Paine Webber was an independent and large United States-based stock brokerage firm that boasted an impressive and nationally comprehensive 8,500 brokers located in 300 different offices throughout the United States. The firm catered successfully to wealthy clients and accredited investors. The company counted an important money management business as well. For years it was the subject of rumors regarding takeover possibilities. The CEO Mr. Marron fended these off and stubbornly clung to the firm’s rare brokerage operation independence until he finally received a takeover offer too good to refuse from Swiss Banking Giant UBS (Union Bank of Switzerland).
In July of 2000, this longstanding independence of Paine Webber finally came to an end. Union Bank of Switzerland paid approximately $12 billion worth of both cash and stock to acquire this the fourth largest brokerage in the United States. The price meant that UBS valued the American stock broker at over $73 per share. This represented a hefty premium of around 46 percent more than the share closing price the day before the announcement, which had traded at the then-current share price of $49.94.
Two parties in particular benefited massively from the merger deal. General Electric Company, better known as GE, was the foremost beneficiary. As they had sold their Kidder Peabody brokerage subsidiary to Paine Webber in exchange for company stock, GE controlled approximately 31.5 million shares, or nearly 22 percent of the entire Paine floating stock issue. This stock became valued at $2.3 billion at the proposed merger price. The other big winner from the deal turned out to be the two decades long CEO Mr. Marron who held shares which then became valued at $85 million. The deal closed with UBS providing half of the purchase price in cash and the other portion in UBS stock. It represented the largest Wall Street firm deal up to that point as of mid year 2000.
When UBS bought out Paine Webber, they mimicked the Merrill Lynch model that had worked so well for them for so very long up until the Global Financial Crisis ended the long-standing independence of the largest stock brokerage firm in the U.S. The model was to both package up securities to sell them to investors in the activity of investment banking all the while also distributing them to individual retail investors directly using their own proprietary network of in-house stock brokers. In fact the two largest financial service operations in the country at the time of this merger in the year 2000 were Citigroup and Morgan Stanley Dean Witter & Company. Both were created by mergers of brokerage firms and investment banks.
The much-touted combination of Paine Webber and UBS proved to be ideally complementary. Because of this lack of business overlap, few jobs were lost in the acquisition. UBS was the $1 trillion asset manager for European institutions that also controlled its own American investment banking arm business they established with their purchase of firms Warburg and Dillon Read, which they acquired during the 1990s.
Though Paine Webber failed to be truly competitive against the other Big Three Wall Street investment banking firms of the day, Merrill Lynch, Morgan Stanley, and Goldman Sachs, they did boast impressive trading operation and stock research businesses. UBS also concentrated efforts on trading and research of European currencies and securities prior to the acquisition of this American fourth largest stock brokerage.
The ultimate motivation behind this takeover of Paine Webber by UBS lay in its long- running ambition to be a big player in both the financial services arenas of Europe and the Americas. To this effect, UBS had listed shares on the New York Stock Exchange only two months before announcing the acquisition. The chairman of UBS admitted that the overriding purpose of such a listing lay in coming up with a stock shares currency which they could deploy to pursue important acquisitions within the United States.
Ironically, even a month before the official revelation of the takeover, Paine Webber had just finished completing its own significant regional brokerage purchase in the form of Nashville-based J.C. Bradford for $620 million. UBS was fortunate to obtain an incredibly valuable financial products and services distribution network within the U.S. at a price far less than they would have to pay to reproduce such a successful network (per Keefe, Bruyette, & Woods analysts). UBS intended to and did run the American brokerage as its full brokerage arm after the take over, keeping the Paine name alive in the process, though the firm’s independence was no more.