It was recently revealed that in a bid to allay fears of ‘cultural contamination’, UBS had introduced ‘red lines’ which prevent Credit Suisse employees from carrying out certain activities following its acquisition of the collapsed bank.
Given the unprecedented number of bank failures and subsequent acquisitions seen so far in 2023, that provokes some big questions for the banking industry.
A unique case?
It would be unfair to address this topic without acknowledging that, unlike other deals we have seen this year between failed lenders and their purchasers, UBS’s acquisition of Credit Suisse was not entirely voluntary.
That is partly because the latter has faced years of scandal including charges of tax evasion, fraud and lax anti-money laundering efforts, and, more salaciously, corporate espionage. These issues are not historic either: Credit Suisse was in court in London as recently as April 2023 facing charges of systemic fraud.
Regarding this most recent case, Mark Hastings, a partner at commercial disputes practise Quillon Law, commented: “[It] exemplifies the uphill battle UBS faces to resolve the legacy issues it will inherit in its controversial takeover of Credit Suisse.”
That helps explain UBS’s reluctance to take the bank on and its subsequent actions. And while acknowledging Credit Suisse’s history is extreme, it is important to note that UBS believes the root cause of its woes was its culture, as pointed out by the Financial Times.
Other organisations may not have the same chequered pasts, but they do have individual cultural quirks which can make mergers and acquisitions (M&A) challenging.
For example, the failure of Silicon Valley Bank (SVB), which suffered the same fate as Credit Suisse in the same month, was also put down to issues related to culture by some commentators. Similar to its Swiss peer, SVB faced accusations of a lackadaisical approach to risk management.
Additionally, it is widely believed to have focused too much on growing by targeting a niche but wealthy audience and not enough on sustainability. A cultural obsession with growth at the expense of other business priorities is a trait common among the start-ups that SVB almost exclusively served, but which is proving increasingly dangerous for them. This was especially so for an organisation tasked with protecting large volumes of deposits.
That’s something SVB’s respective UK and US acquirers, HSBC and First Citizens Bank, will be well aware of.
The challenge of cultural alignment
Cultural alignment is a known challenge in the financial services industry. That is often due to the dynamic between deal participants which tends towards bigger, incumbent organisations purchasing or merging with smaller, newer ones.
In many cases, a large part of what makes the acquisition target appealing is the result of its ability to operate in innovative ways, unrestricted by the constraints and processes that almost always come once an organisation reaches a certain size.
The acquirer is then faced with the difficulty of protecting these cultural qualities, while eradicating others that do not align with its business model or regulatory status. As the examples outlined above illustrate, risk appetite is likely to be a huge area of conflict.
risk appetite is likely to be a huge area of conflict
Another, which has been recently brought to the fore, is ways of working as newer, smaller organisations maintain flexible working policies while larger, incumbent financial institutions push employees to return to the office.
But for any M&A activity to succeed, a way must be found through these challenges because failure can spell disaster in any number of ways.
For example, UBS’s concern is that Credit Suisse employees used to doing things a certain way will act in a fashion that damages its reputation and bottom line before it has a chance to fully assess what it has acquired and work out what the future holds for both brands.
Meanwhile, HSBC, SVB UK’s new owner, decided to bundle SVB assets in with its own newly created innovation teams to create a novel unit called HSBC Innovation Banking, but in doing so faces the possibility of stifling what made SVB a success in the first place.
Additionally, its decision to create new teams in new geographies as part of the new venture will add further strain to its ability to preserve the positive core tenets of start-up culture.
And finally, JPMorgan, which acquired the failed First Republic in the US largely as a way to bolster its wealth management business, is already facing the consequences of culture-clash as advisors who liked working for the smaller, more flexible First Republic are choosing not to stay on with its new parent company.
Damage limitation
UBS’s ‘red lines’ are almost certainly designed to be temporary while it works out next steps. As Dr Stefan Legge, economist and head of tax and trade policy at the Swiss-based University of St Gallen, points out, there are still many questions to be answered about practical matters including whether the Credit Suisse brand will remain and how the integration will actually take place.
Regarding cultural change, Michael Barnett, a leading financial markets litigator based at Quillon Law, agrees that there is a lot more to do, and none of it easy.
“While UBS may intend to weed out ‘bad apples’ and impose robust risk restrictions, it cannot implement a cultural integration plan effectively without establishing organs, with very clear mandates, that are themselves accountable to senior stakeholders and regulators.”
[UBS] cannot implement a cultural integration plan effectively without establishing organs that are themselves accountable to senior stakeholders
Meanwhile, HSBC’s strategy to avoid losing too much of the culture that made SVB a success was to bring onboard as many SVB employees as possible, particularly outside the UK. In April, it announced the hiring of four “Silicon Valley veterans” to lead its US advance.
This would seem like a sensible strategy; however the complexity of the break-up of SVB threw a spanner in the works – First Citizens Bank, which acquired SVB’s US assets, is now suing HSBC for poaching the staff to the tune of $1bn.
JPMorgan’s actions are not as obvious, other than the fact it has announced that 1000 former First Republic employees will lose their jobs, while the remaining 85% of staff have been offered transitional or full-time roles. Unlike UBS, there has been no clear messaging to suggest that those being let go are considered ‘bad apples’ – it is more likely to do with avoiding the duplication of roles.
Rather than being afraid of any ‘contamination’ or culture clash, the US giant seems to have taken a like-it-or-lump it approach, although there will surely be some incentives offered to members of the wealth management team to persuade them, and their wealthy clients, to stay on.
Culture on par with due diligence
Each of the acquisition examples mentioned above are the result of highly unusual, individual and complex circumstances, meaning the cultural considerations of each acquirer are unique.
That said, cultural alignment is clearly a high priority in each case, as it should be for financial institutions that want to make a success of M&A.
Courses of action may be specific to each deal, but as Mr Barnett says on the Credit Suisse deal: “Transparency and accountability are key in this regard and, going forward, this will likely play a crucial role in the future reputation and management of UBS.”
