Is This Marriage Made IN HEAVEN? - merger of PaineWebber Group and UBS AG - Statistical Data Included

Chief Executive, The, May, 2001 by Donald B. Marron

For years Don Marron expressed little interest in merging PaineWebber, and turned his company's many suitors away at the door. But then UBS AG came a'courting and convinced Marron to give married life a try. Here's what this CEO says he's learned.

On a Friday evening Last July, I telephoned the board members and senior executives of Paine Webber Group to report on a meeting I'd had that day with a Swiss banker named Marcel Ospel. I was reluctant to intrude on their weekend. But I knew that the importance of what I was about to tell them merited the interruption. I was confident they would agree.

Marcel, who was CEO of UBS AG, had flown in from Zurich to advance a preliminary discussion he'd initiated that spring about the possibility of merging our companies. That in itself wasn't newsworthy: Our company had been courted by many suitors in recent years, and while many of those proposals were not without appeal, I've always believed that our clients, employees, and shareholders were best served by our steadfast independence and by our singular focus on serving affluent investors in the U.S.

But, as a public company, we also had an obligation to those same constituencies to weigh any reasonable offer put before us. I valued our firm's independence, but at the same time, I didn't view it as an end in itself. I'd been saying for years that if a truly interesting offer came along, I would pursue it. That summer evening, I told them this was that offer--the real deal.

When the PaineWebber-UBS merger was announced a few weeks later, a number of reporters reminded me of my often repeated insistence that PaineWebber would prefer to remain independent. What changed my mind, they wanted to know. What made UBS different?

It was a valid and critical question--one that came up during my initial conversations with PaineWebber's leadership that weekend. From where I stood, the merger made eminently good sense. For one thing, it seemed clear that the deal would enhance our employees' productivity and morale by expanding the menu of resources and support functions available to them. Our clients too would benefit through a greater choice of financial products--especially in private banking--as well as new access to international investment opportunities and research. And if the deal was good for those two groups, it would probably yield increased value for our shareholders.

But that isn't to imply that we said yes to UBS before meticulously parsing its proposal and weighing its implications for each of our three constituencies. And UBS, for its part, was no less rigorous in sizing up PaineWebber. Evaluating merger proposals is not an exact science: No matter how much thought and analysis go into the due diligence process, the picture will always be clouded by variables not readily quantified, as well as by external market forces not even the most prescient CEO can anticipate or control. Nor is there anything like a universal benchmark; every offer must be evaluated on its own merits. A troubled company that must merge to survive will apply a different set of criteria than a strong company looking to build on its success. Likewise, companies in different industries will have different expectations.

Still, sizing up a merger is neither guesswork nor voodoo science. By asking the right questions--and answering with unflinching honesty--a company can stack the odds in favor of success.

Here are some of the issues we took into account:

What's your gut feeling? I had first met Marcel Ospel two months earlier, when he broached the idea of closer cooperation between UBS and PaineWebber. I liked him from the outset. He was both frank and a good listener--and refreshingly direct. Merger discussions often have a way of dragging on before either party gets to the point. Marcel and I were discussing issues of substance 15 minutes after we sat down. That boded well, I thought.

Is the timing right? Granted, timing an upturn in the financial markets is never easy. But it certainly makes sense to be cognizant of pricing cycles when considering an offer. Under the terms of the UBS deal, PaineWebber was paid $73.50 a share--a 47 percent premium and three times the stock's book value.

Do both parties understand the importance of discretion? UBS and PaineWebber were on the same page with regard to the need for keeping our discussions under wraps until we had something concrete to announce. With the outcome still uncertain, the last thing we wanted was for the media to get wind of our discussions. Leaks can not only wreck a deal, they can stir needless anxiety among your workforce, clients, and shareholders.

Does the potential acquirer understand your client? What set UBS's proposal apart from others that we've fielded was the company's fundamental understanding of our client base. Like our own firm, UBS has served affluent clients for more than a century, so they are keenly aware of this type of clients' needs and goals. With this kind of shared awareness, success is possible. Without it, failure is inevitable.