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The Master Of Zurich


Nestled among the cozy restaurants and boutiques of Bad Homburg, a wealthy Frankfurt suburb, is a handsome 19th century villa with stained glass windows. Inside are the offices of Sauerborn Trust, which manages some $8 billion for about 100 wealthy German families, including the Quandts, the family that controls BMW. Jochen Sauerborn, who founded the firm with the Quandts in 1987, had vowed for years to remain independent. But late last year he and his partners sold for about $160 million to the leading Swiss bank, UBS. What changed his mind? Sauerborn says the Zurich giant's commitment to private banking was key. "All the [UBS executives] speak the same language we do," he says. "They have a clear vision. You don't find this at many German institutions."

UBS is on the hunt for other jewels like Sauerborn Trust. A creation of the $25 billion merger of Union Bank of Switzerland with its smaller but more aggressive Basel-based rival Swiss Bank Corp. (SBC) in 1997, UBS now has the largest market capitalization of any Continental European bank -- $87.5 billion. Yet it doesn't want to be a financial supermarket like Citigroup or HSBC. Instead, the management of private wealth, in the grand Swiss Tradition, is its core business. UBS has almost $2 trillion in personal and corporate assets invested, among the world's largest asset pools.

With acquisitions such as Sauerborn, UBS is pursuing a bold strategy that is not without risks. It is expanding rapidly beyond its Swiss base. It is also taking on clients, such as those at Sauerborn, who had chosen not to put their wealth in the hands of a big institution and who may be skeptical about staying with a money manager as giant as UBS. But UBS figures if it can win the confidence of these top business families its position in Europe's largest economy will get a boost.

By reinventing the art of Swiss banking, UBS has quietly become one of the globe's most profitable financial institutions. Morgan Stanley (MWD) forecasts UBS's pretax profits at $8.9 billion in 2005, an 8% year-on-year gain following a 41% leap in 2004. Revenues are forecast to hit $37 billion. Return on equity, Morgan Stanley predicts, will outpace a wide range of competitors, including Citigroup (C), Goldman Sachs (GS), and Credit Suisse Group (CSR). Last year, ROE came in at a hefty 25.5%, well above Goldman's 19.8%. In the first quarter of 2005 net profits rose 8%, to $2.2 billion, and ROE hit 32.4%. UBS's own private-banking business, which has margins of close to 50%, has ample room to grow. Unlike investment banking, where a handful of players dominate, the wealth-management industry remains fragmented. UBS leads with only a roughly 3% share of what it estimates to be a $30 trillion market. And UBS chief Peter A. Wuffli is confident that more boutiques such as Sauerborn will become available as the increasing cost of regulation makes life tough for smaller wealth managers. "We feel we are just at the tip of the opportunity," he says.

UBS's operations already span the globe from S?o Paulo to Shanghai, making it easier both to court the growing legions of newly minted millionaires and spot companies to add to its stable. Its biggest acquisition was the $12.5 billion purchase of U.S. brokerage PaineWebber in 2000. But the deals keep coming. Sauerborn is just one of nine mostly deluxe money-management firms Wuffli has bagged since he took over as chief executive in 2003. Among other recent acquisitions: Merrill Lynch & Co.'s (MER) German private-banking business, the North American unit of Swiss rival Julius Baer, and British private bank Laing & Cruickshank Investment Management. Wuffli and his private banking chief, Marcel Rohner, have teams combing the globe for more acquisitions.

Rohner just got even more clout as a result of a June 30 reorganization that added U.S. brokerage operations to his portfolio. His mandate is to continue closing the profit gap with Merrill and Citi's U.S. brokerage operations, which have margins in the 19% to 20% range, vs. 14% for UBS. Huw Van Steenis, an analyst at Morgan Stanley in London, envisions Rohner pursuing targets such as U.S. Trust Co., the old-line wealth manager now owned by Charles Schwab & Co. As part of the shuffle, deputy CEO and investment-banking chief John P. Costas is stepping down to manage an in-house hedge fund and trading operation called Dillon Read Capital Management.

The boys from Zurich are acting on a plan they hatched a few years ago. Around the world, customers were becoming more sophisticated about their finances, and regulators were closing in on tax havens. Old World secrecy and discretion were no longer as important. Clients were far more interested in a banker who could analyze their financial needs and deliver performance than one who could, as one insider puts it, find a nice private school for their children or a walker for their dogs. This shift spelled trouble for the smaller Swiss banks. UBS execs realized that if they could update and streamline the core of Swiss banking -- money management -- and improve humdrum investment performance, they would have a great brand name they could roll out worldwide.

The upshot: UBS revamped its private-banking operations so clients could expect a uniform experience whether they were in Hong Kong, New York, or Zurich. UBS advisers are trained to administer a lengthy interview designed to determine the client's financial situation and risk appetite, and then to tailor a package of financial instruments from the vast range UBS can now tap (page 64). "It's like going to the doctor" to give a medical history, says Martin Liechti, chief of private banking for North America. At the same time, UBS has become the largest wealth manager in Asia and a force in Europe and the Americas.

Not all of this expansion is producing easy money. In particular, profit growth in Europe outside of Switzerland is proving hard to come by. Overall, UBS's European "onshore" private-banking business lost an estimated $186 million in 2004, and competitors wonder how long UBS will tolerate such results. Wuffli answers that wealth management is "one business where you do need a long-term commitment."

NEW INVESTMENT PRODUCTS

UBS's wide margins in private banking give it the strength needed for lengthy turnarounds. How does UBS do it? For starters, the bank benefits from huge economies of scale. Each chunk of new money generates fees of 1% or more per year, but the added cost of managing it is next to nothing because UBS can use the same back-office and investment programs. Perhaps best of all, most customers tend to be loyal and not sensitive to UBS's fees, which are hard to figure out in any event because some charges are embedded in the products. Since its name now is known worldwide, UBS finds it easy to attract more money -- $16.3 billion in the first quarter of 2005. As king of the hill, the bank can spend more on advisers and marketing than rivals can. "It is tough to see anyone catching up with them," says Richard Ramsden, a banking analyst at Goldman Sachs in London. "If anything, the gap widens in five years."

Just five years ago, though, UBS was floundering. Disgusted with its poor performance, longtime asset-management clients were pulling out money -- $53 billion in 2000 alone -- and UBS was virtually unknown in the U.S. market. What turned things around? In asset management, Wuffli veered away from a conservative, value-style approach that was a turnoff to investors. UBS hustled to offer its clients so-called alternative investment products, including hedge-fund-style market plays and the chance to sink money into private equity and real estate. These products, which typically earn substantially higher fees than run-of-the-mill mutual funds, now account for 12% of UBS portfolios, vs. 3% in 2000. One hot performer: a synthetic security called a PERLES that lets investors bet on a basket of five Brazilian stocks; it's up close to 60% since it was first issued.

UBS execs insist that today's hedge-fund woes won't hurt them because they are masters at spotting lemons. UBS is the leading purveyor of "funds of hedge funds," a fast-growing segment of the alternative-investment industry, according to Morgan Stanley. Global Asset Management (GAM), the prestigious London fund manager UBS bought from financier Gilbert de Botton in 1999, is the main manager of the $47.7 billion it has invested in those funds. Rivals say UBS doesn't have better people or products, but they concede it is a bigger, more efficient machine. "This is the best asset gatherer the world has ever seen," says a rival.

Although private banking is a primary focus, UBS has also climbed into the big leagues of investment banking and trading, where other European banks have flopped. For the first half of 2005, UBS was the world leader in global equity deals, with $19.1 billion, and the fifth-largest in mergers and acquisitions, with $245.8 billion, says Thomson Financial (TOC). The risk-free revenue that comes from private banking can buy plenty of firepower in investment banking, from traders to analysts, and puts UBS in a position to take greater trading risks.

UBS is even carving out a position in U.S. investment banking, where it was once a marginal player. In the first half it ranked third in the U.S., after Goldman and Morgan, with $155.6 billion in deals. It represented Gillette (G) in its $57 billion deal with Procter & Gamble (PG), and it reps MBNA in its $35 billion sale to Bank of America ( BAC). "They do business in a quality way," says Jack Levy, co-chairman for global M&A at Goldman, which worked with UBS on Gillette.

The former SBC execs who run UBS also know how to make their own deals work. Chairman Marcel Ospel, 55, who ran SBC before the merger, has been in on all the key moves. That he is the only person allowed to smoke inside Zurich headquarters suggests how much clout he retains. "All roads lead to Ospel," remarks one insider.

Ospel was the brains behind a stream of acquisitions by SBC, starting with O'Connor & Associates, a cutting-edge Chicago trading house stocked with PhDs, which SBC bought in 1990. In 1997, SBC effectively took over Union Bank of Switzerland, which had been rocked by big derivatives losses, and adopted its UBS acronym. Ospel diplomatically speaks of the transaction as a merger of equals, but SBC was clearly in charge.

If Ospel is the man who built UBS, Wuffli is the executive who is making it work. He was elevated to CEO after serving as chief financial officer and then as head of asset management. Earlier, Wuffli was a business reporter for Switzerland's Neue Zürcher Zeitung newspaper before joining McKinsey & Co. in 1984. He became a McKinsey partner in 1990. In 1994 he left to become CFO of UBS. Insiders give the boyish 47-year-old a lot of the credit for persuading the various parts of UBS to work together -- not an easy task at ego-driven financial institutions. "You can express an opinion without it being a prejudicial thing," says Huw Jenkins, the bank's new investment-banking chief. Wuffli also belies Switzerland's reputation for banking secrecy by publishing reams of information: Last year's annual results came in three volumes. And Wuffli is huffing and puffing to keep the stock price up, returning about 70% of cash flow to shareholders through buybacks and dividends.

CALLING FAMILY BUSINESSES

One key Wuffli strategy is the drive to get investment-banking business from wealth-management clients. The investment bank, for example, creates lots of "structured products" for private-banking clients. These might be securities that let clients put a floor under a large stock position or bet that the dollar will fall or interest rates rise. Goldman's Ramsden estimates that UBS makes 10% to 15% of its security revenues -- around $1.6 billion -- from the private-client business. At UBS much of the trading in private accounts is funneled through the UBS stock-trading system, which processes roughly one of every nine shares traded globally.

UBS executives also hope superwealthy money-management clients will favor its investment bank when they decide to sell their companies or raise money. Such thinking factored into the courtship of Sauerborn Trust in Germany, where UBS has not yet climbed to the top rungs of investment banking. In an effort to appeal to large family businesses, Jochen Sauerborn will become the chairman of UBS's German business.

What could derail the bank? UBS is still vulnerable to the gyrations of the markets. Pretax investment-banking profits were down 22% year-over-year in the first quarter of 2005, the result of a fall-off in the equity and fixed-income businesses. Improving profitability at Wealth Management USA, mostly the old PaineWebber brokerage business, has been a struggle. Wuffli concedes that PaineWebber probably wouldn't fetch the $12.5 billion he paid for it. Yet he defends the move. "If we hadn't bought it, we wouldn't be anywhere in U.S. investment banking, and we wouldn't be a global wealth manager," he insists.

Meanwhile, Switzerland remains important because UBS books about 40% of its revenues from there. But the blanket promises of anonymity that have characterized Swiss banking are disappearing. The bank now closely scrutinizes clients and makes a clear distinction between criminal activity, which includes tax fraud, and tax avoidance, which Swiss law does not recognize as a criminal offense. Each year, UBS reviews clients who may be "politically exposed," including "ministers, heads of state, and kings, and [we] form a judgment about whether they are acceptable," Wuffli says. These days, UBS can afford to sacrifice a billion or two from a politico in the twilight. The latest crop of millionaires will compensate for the loss.

By Stanley Reed, with Andrea Zammert in Frankfurt


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