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Industry Spotlight > Mergers and Acquisitions

UBS-Wealthfront Deal Puzzled Many From the Start

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What You Need to Know

  • The deal was doomed from the start, according to Tim Welsh of Nexus Strategy.
  • The two firms were diametrically opposed, so it was not surprising the deal didn’t get consummated, Welsh says.
  • The $70M investment planned by UBS is beneficial to Wealthfront but does nothing to tell us what the robo-advisor business is worth, says Riskalyze CEO Aaron Klein..

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.”

That, however, still meant “UBS was paying around 10X revenue, which is NUTS considering that SoFi paid 10X for Galileo, Stripe’s last funding round was at 10X and Intuit snagged Credit Karma for only 7X,” Iskowitz noted.

Additionally, “Wealthfront has no differentiating technology, no special sauce or moat protecting their revenue (except inertia) and only 400K clients, which is a drop in the bucket for B2C providers,” Iskowitz said, pointing out mobile apps such as Acorns, Stash and MoneyLion had over 4 million clients each.

Andy Rachleff, Wealthfront executive chairman (and previously its CEO and president), had been pivoting “like crazy to try reach scale including high-interest saving accounts, retail banking and cryptocurrency [but] none of these got much traction,” according to Iskowitz.

Meanwhile, “Rachleff was trashing the banking industry, saying that they were going to lose 50 million customers over the next decade, which Wealthfront was targeting,” Iskowitz said. “Then he up and sells his company to one of the biggest banks in the world. The promise of a big payday can make people do or say almost anything, no matter how crazy.”

Iskowitz added: “Now that this deal has been thrown on the dung heap of fintech history, hopefully someone involved will spill the beans on exactly what went on behind the scenes. It’s got to be a wild story.”

Joel Bruckenstein, publisher of the Technology Tools for Today Technology Hub and producer of the annual T3 Conference, responded to Iskowitz, saying: “I agree that the culture clash and the valuation made no sense from the outset. I guess UBS came to the same conclusions a bit belatedly.”

What Went Wrong?

In a tweet on Friday, Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, noted that there were “very little details given” by UBS or Wealthfront in their press release that day, so it was “not clear what exactly went wrong.”

In response, Rick Ferri, CEO and founder of Ferri Investment Solutions, tweeted: “My take on the deal was UBS wanted a direct indexing business and WF had one. It was a hot market for direct indexing and ESG a year ago [but] not anymore.”

UBS declined to comment on what the fintech experts and executives said about the matter.

(Photo: Shutterstock)


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