From the October 2006 issue of Research Magazine • Subscribe!

October 1, 2006

UBS to Buy McDonald after Piper Jaffray Deal Closes

What do you do after gobbling up some 700 Piper Jaffray advisors? If you're UBS, you make another deal -- this time to rake in about 340 FAs in McDonald Investments' branch network for $280 million.

"This doesn't surprise me. They've become the new Wachovia when it comes to buying a series of regional brokerages," says Chip Roame, head of Tiburon Strategic Advisors in Tiburon, Calif.

(Wachovia Securities, which was formed after a merger with First Union in 2001, added Prudential Securities in 2003. Prior to the merger, First Union picked up Wheat First Butcher Singer in 1998, Everen Securities in 1999 and First Albany in 2000; Wachovia acquired Interstate/Johnson Lane in 1999.)

The latest M&A news, Roame adds, signals UBS' intention to establish a strong U.S. retail presence via acquisitions, as the company has been quick to point out.

At the same time, Roame explains, KeyCorp's sale of McDonald shows that banks are interested in taking the opposite tack and getting out of the brokerage field. "We are seeing the continued bank exodus from the retail brokerage business after the failure of promised synergy."

UBS officially wrapped up its $500 million purchase of Minneapolis-based Piper Jaffray's retail operations on August 14, some four months after the deal was first announced. On September 6, the Swiss brokerage firm went public with plans to acquire Cleveland-based McDonald Investments' branch network.

"This [McDonald Investments] transaction, coupled with the recent acquisition of the private client branch network of Piper Jaffray, further strengthens UBS Wealth Management's presence in the U.S.," says Marten Hoekstra, who heads the group. The group now includes more than 8,000 FAs, not including those with McDonald.

Now, UBS is moving aggressively again to add to its ranks -- six years after it purchased PaineWebber, which had more than 8,000 reps at the time, including those previously affiliated with J.C. Bradford. Analysts say UBS' retail network in the U.S. topped 9,000 in 2000 and that the company isn't interested in getting back up to that level anytime soon.

Still, the number of UBS FAs could near 8,500 if most McDonald reps stay on.

"They've bought Piper Jaffray's brokerage from U.S. Bancorp, now it's McDonald Investments from KeyCorp," explains Roame. "My guess is that this is not the last acquisition we'll see from them."

When UBS announced its Piper Jaffray acquisition earlier this year, it had the potential of drawing in some 840 advisors. Since that time, about 100 Piper Jaffray reps have elected to leave. According to UBS, that represents a retention level of about 80 percent, which suits the company just fine.

"We are very satisfied with the retention levels of financial advisors and client assets," says Hoekstra.

And, for his part, Roame says the firm should be pleased. "That's a pretty good retention level," the consultant says. "Financial advisors, like everybody, don't like change. And you'll always have some percent that will depart."

Other observers agree. "UBS has done a great job with Piper Jaffray," says Howard Diamond, managing director and COO of Diamond Consultants, a recruiting firm in Chester, N.J. "They learned a lot from Merrill Lynch," which recently acquired Advest from AXA but reportedly failed to retain a majority of the firm's roughly 500 advisors.

"UBS has been treating the Piper Jaffray advisors properly," adds Diamond, "and has been meeting with them and telling them that their situation will really be OK [in terms of changes to fees, etc.] for a year or so. They've really been saying the right things, especially to the bigger producers."

To retain the 340 advisors with McDonald Investments, UBS is said to be offering some attractive packages. Advisors with $500,000 trailing 12 months production level and above may be given 60 percent of this total in upfront compensation (i.e., cash), with another 25 percent coming in as options and the remaining 15 percent as deferred comp.

Those in the $300,000-$400,000 production level for trailing 12 months may be offered a total package of 60 percent of this total, with some cash, options and deferred compensation. Those below $200,000 could see only 10 percent of their compensation offered upfront as an incentive, with no options or deferred comp.

From what Diamond hears, the message is clear: "If you are at $400,000 and above, UBS is looking to keep you. But for those under $200,000, it's time to start looking."

UBS has to improve its productivity, which means cutting costs, experts note. "We expect that UBS might close some small McDonald offices that are near to existing UBS branches to cut costs and avoid duplication," says Howard. Such changes may not happen for another 12 months, but "the handwriting is on the wall," he adds.

Based on 2005 data, UBS' brokers in the United States have pre-tax margins of about 9 percent, well below the performance of rivals like Merrill Lynch and Smith Barney with 20 percent, says Bear Stearns equity analyst Christopher Wheeler. They do, however, rival Merrill in terms of revenue per advisor at about $710,000.

"The turnaround in the U.S. business is the biggest opportunity for UBS," explains Wheeler in a June report.

And this effort just became more challenging with the departure of Thomas Brown, the former head of national recruiting for the U.S. wealth management group, in early September.

While productivity improvements and higher production levels for reps are important, Roame points out, UBS also has to be ready to respond quickly as opportunities for acquisitions arise. "You must buy when you get wind of a deal. You just can't sit round and wait, or there won't be anything left."

Plus, by expanding the number of advisors in its network, UBS is able to take further advantage of its global scale and wealth-management expertise. "They are enormous," Roame points out. "And they have best practices from other countries, from their private bank and trust services and other wealth-management tools."

"UBS is coming here anyway they can, in a big way. They could do another blockbuster acquisition at anytime. McDonald Investments is just another notch on their pole," Roame shares.

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Janet Levaux is managing editor of Research magazine.

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