UBS-Wealthfront Deal Puzzled Many From the Start

The decision by UBS Group AG and Wealthfront that was announced late Friday to terminate the planned acquisition of the robo-advisor by the bank came as little surprise to at least some tech and financial services industry experts. Some of them had questioned the logic of the $1.4 billion deal after it was announced in January.

Although the deal was scrapped, UBS will buy a $69.7 million note that is convertible into Wealthfront shares. “UBS remains committed to its growth plans in the U.S. and will continue the build-out of its digital wealth management offering,” it said in a statement late Friday.

“This deal was doomed from the get-go,” Tim Welsh, CEO, founder and president of wealth management consulting firm Nexus Strategy, told ThinkAdvisor by email on Tuesday. “This was always an odd deal,” he said, noting it “seemed to be a forced sale” without “any real strategy or long term synergies.”

“Basically, the two companies were diametrically opposed, so not a surprise it didn’t get consummated,” Welsh said. “Also, the deal was at the peak of the market, so UBS was dealing with buyers’ remorse and the ultimate understanding that they way overpaid.”

Buying a Business vs. Investing in a Business

The collapse of the deal “speaks volumes about something many people don’t understand — the difference between buying a business vs. investing in a business at a certain valuation,”  Aaron Klein, CEO and co-founder of fintech firm Riskalyze, said in a tweet on Monday. “Why would UBS be willing to do one but not the other?”

He explained: “When you acquire or take a majority stake in a business at a certain valuation, you own that stake outright [and] it’s the purest, most accurate form of valuation there is.”

Before the deal was announced, “somebody at UBS built a model that said they could generate growth in cash flows >$1.4B over time by owning that asset,” he tweeted, noting: “UBS truly thought the asset was worth that much back then.”

But times have changed. “We may never know what happened or what leverage UBS had to get out of the deal, but now they do not believe the asset is worth $1.4B,” Klein said. He still, however, wondered why UBS is investing $70 million at the same $1.4 billion valuation.

The ‘Dung Heap of Fintech History’

Craig Iskowitz, CEO and founder of Ezra Group, called Klein’s analysis of the UBS-Wealthfront breakup “spot on,” tweeting in response: “Bailing on a $1.4B purchase for just $70mm in convertible notes is the deal of the century” for UBS.

“There were early signs this wasn’t a great deal,” Iskowitz said in a LinkedIn post on Monday.

For example, “Wealthfront had been shopped to a number of other potential suitors (including RBC and other wirehouses) before UBS agreed to buy them,” he wrote. “And while the headlines proclaimed they paid $1.4 billion, it was actually only $700 million in cash with another $700 million in incentives only if revenue objectives were met.”