UBS to enter talks with Michael Klein to terminate First Boston deal

UBS is set to enter talks with Michael Klein to unwind a deal that would have seen the Wall Street dealmaker take control of much of Credit Suisse’s investment bank, according to people with direct knowledge of the matter.

The negotiations, coming days after UBS was forced to buy its Swiss rival for $3.25bn, underline the view among UBS executives that Klein secured terms that were too favourable. UBS also sees some value in keeping parts of the now defunct Credit Suisse’s investment banking unit.

“We assume he [Klein] is cherry picking. The deal was done when the selling bank had a gun held to its head and we are no longer in that position,” a person close to UBS said. “We are not here to enrich Michael Klein at the expense of our shareholders.”

Last October, Klein, a former Credit Suisse board member, negotiated a merger of his boutique advisory firm with the advisory and capital markets unit of Credit Suisse, planning to spin off and list the combination under the historic First Boston brand. Klein would have owned a minority stake and the Swiss lender a majority position.

Credit Suisse had agreed to buy M Klein & Company for $175mn and separately paid Klein personally another $10mn for advising on the restructuring of its investment bank.

UBS has now assigned a legal team to examine how to void the contract Credit Suisse signed with Klein in the cheapest way possible, the people said. In particular it is reviewing whether it can scrap or negotiate down a break-up fee owed to Klein. However, if it cannot, one person said, the costs to activate the break clause would not be material.

One person close to Klein said they “seriously doubt” the transaction can go ahead on the same terms because “First Boston can’t be what it was meant to be” with its parent company set to disappear.

A key part of First Boston’s strategy was a close partnership with Credit Suisse’s wealth management and trading operations, which is unlikely to continue under UBS’s ownership, the people said.

Once Credit Suisse is subsumed, First Boston would no longer be able to receive capital from its parent or be able to distribute equity to staff that transferred over, they added.

UBS and Credit Suisse declined to comment, as did a spokesperson for Klein.

For Klein, the deal would have fulfilled an ambition of running a high-profile Wall Street business after his 2008 departure from Citigroup. A protégé of former Citigroup leader Sandy Weill, the 59-year-old investment banker was once considered a candidate to take the helm of the Wall Street giant.

After founding M Klein & Co, which employs about 20 staff, Klein has continued acting as an adviser to CEOs, corporations and governments on major transactions. He has become a close adviser to Saudi Arabia, including on the initial public offering of its state oil company Saudi Aramco.

Former Credit Suisse shareholder Harris Associates had raised questions over the terms of the deal with Klein and his possible conflict of interest given the banker had been on the board for four years.

UBS has assessed that parts of Credit Suisse’s advisory and capital markets operations are complementary to its own, while it is planning to accelerate a rundown of its trading operations.

“Credit Suisse’s strength, particularly in the US and the technology sector, makes a very good fit to our strategy, where we know that technology entrepreneurs are the wealth creators of the future,” chief executive Ralph Hamers said on a call with analysts Sunday night.

Hamers also wants to retain bankers specialising in pharmaceuticals, media and telecoms, which UBS believes will provide a pipeline of wealthy customers for its private bank.