Should UBS Dump Paine?

An effort to attract the uberwealthy customer has failed to take hold.
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UBS's

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recent management shift is meant to stave off a larger break-up of the firm, but is it time to seriously consider shedding its retail brokerage arm?

It has been seven years since the Swiss banking giant scooped up PaineWebber Group in a cash and stock deal worth more than $10 billion. However, UBS's lack of direction and the continued lackluster performance of the brokerage unit may make this an opportune time to sell PaineWebber.

The merger of PaineWebber in the U.S. was completed to enable UBS to tap uberwealthy Americans. But some observers just don't think the model has worked as well as UBS had envisaged.

"They were desperately looking for a footprint in the U.S. but made a fatal decision in buying PaineWebber," says Alois Pirker, an analyst at advisory firm Aite Group in Boston and a former UBS executive. "They didn't realize how hard it is to turn a brokerage shop into a wealth management" business.

UBS says the combination works and has been effective at driving up business in the area of the ultrarich. In a statement from the company's conference call last week, new CEO Marcel Rohner, who replaced the deposed Peter Wuffli, said that the firm has no intention of altering its strategy in terms of a splitting up its business operations.

Pirker says the 42-year old Rohner, who was formerly deputy CEO and global wealth management head, is a young talented exec who could help UBS turn the corner by blending its various business lines over time. Still, he says, the time for Paine might be nearing an end.

"If you haven't managed to integrate a business in six years, you have to wonder how much time shareholders will give," Pirker adds.

Although selling off its brokerage unit would not solve UBS's other areas of concern, Pirker estimates that the bank might be able to fetch about $15 billion and may be better positioned to bolster its wealth management operation by buying a pure player. Last year, it acquired

Piper Jaffray's

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private client arm for $500 million and McDonald Investments from

KeyCorp

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for $280 million.

Bear Stearns' analyst Christopher Wheeler in London thinks PaineWebber is worth keeping despite his opinion that the unit hasn't quite performed up to snuff. "

The PaineWebber investment was strategically sound but the timing was awful," Wheeler says. Indeed, running hot on technology stocks, the markets began to slip in 2000 after UBS heralded its acquisition of Paine.

Even so, Wheeler is confident that UBS can benefit from retaining its brokerage arm, especially with the view that the U.S. will continue to be a strong farm system for the newly minted ultrarich.

Wealth management has been a huge focus of U.S. financial institutions of late, largely based on the view that those clients can generate other business and services within a well integrated bank.

Bank of America

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paid $3.3 billion to purchase wealth management firm U.S. Trust and

Merrill Lynch

(MER)

has offered $1.8 billion to acquire San Francisco-based private banking firm

First Republic

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.

Beyond wealth management, UBS has faced an embarrassing blow-up of its hedge fund Dillion Read Capital Management and several high-profile departures within the firm's investment banking unit. That's brought into question high effective the company can be at growing that portion of its business.

The firm saw rainmaker Ken Moelis depart to start his own shop and co-investment banking head Jeff McDermott leave to join a start-up distressed investment firm with billionaire Michael Heisley.

A spokeswoman says UBS is committed to a one-bank strategy, integrating its asset management, wealth management and investment banking division.

If UBS is to stay intact, making it all work will be on Rohner, who Pirker says might be best suited to do the job given his wealth management background.

"If he is able to integrate these businesses and to bring UBS' overall strategy in line with the changed market conditions, Marcel Rohner could be the new face of UBS for the next decade to come," he says.