Mergers might be on their way back, along with UBS

David Hellier
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WHEN UBS hired the rain-maker Andrea Orcel to be co-head of its ailing investment bank a year ago, it always looked like a last throw of the dice. Now we know how much the Swiss banking group was prepared to pay for the privilege.

Some at the bank and beyond will no doubt be aghast at the amount – $26.2m – it cost UBS to persuade Orcel to leave Bank of America Merrill Lynch, where he had plied his trade for the past couple of decades, notching up a fortune in unvested stock.

But if it wanted to keep the investment bank alive, it had little choice. Hiring a person of Orcel’s experience, network and charisma was crucial for UBS last year, after the morale of its investment bank had been sapped by an exodus of top talent, combined with the side-effects of the rogue trader and Libor scandals.

His hiring has undoubtedly persuaded clients to stay on and has pepped up morale at the bank, even though there has been an intense attempt to reduce costs elsewhere.

UBS chief executive Sergio Ermotti has been at pains internally to emphasise that Orcel has not been given any money over and above the sum necessary to compensate him for his losses incurred because of his transfer.

Coincidentally, I have been talking this week to UBS bankers about their involvement in two equity deals that have been sprung upon the London market: the capital raising at British Land, and the RBS sale of a block of shares in the insurance group Direct Line.

UBS’s involvement in both these transactions and in a capital raise for Intu Properties earlier this year shows it is still in the game in these sorts of deals in London. That will please Orcel, who has a massive job on his hands in holding the investment banking arm of UBS together.

The healthy London equity market is encouraging companies to sell down stakes in non-core assets or to issue new shares. Equally, there is a thawing of the new issues market, with the insurance group Esure and Countrywide the latest to be reporting strong demand from institutions for their shares.

But there has still been a reluctance on the part of company boards to engage in mergers to any great extent. One source told me that company chairmen, still rocked by the volatility of the stock markets over the past couple of years, were not quite ready yet to be bold. But he expected bids to pick up later in the year if the markets continued to be relatively stable.

One bid that is progressing is Ithaca Energy’s £300m takeover of Valiant, which yesterday received a major boost as two US hedge funds withdrew their opposition to a deal.

Ithaca is poised to become a substantial player in the North Sea if the deal completes, which is now looking likely, with the company going from a producer of 6,000 barrels of oil a day to around 20,000.

Ithaca needs a 75 per cent vote from Valiant shareholders for the deal to go through, so the hedge fund opposition could have been fatal. Now the group is on its way to joining the bigger league. Others may follow.

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