What happened
Shares of Credit Suisse (CS +0.00%) traded more than 51% lower as of 10:23 a.m. ET after another large Swiss bank, UBS (UBS 1.28%), agreed to acquire Credit Suisse in a deal heavily pushed by regulators.
So what
Credit Suisse's stock fell significantly last week after the bank continued to experience net asset outflows and had to tap the Swiss National Bank for liquidity. It became quite evident to regulators that the bank would need to be acquired to avoid a systemic event, especially with the banking sector already struggling.
UBS was a likely candidate and the bank acquired it for a very attractive price of roughly $3.24 billion in an all-stock deal, valuing Credit Suisse stock at $0.82 per share. On Friday, shares had been trading at close to $2, which is why the stock is down so heavily today.
The deal includes more than $27 billion of downside protection to account for charges UBS is likely to have to take, purchase price adjustments, and restructuring. The downside protection also covers losses as high as roughly $9.7 billion beyond the first $5.4 billion that UBS would have to incur due to non-core asset losses from Credit Suisse.
NYSE: CS
Key Data Points
Interestingly, Swiss regulators wiped out just under $17.3 billion of debt owned by bondholders, which is supposed to have priority over preferred and common stock.
Now what
Despite the risks of taking on a struggling bank, this acquisition does look very attractive for UBS. It will create a lot of scale in UBS' asset and wealth management business, which will grow to $5 trillion in client assets. UBS also gets Credit Suisse's strong domestic banking unit, which will make it the No. 1 personal and corporate bank in Switzerland.
The deal will increase UBS' tangible book value per share, or net worth, by a whopping 74%. Bank stocks trade relative to this number so this should be very beneficial over the long term.
The deal is expected to start to benefit earnings by 2027 and is expected to generate 8 billion Swiss francs of annual cost savings by 2027. I do think it is worthwhile for Credit Suisse shareholders to keep their UBS shares and hopefully recoup their losses as the franchise gets more valuable over time.
