Activist hedge fund seeks Credit Suisse break-up

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From the Financial Times in London, I'm Patrick Jenkins, the FT's financial editor, and this is FT News. Swiss banking group Credit Suisse has come under attack from an activist shareholder. RBR, a small Swiss hedge fund, has bought a small stake in the bank, and is now trying to get support for its plan to break up Credit Suisse.

With me to discuss that are Laura Noonan, our investment banking correspondent, Attracta Mooney, our investment correspondent, and Davide Serra, from the hedge fund Algebris. I suppose, Laura, it might be worth spelling out exactly what has happened here, and how the proposal from this activist investor compares with Credit Suisse's current situation.

We're about two years on from when Credit Suisse's then-new CEO Tidjane Thiam announced a restructuring plan for the bank. And his plan was basically to concentrate the bank more around Asia-Pacific, to concentrate it around wealth management, to take some resources away from the investment bank, which at the time was tying up a lot of Credit Suisse's capital was quite expensive, and then to use that to grow other parts of the bank.

At the time, he also wanted to separate Credit Suisse's Swiss bank, and he was going to IPO that separately. Since then, they have changed their mind about the Swiss IPO, but the rest it remains pretty much on track. And the idea is that Credit Suisse will be a wealth manager which will then leverage the wealth management to grow revenue for the investment bank. And they also have a retail bank. And that's pretty much the bones of it.

And the Credit Suisse management argument is that the group works best like that when there are lots of synergies from having their various activities all under the one group. In the last couple of days, it has emerged that there is a hedge fund which has built a stake-- a pretty small stake at this space-- they were talking about less than half of a percent of Credit Suisse's equity capital. But they built this stake.

And what they want to try to do it is effectively split the business into three. So in the US, you would have an investment bank, which will go under the old First Boston brand, which Credit Suisse bought a number of years ago. Then you would have a wealth-manager-cum-retail-bank, and that would be a separate entity. And then the third entity which will be Credit Suisse's asset management arm-- and they think that they could make it a much more profitable entity by doing this.

Now, we've been there, done that, when we think about the investment banks. We've had several campaigns. One an UBS run by [INAUDIBLE], where they were trying to separate UBS. It hasn't worked before. But when they look at this now, they say that there are some unique advantages to doing it for Credit Suisse at this juncture.

OK, well, thanks for setting the scene. I think the bottom line is that these guys have had a successful track record, though limited. But what's different here is that there's a far bigger organisation that they're going after. They've got a far smaller stake.

And so I suppose it would be useful to hear from Attracta. Attracta, you write about the asset management industry. And you've seen this entity, RBR, go after a big asset manager in Switzerland-- GAM-- and be pretty successful. What can you tell us about their modus operandi, and, particularly, the individual who heads this RBR business, called Rudy Bohli?

Rudy is a controversial figure. He is friendly in person, but not afraid to criticise individuals, as well as companies. And with the GAM story, this year, they were pretty aggressive and professional. And I that's probably one of the key points.

They brought in consultants. They developed a huge plan for how they would revamp GAM, which included overhauling its board, cutting jobs, getting rid of the CEO-- various different measures. And the proposals actually won support from the big proxy advisors that advise investors how to vote, which is a pretty big feat, because it can be hard to get their support. And that was because they said that the proposals were fairly professional. And although they didn't agree with everything, they thought he was making a decent case.

So with the GAM story, they did not get somebody on the board. What they did manage to do was have a revolt over pay. And over the time where they were invested, which was a little under a year period, the share price rose significantly. And the same with Gategroup, which was a company they targeted a year previously. They were pretty successful with that campaign, too, and saw it being sold off in the end, with a 20% premium.

So they're small campaigns, but growing bigger by each year. And he has been noisy, is probably the best description. He is good at making noise and drawing attention to these companies.

Well, he's going to be making some more noise in the coming days. My understanding is that he's due to present his strategic case at a conference in New York later this week-- the so-called Robin Hood Conference, organised by JP Morgan. And he's also, we gather, signed nondisclosure agreements with 100 other investors. This would suggest that he's trying to get new investors on board as part of a mission to get a momentum of feeling against Credit Suisse's current strategy, and in favour of his own alternative breakup model.

Now, we've got one hedge fund, which is a well-known investor in financial services, but which does not agree with the RBR strategy, and that is Algebrist, the London-based hedge fund. And Davide Serra, their founder and chief executive, joins us on the line now. Davide, hi. The question I wanted to ask you was, why do you not agree with the RBR breakup plan?

The reason why I do not agree with the breakup plan is because shareholders would be worse off, clients would be worse off, creditor will be worse off. So it's a lose-lose.

Why it's a lose-lose-- because Credit Suisse is a group that has been formed over the last 100, 150 years. And today, you do have a balance sheet. With the current balance sheet, if you were trying to separate the investment bank, the retail operation, and asset management, you will actually have to put more capital, not less, and you'll have massive attrition of clients, because clients will have an unstable institution all of a sudden. And at the same time, the synergies that can actually be achieved, whether in digital, in product, in running an integrated firm, would be lost.

Hence, I think, here, the activist has invested in a firm that has three business pillars. And assuming that you create value by breaking that up-- it just makes no sense. If what he wants is pure asset management or retail, then he should invest in firms that only that do that, like Julius Baer, or a pure asset manager. The company, Credit Suisse, it's an integrated firm. And breaking it up would actually, in my view, destroy value rather than creating it.

He makes the argument that there are big dis-synergies in this conglomerate structure, and that, I think, the valuation that he's suggested might be released from break-up-- would be, in aggregate, a doubling of the valuation, particularly on the wealth management side, which he argues is discounted heavily by being in the same group structure as an investment bank. You don't buy that, though.

Well, the issue is, the investment bank is still loss-making in my view, de facto. And so the assumption he runs is that you can value of the equity in the investment bank as cash and hence, the wealth management is much more valuable, and hence, he should double the value of their little group.

Well, those are two wrong assumptions. The investment bank will never be able to attract cash value. It will require more equity. God knows who's going to ever fund it. And as a result, you know, you have a big liability in it. So the only way you reduce the liability is actually managing, cutting costs, integrating, serving clients, which is what Tidjane is trying to do-- similar to what [INAUDIBLE] is trying to do in [INAUDIBLE].

And the activeness of Credit Suisse is that it has this fantastic wealth management franchise and private banking franchise globally, which is the core jewel of the firm. But you can't just value the good bit and ignore the bad bit. It doesn't working in that way. Because you have both bits. And that you can't just chuck one off.

And what those within the bank would argue, I suppose, is that you need the investment bank to service the clients within the private bank. A final thought from you, then, Davide-- I don't know if you know Rudolf Bohli from RBR, but whether you do or you don't, do you think he's going to have success in rounding up support for his view? However flawed that view might be, will other investors buy into it?

So on average, I support activists. Because there's always a reason why someone is happy to speak up and step up. I think, though, in this case, what they are proposing, it's wrong. It's against the shareholder interests. It's against the company interest. And I don't think he will have shareholder support. Because shareholders ultimately vote in their own interests. And in my view, this is against their own interests.

What he highlights is that there is value in the firm, which I do agree. There is long-term value. But we need two or three years to execute the plan.

I'll give an example. Tidjane first thought of floating the retail unit. I thought that was a bad idea. And then he changed course, and he decided to raise capital rather than floating the business. Why the retail business is better off inside-- because if you create, suddenly, conflict of interest between asset management, investment banking, wealth management, what happens is, rather than looking at their own client's interests, you're just having people fighting against each other. And that's against both the client and their overall stakeholders.

As a result, I think their plan will not float. It won't work. And most importantly, if you were to ask the regulator, the regulator will probably tell you no way. This is a regulated business. So they ultimately say it's in the regulator hands. And I can tell you, being Credit Suisse a G-SIFI there is no way that we'll ever allow a breakup of it. Of

Yeah, as you say, as a G-SIFI, or a so-called systemically important bank, you get much closer regulatory scrutiny than any other bank in the world.

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Davide, thank you so much for joining us and giving us your thoughts.

Well, that is a segment from the FT's Banking Weekly podcast, which goes on every Tuesday, and is available from the usual podcast apps.