The idea of a full-blown merger between Swiss giants UBS and Credit Suisse is being taken coolly. Banking professor Teodoro Cocca lists several reasons why the topic is a hot one, in a finews.com column.

The main question to ask is how satisfied the two big banks' main shareholders are with the value of their stock holdings. They can't be particularly happy, given the lackluster development in recent years.

At least UBS' investors can count on a hefty annual dividend. Of course, there are many reasons why banking stocks haven't found much favor with investors of late. Nevertheless, few international rankings include a Swiss bank in the top 30 anymore.

Conversely, this means some banks actually made remarkable progress on growth, profitability, or efficiency in recent years.

Clear Need To Act

There's no denying a certain need for strategic action, based on the value generated for the owners of UBS and Credit Suisse in recent years. Both are solidly positioned and managed well, but the difficulty appears to be telling a strong entrepreneurial story that sweeps investors into believing a growth story.

The consistent use in recent years of digitization's opportunities is strategically the right thing to do to stave off tech competition, but it is ill-suited to set an investor's pulse racing.

It remains more of a defensive than a proactive component of strategy: the use of synergies between various banking divisions – the real «raison d'être» for big banks – remains a huge challenge, with limited success in generating bottom-line results.

What If Goldmann Sachs Bid?

With market capitalizations of $24 billion and $40 billion, Credit Suisse and UBS are absolutely affordable takeover targets for vastly larger competitors – especially those in Asia or North America. We can ignore the modest share price development only to a certain point – but with the shareholder structure, they both maintain, this isn't a smart long-term stance.

The high proportion of foreign institutional investors as well as a diverse spread of shareholders heighten the chances of one or the other becoming the subject of a takeover attempt. However, an unfriendly takeover is unthinkable in banking: clients and top talent would defect.

Initial skepticism by investors in London, New York, Singapore, and Qatar would quickly fade if, for example, Goldman Sachs bid 50 percent over the current share price – which incidentally would still represent a valuation of less than book value on price-to-book over the next 12 months.

Gems For A Bargain

The question remains what a potential buyer would do with UBS or Credit Suisse. It's also the simplest question: both banks have total gems in their respective flagship wealth management divisions for the distribution of investment products and investment banking services.

Asia, in particular, would be seductive for its competitors, but the Swiss domestic money machine is also attractive for a potential suitor – it represents an ideal cross-subsidy to invest in other areas.

All this comes with an overall robust credit portfolio as well as a solid to the very solid capital cushion. Parts of their respective investment banks – mergers-and-acquisitions advisory, equities, or fixed income – would also be attractive to potential buyers and could generate countless synergies with other strong capital markets divisions.

Too-Small-To-Compete?

Europe's regulatory framework remains a huge hindrance to a larger transaction. The back-story is a regulatory near-obsessiveness with too-big-fail issues, which is warranted but is likely to stand in the way of creating European champions. It is increasingly becoming a European «too-small-to-compete» issue rather than a systemically relevant one. 

If regulatory issues prevent strategically sensible mergers, we need to question the logic of the supervisory framework. We'll see what avenue regulators take on a European deal when one surfaces in real life. Finma, Switzerland's financial overseer, would have its hands full with a cross-border merger involving one of its own.

Management A Sticking Point?

Remarkably, the initiative for the current discussions appears to come from UBS and Chairman Axel Weber in particular. UBS is the more attractive bride than Credit Suisse: it has the largest wealth arm in the world, meaning it is would lucrative for far more potential partners (no other bank has the same access to rich clientele in as much of the world). This would probably translate to a higher price for a buyer.

UBS' top management is shtum – which is understandable since mergers are primarily the board's job. On the other hand, a merger needs to be tied to a strategic vision that at least has to be shared by top management.

That appears to be another open issue, especially under designated UBS CEO Ralph Hamers. Just how closely the interest of top management aligns with that of the board and shareholders is a crucial question – and can be a massive sticking point.

Global Swiss Champion Vs Target

The belief that Switzerland's two major banks are actually doing fine is the precise reason why their independence is in danger. Being good banks at an affordable price is exactly why they are attractive takeover targets.

Perhaps we should evaluate a potential merger of UBS and Credit Suisse through new lens: creating a «global Swiss champion» certainly wouldn't solve all their growth problems, but combined with a strong entrepreneurial vision would still be a better strategy for Switzerland's financial center than becoming an acquisition target.

Teodoro D. Cocca is a professor for asset and wealth management at Johannes Kepler University in Linz. Before joining the university in 2006, he worked in investment and private banking at Citibank for a number of years. He was a researcher at Stern School of Business in New York and a lecturer at Swiss Banking Institute in Zurich. The Swiss academic, who has Italian roots, is an adjunct professor for private banking at Swiss Finance Institute (SFI) in Zurich. He advises financial firms and government bodies in Switzerland and abroad. Since April 2011, Cocca has been a member of the board at VP Bank in Vaduz and heads the bank’s strategy and digitization committee.