretary-general of the Swiss trade union which represents bank staff, described the merger as "complete madness" because of the proposed size of the job cuts.

The UBS/SBC link-up is the latest in a string of "mega-mergers" in the financial services industry. In June, Morgan Stanley and Dean Witter completed their $11bn merger, and last month, Travelers Group completed the $9.3bn takeover of Salomon Brothers. More recently, Merrill Lynch offered pounds 3.1bn for Mercury Asset Management.

Yesterday's news prompted speculation about the next link-up in European banking. Shares in Barclays Bank and National Westminster Bank, which are understood to have had informal merger talks, soared. NatWest closed up 58p at 998p. Barclays closed up 27p at 1573p.

Under the terms of the deal, Warburgs, perhaps one of the most distinguished names in British investment banking, will not disappear into the history books. Though the newly formed United Bank of Switzerland will be headquartered in Zurich, investment banking will be run out of London under the name of Warburg Dillon Read. The new bank's institutional asset management division, to be called the Brinson division, will be run from Chicago. Gary Brinson presently heads up SBC's asset management arm and will become boss of UBS's maverick fund manager Tony Dye.

Experts predicted the merger was unlikely to run into regulatory difficulties in Europe, but regulatory hurdles in Switzerland may prove more tricky.

UBS and SBC estimate the merger, once completed, will result in annual cost savings of SFr3-4bn, but that restructuring costs would wipe out their combined profits this financial year. Under the terms of the merger UBS shareholders will hold 60 per cent of the new company.