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Death of UBS-Wealthfront Deal Isn’t All About the Money

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What You Need to Know

  • Abandoning the deal likely signals that a difference in views between chairman Colm Kelleher and CEO Ralph Hamers.
  • Hamers sold the deal as an acquisition of Wealthfront engineering talent and innovative culture.
  • During Kelleher's tenure at Morgan Stanley, corporate strategy was geared more toward growing assets and wealth.

When UBS Group AG ditched its biggest acquisition in more than two decades with no explanation after markets closed on the Friday of Labor Day weekend, investors and everyone else were left to guess what happened.

Wall Street analysts have presumed that $1.4 billion is now just too much to pay for Wealthfront, a U.S. digital investment advisor that won’t make profits for years. Vertigo-inducing fintech valuations have returned rapidly to earth since the deal was struck in January, exemplified by Klarna AB. The Swedish Buy Now Pay Later company raised funds this summer at less than one-fifth of its valuation just 12 months earlier.

But price isn’t a sufficient explanation – UBS never attempted to justify the valuation, nor is it suddenly in need of conserving cash. Abandoning the deal likely signals that Colm Kelleher, who took over as chairman in April, may have a different view from Chief Executive Officer Ralph Hamers about how UBS should grow its U.S. business and improve its technology.

The bank gave no reckoning on the purchase price for Wealthfront when it struck the deal. Analysts viewed it as a high valuation at the time, equivalent to more than 5% of assets under management when similar businesses traded at closer to 3% of assets last year, according to data from Houlihan Lokey.

UBS also never disclosed financial expectations nor targets for the deal. In fact, Hamers told investors it would be counterproductive to try and make it profitable too soon. “If you expect [profits] to come from a business like that in the first five years, basically, you’re setting it up for failure,” he said when discussing the purchase during February’s full-year earnings call.

The CEO wanted to protect it from pressures to produce quick returns, preferring to let it pursue growth among younger, tech-savvy U.S. clients who are wealthy but not among UBS’s main super-rich clientele. But Hamers also sold it as an acquisition of the engineering talent and innovative culture of Wealthfront: UBS was buying the people who could improve its technology elsewhere.

Hamers had a technology-led focus on growth first and profits later in his previous role as CEO of ING Groep NV. The Dutch bank has long had a good reputation for innovation and digital banking in Europe but that didn’t translate into strong stock performance over the last two years of his leadership.

Steven van Rijswijk, his successor as CEO, swiftly refocused ING on profitability, pulling out of markets like the Czech Republic, abandoning a costly and ambitious IT project and shutting down a payments company it had acquired in 2018.

Kelleher came from a long career at Morgan Stanley, which is UBS’s closest peer on Wall Street in strategy and business mix. Its U.S. wealth and asset management units have grown significantly over the past decade through acquisitions like Smith Barney in 2012 and, more recently, E*Trade and Eaton Vance. These added immediate scale to Morgan Stanley’s assets and took the share of profits from those units to nearly 50% from one quarter previously.

Kelleher wasn’t responsible for these deals, but he helped set corporate strategy and was a close confidant of CEO James Gorman. It wouldn’t be unusual for Kelleher to put his mark on UBS’s strategy: In Switzerland, the chairman is legally responsible for company strategy and the CEO for implementing it.

UBS didn’t need to abandon Wealthfront to save money. Sure, having an extra $1.4 billion in capital will be helpful with markets and economies looking volatile, but UBS has enough funds to be comfortably buying back $5 billion worth of shares this year even before canning this deal.

Putting the Wealthfront cash straight into a bigger buyback plan would be better for shareholder returns in the near term, according to Flora Bocahut, analyst at Jefferies Financial Group Inc.

Investors, however, greeted the scrapping of the takeover with a shrug, suggesting they were unconvinced. UBS’s share price slipped 1%, almost exactly in line with the Stoxx 600 index of European banking stocks. What will be much more interesting for investors is how the strategy and leadership of UBS develops from here.

— For more Bloomberg Opinion articles, visit http://www.bloomberg.com/opinion.


Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.

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