UBS To Acquire Paine Webber

UBS AG, one of the world's largest private wealth managers, said on Wednesday it will buy PaineWebber Group Inc. in a cash and stock deal valuing the U.S. broker at $10.8 billion.

If the deal goes through, Switzerland's largest bank, which also owns Chicago-based asset management firm Brinson, will drastically improve its product and service distribution in the lucrative U.S. market for high net worth clients.

Like its rival Credit Suisse Group, UBS is seen eager to expand its offerings to upper-tier private clients, including those who may fall below the super-wealthy category.

UBS said it would offer PaineWebber shareholders $73.50 per share in what it dubbed a merger. The deal is recommended by PaineWebber's board and supported by two shareholders accounting for 30 percent of the U.S. firm's outstanding stock.

Under the transaction, PaineWebber shareholders can accept either 0.4954 UBS shares per PaineWebber share or $73.50 in cash, but UBS said it would ultimately pay half in cash, half in shares for the U.S. broker.

Some U.S. investors are seen likely to favor a share-for-share exchange, which is not taxable as a cash offer would be.

The offer represents a 47 percent premium over PaineWebber's closing stock price of $49-15/16 on Tuesday, UBS said.

Schroder Salomon Smith Barney calculated the offer at roughly 15 times next year's earnings at PaineWebber.

UBS shares were briefly suspended on the Swiss Exchange, but after the suspension was listed fell to 233 francs by 0920 GMT after closing at 242.50 francs on Monday, close to the June 15 year high of 251.

UBS recently listed its shares on the New York Stock Exchange. It said at the time the listing would aid in U.S. acquisitions by allowing it to use own shares as a currency.

UBS has plenty of acquisition currency for such a deal. It reported at end-March it had 36.27 million Treasury shares, worth around 9.6 billion Swiss francs ($5.90 billion).

It said it would fund part of the cash offer by issuing $1.5 billion in UBS preference shares.

John Leonard, European bank analyst at Schroder Salomon Smith Barney, said that based on his firm's calculations, the move made sense, and was in keeping "with the integrated global securities firm approach."

Leonard said the valuation of managed and administered assets "also appears in line."

UBS, based in Basel and Zurich, is one of the world's largest managers of private and institutional money, but its strengths in private wealth management are centered in Europe.

Its assets under management totaled 1.767 trillion Swiss francs ($1.085 trillion) at the end of the first quarter.

Analyst Christoph Bieri at Banca del Gottardo said the move "makes sense, because UBS has really one of the best global reseraches, and too little distribution power."

For brokers like PaineWebber, which face increasinpressure from competition from e-services, the move also makes sense, Bieri said. On the whole, he saw it as a good combination.

Traditionally it was usually the case that "in the U.S., the investment banks are regarded the brains, and the brokers are the muscle," he said.

Firms combining operations "have been pretty successful," he said, citing Morgan Stanely Dean Witter as an example.

PaineWebber, which last quarter posted the best operating results in its 120-year history, has long been described as an attractive takeover target because of its large brokerage sales force and upscale client base.

While Bieri believes PaineWebber lacks profile in terms of research, it offers strong distribution capability.

The move is expected to expand UBS's reach to higher-net worth retail investors who are PainWebber's mainstay.

The firm, classed as the fourth-largest U.S. broker, has more than 8,000 brokers and client assets of over $475 billion.

After the merger, around half of the group's private client assets will come from wealthy and affluent U.S. clients.

The transaction should boost UBS's cash earnings per share from 2001, UBS said. The deal, expected to generate annual pre-tax synergies of $425 million by 2002, is still subject to shareholder and regulatory approval. It is expected to close in November, UBS said.

The acquisition of PaineWebber could also provide a shot in the arm to UBS's private banking business.

UBS also reported on Wednesday that second-quarter net profit more than doubled from the year-earlier period to 2.16 billion Swiss francs but slipped from first-quarter levels as asset growth and private banking disappointed.

UBS said that General Electric and Yasuda Mutual Life, who together account for about 30 percent of PaineWebber's issued share capital, support the merger and have agreed to vote in favour of the deal.

If the deal is completed, PaineWebber will continue to operate under its current brand name, UBS said.

By Alice Ratcliffe