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Taking on America

Even as rivals cut back, UBS is spending lavishly to build a U.S. investment banking powerhouse. Will it break into the bulge bracket?

Even as rivals cut back, UBS is spending lavishly to build a U.S. investment banking powerhouse. Will it break into the bulge bracket?

By Jenny Anderson
June 2001
Institutional Investor Magazine

Even as rivals cut back, UBS is spending lavishly to build a U.S. investment banking powerhouse. Will it break into the bulge bracket? Or does its plan contain more holes than Swiss cheese?

The U.S. Securities and Exchange Commission's new Regulation FD forbidding selective disclosure of sensitive company information has made many chief executives guarded about what they say and to whom. But Luqman Arnold, who heads Swiss banking giant UBS, can seem more circumspect than most.

Last September, when Arnold was CFO of UBS, he flew from Zurich to New York to address the bank's American employees at the Waldorf-Astoria hotel. UBS was on the brink of acquiring PaineWebber - the deal had been announced three months before and would close in November. Arnold's mission: to inspire senior staff with his vision of how the U.S. brokerage firm would help fulfill UBS's grand global ambitions.

Arnold, however, began his remarks not with an uplifting story or a self-effacing joke but with a formal disclaimer that sounded something like this: This presentation contains statements that constitute forward-looking statements, including, without limitation, statements relating to the implementation of strategic initiatives.

A legal disclaimer at a conference of institutional investors, fine; at a conclave of Wall Street analysts, sure; but at a motivational gathering of your own employees? Odd.

"My lawyers make me do it," pleads Arnold.

Extreme caution has long been the hallmark of senior Swiss bankers, of course. So the fact that the 51-year-old Arnold is presiding over UBS's extraordinarily bold plans for its investment banking arm - UBS Warburg - is all the more remarkable. Nevertheless, the Swiss bank is hell-bent on forging an American investment banking powerhouse to complement UBS's better-established corporate finance operations in Europe and Asia. Bluntly, UBS aims to boost itself into the very top ranks of global investment banking firms by buying its way into the U.S. bulge bracket - the handful of houses that constitute the top tier.

"We have a decent position in the second tier," says the British-born Arnold, who succeeded Marcel Ospel as president of the group executive board, effectively CEO, in April, having joined the bank barely five years ago. "Now we want to take it to the top five. We are a top global firm today without being top five in the U.S., but we would be the dominant global firm if we were also in the top five in the U.S."

Can UBS do it? The evidence, starting with the numerous previous failed attempts by well-backed firms - including UBS's predecessors - to storm the U.S. investment banking barricades, suggests that its quest is quixotic. Still, if UBS fails, it won't be for lack of money, effort or what they call in New York (if not in Zurich) chutzpah. And its battle campaign says something about how much more competitive the already fiercely competitive world of U.S. investment banking, dominated by Morgan Stanley, Goldman, Sachs & Co. and Merrill Lynch & Co., has become.

UBS has set off on its mission at a serendipitous moment in one critical respect. Even well-known bankers are willing to listen to offers in this lean and uneasy environment. All along Wall Street, as the markets droop in the wake of the technology stock bust, firms are seemingly trying to outdo one another in cutting heads. Morgan Stanley will let 1,500 go, including 150 investment bankers, and Goldman Sachs is lopping off 12 percent of its bankers.

UBS Warburg, by contrast, has embarked on a hiring binge, adding high-profile, high-priced bankers in a sweeping buildup of its U.S. corporate finance presence. Since the start of 2000, the investment bank has increased its complement of staffers in U.S. equity and debt sales, and trading and support from 820 to 1,275. More significantly, and expensively, it has pumped up its ranks of corporate finance professionals by 60 percent, from 400 to 650 today. What's more, the bank's approach has evolved from a tentative one of targeting specialties such as health care to a brasher one of growing across the whole range of industry sectors.

UBS Warburg's deep pockets have caused rivals to gasp, when they're not sneering. The munificence began back in 1999, when the bank wooed health care banking star Benjamin Lorello for $70 million guaranteed for three years to bring his 25-person team over from Salomon Smith Barney. It was an opportunistic hire, and UBS did little more until late 2000. Then last fall, in a coup, UBS landed a new head of investment banking: Donaldson, Lufkin & Jenrette junk bond banker Kenneth Moelis, for a purported $20 million per year for three years. Such a number hasn't been seen since, well, the last time Credit Suisse First Boston tech banking star Frank Quattrone switched firms.

After joining UBS Warburg earlier this year, Moelis opened a hiring hall, adding 70 bankers in just three months - some in wholesale lots. Among the recruits: the head of media banking from Morgan Stanley, the co-head of European M&A from CSFB and high-profile hires from Salomon Smith Barney's industrial banking group.

"This is a once-in-a-decade opportunity to grab market share and to expand our corporate footprint," contends Moelis's boss, John Costas, who as president and COO of UBS Warburg signs most of the checks.

The buildup is the brainchild of former CEO Ospel, who created the current UBS through the 1998 merger of Swiss Bank Corp., which he ran, and the old Union Bank of Switzerland. Ospel recently stepped up to chairman of UBS's supervisory board but remains very much in the picture devising strategy, while Arnold pulls the levers on execution. "Marcel's a visionary," explains one top UBS Warburg manager. "He has been a strong driver. Luqman will be a no-nonsense guy with a good command of the details."

Indeed, Arnold may lack the charismatic Ospel's vision and deal-making skills, but the peripatetic banker is famous for his instant command of the nitty-gritty of complex subjects. The son of a British father and an Indian mother, Arnold graduated in 1972 from the University of London, where he studied economics. He broke into banking at First National Bank in Dallas in 1973. Four years later he moved to Manufacturers Hanover Corp., jumping between Asia and London. In 1983 he joined CSFB's investment banking group, where he continued to make the London-Asia circuit for the next seven years. After a sabbatical and a stint running Banque Paribas's capital markets efforts, in 1996 he made his way to SBC Warburg, as chairman of its Asia-Pacific operations. After rising to chief operating officer of Warburg Dillon Read, he became CFO of UBS in 1999, playing a pivotal role in helping Ospel manage a massive restructuring of the bank.

Most observers expect Ospel to continue to shape and drive UBS's ambition to create a truly global investment bank, while Arnold serves as the hands-on manager of UBS's three distinct and independent operating groups: UBS Switzerland, which houses private banking and retail and corporate client services; UBS Asset Management; and UBS Warburg, which includes the investment banking and securities business, the private equity group UBS Capital and UBS PaineWebber.

The goal of UBS's current U.S. strategy is simple. The Swiss bank wants an investment banking franchise with the same reach and world-class reputation that it enjoys in private banking and, to a lesser extent, in asset management. UBS knows that to accomplish this it needs to attain top-tier status in the U.S., which accounted for half of global banking fees over the past three years.

A very practical rationale underlies this lofty ambition: Few industry leaders or analysts believe more than a handful of firms - pick a number from four to six - can make enough money to justify the massive infrastructure of people and technology required to run a worldwide business offering a profusion of products across multiple markets.

"They want to be top five to survive," rhymes Adrian Pilz, a Merrill Lynch European banking analyst. "The top five will be able to originate 80 percent of the world's securities, and they will be able to place them, research them and trade them in three main currencies."

UBS's Arnold puts the case plainly: "It is much more profitable to be in the top five in the U.S. Market share is the primary driver of profitability."

Yet gaining entrâe to that elite won't be easy, for UBS Warburg or for other contenders. History weighs against it. Success in the U.S. has always proved elusive for UBS and its predecessor firms for a host of reasons, ranging from cultural incompatibility to upheaval from other acquisitions to the lack of a long-term commitment. As late as 1999, say sources, UBS discussed selling its investment banking arm, then known as Warburg Dillon Read, to J.P. Morgan. But the talks fell apart over what role UBS would play. Spending $12.5 billion for PaineWebber putatively attests to UBS's desire for a significant and lasting U.S. presence.

But UBS Warburg still has a long way to go to catch the market leaders. In this painfully dry season for investment banks, the firm ranks ninth as of late May with a 4.4 percent market share in combined U.S. equity and debt underwriting, according to Thomson Financial Securities Data. That's up from tenth and 3.3 percent in 2000. But the rise owes as much to the disappearance of DLJ and the old J.P. Morgan as distinct entities from the underwriting tables as it does to any deal-making heroics by UBS Warburg. (The firm hasn't finished higher than ninth in the combined category in any of the past five years.) By comparison, the top five firms routinely control about 60 percent of the market by volume.

UBS Warburg's top deal so far this year was its co-lead, with Goldman Sachs, of a Ï3.5 billion ($5.1 billion) global equity offering in May for the U.K.'s Vodafone Group, demonstrating its placing power in Europe. The whole sum had to be raised in less than 48 hours in a volatile market. It was a bravura performance for both firms.

On the continent and in the U.K., UBS won advisory positions on four of the five largest announced European deals in the first quarter, including Allianz's $20.4 billion acquisition of Dresdner Bank and BHP's $28 billion purchase of Australian mining company Billiton. It ranked second in European cross-border mergers in the first quarter, up from third at the end of 2000. In the U.S. it ranked fifth through the first quarter, up from ninth for the same quarter a year ago.

Investment banking boss Moelis and his crew of expensive deal makers appear to be paying dividends already. They landed UBS Warburg the lead advisory slot for food services company Sodexho Marriott Services when Sodexho Alliance, a French catering company, bought the 52 percent of the company that it did not already own. The $1.98 billion deal produced fees of about $8 million (enough right there to pay Moelis's compensation for almost five months). UBS Warburg is also advising struggling U.S. apparel maker Warnaco Group on its restructuring. And last month the investment bank landed the lead on a $1 billion convertible for satellite television broadcasting company EchoStar Communications Corp., which may use the proceeds to upset Rupert Murdoch's bid for Hughes Electronics Corp.

But the competition UBS Warburg faces is tougher than ever. Just a few years ago, analysts thought that perhaps ten banks might survive to have genuine - and profitable - global banking capabilities. Now there are only about that many left competing; one after another has succumbed to consolidation or simple exhaustion. But even before the market downturn, most observers had concluded that only five or so could flourish.

Assume - and even this is no longer the sure thing it was, say, two years ago - that Morgan Stanley, Goldman Sachs and Merrill Lynch (the triad nicknamed MGM for its star power) can retain their top slots. That leaves only two or three spots open, and the aspirants are all powerful and ambitious. Last year CSFB snapped up DLJ, and Chase Manhattan Corp. merged with J.P. Morgan to create even more formidable firms. Also slugging it out: Citigroup's increasingly aggressive Salomon Smith Barney, Deutsche Bank, Bank of America and, of course, UBS. Defying most handicappers, the decidedly smaller but resurgent Lehman Brothers clings tenaciously to a top-tier U.S. ranking while expanding in Europe.

"If UBS Warburg wants a profitable business in targeted niches, they can absolutely do that," says Stefan Selig, head of M&A at Bank of America Securities and former head of M&A at UBS Securities. "If they are spending money with the aspiration of being a bulge-bracket firm in the U.S., they would be the first foreign bank to accomplish that."

Adds Sanford C. Bernstein & Co. European banking analyst Evangelos Kavouriadis, "Maybe they'll be a niche player, but they won't be bulge bracket without an acquisition."

The odds against UBS Warburg making it into the top ranks on its own are daunting. One firm after another has tried and failed. Deutsche Bank launched a major effort in the mid-1990s, spending a fortune to bring in tech sector berbanker Quattrone before finally abandoning the go-it-alone approach and buying Bankers Trust Corp. It's still trying. J.P. Morgan expended billions of dollars and a dozen years vainly trying to bulldoze its way into the bulge bracket before merging with Chase. Sanford Weill's Smith Barney Shearson brought in merger legend and ex-Morgan Stanley president Robert Greenhill but still failed to find the door into the bulge-bracket club. It took the acquisition of Salomon Brothers and the merger with Citigroup to get the operation to where it is today - scrambling for one of the two slots behind Morgan Stanley, Goldman and Merrill.

UBS Warburg faces special obstacles. Timing is one. Although weak markets mean plenty of bankers to hire, they also mean little profitable business for those bankers to do. U.S. equity issues were down 57 percent through May compared with the same period in 2000. IPOs were off 64 percent, and M&A had dropped by 56 percent. And even after all of its recruiting, UBS Warburg remains a welterweight, with little more than 650 bankers. By comparison, Morgan Stanley has just about double that number, and CSFB's banker contingent is more than twice as big. Moreover, UBS Warburg lacks the strong customer base and brand recognition of many of its rivals.

Counting in UBS Warburg's favor, however, are its parent's size, its sheer determination and a culture of adaptability instilled by Ospel. First at Swiss Bank Corp. and later at UBS, he sought out talented people and then gave them the freedom to actually get the job done. That may sound like a bromide lifted from a corporate recruiting brochure, but his approach marked a departure from the staid and controlling management style of most Swiss banks.

Now Ospel is determined, wisely, to make sure that UBS Warburg's U.S. operation has a distinctly local cast to it. "The combination with PaineWebber and the hiring of talent will have an impact on the culture of the investment bank and will make it more American, which we think is a very good thing," he says. "They will enjoy the level of autonomy that they need to operate successfully."

Zurich will have to supply more than a long leash. But by any measure UBS Warburg is backed by a parent bank that is a formidable enterprise. With offices in 50 countries, $1.4 trillion in assets under management in its mammoth private client business (the most of any private banker) and a market capitalization of $65 billion, UBS is certainly a force to be reckoned with globally. Last year the bank earned profits of Sf7.8 billion ($4.62 billion), up 27 percent from 1999. First-quarter profits slumped 29 percent to Sf1.58 billion. Investment banking accounts for a hefty proportion of operating profits - 60 percent for the first quarter and 47 percent for all of 2000. Its relative strength comes from the continued slippage in asset management and private banking, which suffered fallout from the 1998 Union Bank of Switzerland-Swiss Bank merger.

An April meeting of the UBS board affirmed the bank's primary commitment to regaining the momentum it has lost in private banking. Given how central private banking is to UBS, this is as unsurprising as De Beers proclaiming that it will continue to concentrate on increasing diamond sales. "Private banking will be subject to the same concentration and competition as other areas of financial services," points out Arnold. "In this game UBS is the best-positioned bank in the world. Most importantly, our focus on this sector is the absolute core objective on a global scale."

But UBS's second priority - building up its U.S. corporate finance business - supports its first. "If you tried to run the private bank today without the benefit of a sophisticated in-house investment bank, you would be at a tremendous disadvantage," explains Arnold. "All our competitors have in-house investment banking, and we absolutely have to have that."

UBS's record as a builder is mixed.

Although the scale of the bank's global operations is impressive, the process that the bank had to undergo to get where it is today was fraught with difficulties. For years both Swiss Bank Corp. and Union Bank of Switzerland had sought to break out of their overbanked home market, but neither had much success in the U.S.

The old UBS, dogged by Swiss shareholder activist Martin Ebner for its low margins and ponderous pace of change, relied for growth on its massive private client base. Unlike rival Credit Suisse, which viewed itself as a global bank domiciled in Switzerland, UBS remained determinedly Swiss at its upper reaches. In the early 1990s it looked long and hard at Lehman Brothers but chose instead to focus on hiring individual bankers or teams in the U.S. Often it offered superstar pay packages and guarantees to bankers who just as often were not superstars.

The smaller but more aggressive SBC leaned toward acquisitions, incorporating expertise and talent that it lacked and opening itself to the culture of the firms it bought. No acquisition exemplified this more than Ospel's first: the 1990 purchase of Chicago-based derivatives shop O'Connor & Associates to build up SBC's trading and risk management capabilities. By 1995 two of the six executives on SBC's executive board were Americans from O'Connor, including David Solo, who rose to deputy COO at Warburg Dillon Read before becoming UBS's chief risk officer, and Andy Siciliano, who rose to become chief interest rate officer at Warburg Dillon Read.

"Ospel was very open to new people with new skills and gave them a lot of authority," says Solo.

With Europe about to undergo a major restructuring because of European Community initiatives, SBC chose to focus close to home. It saw the possibility of leapfrogging the competition as there was no clear pan-European leader in investment banking and the market was not as saturated and hypercompetitive as in the U.S. In 1995 SBC bought S.G. Warburg, which was reeling from a planned December 1994 merger with Morgan Stanley that had abruptly collapsed. SBC got a marquee name to try to expand its corporate finance business; Warburg acquired a balance sheet and trading capabilities.

"During the first half of the '90s, we went through the process, 'Should we acquire in the U.S., or should we acquire in Europe?'" says Ospel. "We opted for Europe, which was probably an easier move - certainly dramatically less expensive given the change in equity structure in Europe. Strategically, we justified it that way - it represented less risk for our shareholders. With the perspective of hindsight, you may judge it differently. We don't."

The SBC-Warburg combination didn't do much to advance the bank's efforts in the U.S. At its peak Warburg had about 630 people in the U.S., but no real business. "We had a realistic view of where we could win and where we couldn't," says Solo. "In assessing North American M&A and primary equities, we asked, If we spent $100 million for five years, could we be as good as Salomon? It would take a miraculous performance, and we would not want to be in the position of Salomon in those markets anyway."

But the alternative bet on Europe did not go as smoothly as planned. Goldman, Morgan Stanley and Merrill began to reap the benefits of years of building up the U.K and the Continent, grabbing market share from European corporations unprepared for the technological prowess and aggressiveness of U.S. banks. From No. 1 in European M&A in 1996, UBS Warburg fell to second in 1997 and dropped off to sixth in 1998. That year UBS ranked fifth in European equities and first in European debt (a position it has fallen out of only once, to second, since 1996). In 2000 it fell to tenth in equities but recovered to second in this year's first quarter.

"Until about three years ago, Warburg was the dominant European franchise," says London-based UBS Warburg CEO Markus Granziol. "It slowly lost against Goldman and Morgan Stanley even though it still had a great franchise."

In the U.S. Ospel opted for a compromise between acquisition and organic growth: He bought Dillon, Read & Co., a modest if pedigreed bank whose best years were behind it. Once run by former U.S. Treasury secretary Nicholas Brady, Dillon Read was an old-style bank best known for its role advising RJR Nabisco in its historic 1988 leveraged buyout, at $25 billion then the largest ever. But as a platform to build on, Dillon Read was shaky, and the building project would be halted anyway because three months later Ospel announced the $25 billion merger with UBS.

"We had more aspirations for Dillon Read than could materialize," admits Ospel. "We underestimated the difficulty of bringing together two investment banks across the Atlantic."

Announced at the end of 1997 and closed in the middle of 1998, the SBC-UBS deal had a straightforward rationale: SBC needed capital to leverage its trading and corporate finance capabilities. UBS - faced with shareholders angry over proprietary trading losses and declining market share in private banking - needed a lifeline.

Billed as a merger of equals, it proved to be anything but. UBS kept its initials (the name Union Bank of Switzerland was axed) but little else. The SBC logo, management and culture won out. Nowhere was that more apparent than in the U.S., where Warburg Dillon Read bankers stayed put while UBS Securities' bankers fled the premises. The two biggest parades that spring, Warburg Dillon Read bankers liked to joke, were the one on St. Patrick's Day and the one of bankers filing out of UBS Securities. (UBS acquired the unflattering nickname "U've Been Screwed.")

The integration of the two firms was going poorly enough as it was, when go-go hedge fund Long-Term Capital Management blew up, hitting UBS Warburg with a $715.2 million loss in 1998. A complex derivatives deal that Union Bank of Switzerland had crafted with the LTCM partners backfired. UBS chairman Mathis Cabiallavetta resigned, along with the firm's head risk officer, Warburg Dillon Read's co-chief operating officer and its chief interest rate officer, Siciliano.

"The LTCM problem was one of the worst episodes of Ospel's career; first, he looks like a genius for negotiating a very favorable merger with UBS, then suddenly, UBS reveals itself to host a series of disasters," says one ex-UBS manager.

Not long after, Ospel reportedly began to shop around Warburg Dillon Read - but evidently changed his mind. In January 1999 Ospel met with staffers for a question-and-answer session to address concerns about the LTCM blowup and the future direction of the bank. During the meeting - which was recorded and sent to employees around the world - Ospel said that he would not sell UBS's investment banking operations. "Warburg Dillon Read will continue to play a key role in supporting our asset-gathering mandate," he insisted.

It's a Thursday evening in late March, just a few days before Duke University and the University of Arizona are to play for the U.S. college basketball championship, and UBS Warburg has gathered hundreds from its equities team at the New York Hilton to kick off its campaign to make it into the bulge bracket. The evening's theme, echoing the basketball tournament, is "The Road to the Final Four."

It's a typical bankerly gathering, long on motivational speeches, many peppered with corny references to basketball. The bankers want to be excited, but they're bored and drifting. Until Ken Moelis bounds onto the stage, that is. Short, affable, energetic, he exudes confidence and excitement. He's the prize recruit, the kid who's going to take UBS Warburg to the finals.

Moelis came on board just a month earlier, and he's pumped for action. Already he's hired a handful of name bankers and won a mandate to underwrite a $150 million junk deal for piano maker Steinway & Sons. Suddenly, it's as if the bankers are inside the Minneapolis Metrodome, the venue of the tournament finals.

Laying out his vision for building UBS Warburg into a powerhouse while playing a video of basketball highlights, Moelis becomes almost messianic. He could have made more money elsewhere, he asserts (that gets the bankers' attention!), but he chose UBS Warburg instead. Why?

"We're not here to make money," he proclaims. "We're here to make history."

UBS Warburg has made little money and less history in the U.S. But if it is going to do a little of each now, it will be up to Moelis, 42, the veteran junk bond banker who cut his teeth at the X-shaped trading desk of Michael Milken's Drexel Burnham Lambert office in Beverly Hills, California, before leaving in 1990 to build DLJ's junk operation into an industry power. Fifth in high-yield underwriting in 1990, DLJ reached first in 1995, a spot it held through 1999. When Moelis left this spring for UBS Warburg, he was co-head of investment banking in the Americas for CSFB. He will continue to work on both coasts at UBS Warburg.

A natural leader, with an easy laugh, Moelis must help transform UBS Warburg from a slow, hierarchical monolith to a flatly organized, fast and aggressive U.S. investment bank. More than anything, he has to get rid of the idea that dogs UBS Warburg and other firms affiliated with commercial banks: that they just represent "dumb capital."

"We will compete on speed and service," Moelis says. "DLJ didn't have the balance sheet, but we had speed. We could get an answer to a client quickly."

A consummate salesman, Moelis brings with him a slew of devoted, high-profile clients and a record of big, complex deals, such as Allied Waste Industries' $10 billion 1999 acquisition of Browning-Ferris Industries.

"He understands that the game is getting something done," says one well-known client, real estate financier Samuel Zell. Says another, "None of his clients would imagine doing a deal without calling Ken first."

Moelis is known for making the people he is around feel smart, funny and insightful. Each year he organizes an outing for his clients - who include Zell, telecom carrier Global Crossing chairman Gary Winnick, investor Carl Icahn and Hilton Hotels Corp. CEO Stephen Bollenbach - to Pebble Beach for golf and entertainment. One year he invited the U.S. national women's soccer team and organized a game between the CEOs and the women. Another year it was the women's national softball team. Last year Moelis rented Italian fighter jets and let his clients go up for practice dogfights.

"He's creative, he's fun to be around, and he knows where the money is," says Matthew Hart, CFO of Hilton Hotels and a longtime client of Moelis's. "It doesn't matter if he were to work out of his garage. If we get the execution we want, we'll go for the best deal for our shareholders. What remains to be seen is whether the guys in Switzerland will give him the support he is used to getting."

For his part, Moelis demurs when asked about corporate matters. "I was not born to be a management guru," he says. "I want to be a deal maker."

Under Costas, UBS Warburg had begun ramping up its U.S. efforts even before Moelis came on board. A veteran of CSFB who joined the old UBS in 1996 and soon after was promoted to head of fixed income, Costas oversaw the building up of capital markets and selectively added strength in corporate finance. But his focus was buying PaineWebber - an idea he had presented to the UBS board a few years earlier.

Apart from adding distribution, the acquisition of PaineWebber didn't do anything for investment banking directly, but the retail broker brought other strengths to the table: specifically, a full complement of research analysts. Building on PaineWebber, UBS Warburg has pumped up its U.S. research department by almost 75 percent, to 157 analysts. Costas sees research growing by a further 10 to 15 percent in the next year. With PaineWebber on board, Costas turned his eye to corporate finance again. The mergers of CSFB and DLJ and J.P. Morgan and Chase created a pool of new talent - and the downturn in markets made others more willing to listen to alternative offers.

The hiring of Moelis signaled a shift in strategy: The bank would now go after triple-A bankers. Moelis set out on the recruiting trail immediately. He wooed Morgan Stanley media banker Jeffrey Sine as global head of technology, media and telecommunications banking and vice chairman of the corporate finance group - a move that sources estimate will cost the firm $8 million to $10 million a year, guaranteed for three years. And as Wall Street tightened its belt, UBS cherry-picked Salomon Smith Barney's basic industries banker, Jeffrey McDermott, and CSFB's co-head of European M&A, James Neissa (who is co-heading M&A at UBS Warburg along with Richard Leaman).

In March Moelis brought in Thomas Benninger, CSFB's head of corporate debt restructuring. A month later UBS hired away the rest of the CSFB team - eight bankers in all. Sources estimate that UBS Warburg is paying up to double the typical peak-cycle premium for talent, including generous guarantees. That fact has not been lost on its existing bankers. "I know they're getting paid more than I am," mutters one UBS Warburg banker. Costas says that fewer than 10 percent of the bankers hired have guarantees.

He and the rest of UBS Warburg management stress repeatedly the importance of having the right talent in place. Asked what makes an investment bank great, Ospel doesn't skip a beat. "People," he says. Adds UBS Warburg CEO Granziol: "It's not about the mass of employees. It's about quality, top-quality bankers."

But even as the buildup proceeded, UBS Warburg was axing about 7 percent of its corporate finance group. The bank is aiming to keep the buildup "head count neutral" - hire one, fire one - so that the number of bankers stays at about 650. UBS Warburg managers say they will hire more as growth in the business warrants.

UBS Warburg's ambitions extend across the board as well as across the globe. It aspires to be top four or five in every major corporate finance category within the next three to five years. "I would like to double our current market share from where we are globally," states Granziol, who is most directly charged with executing that task. He estimates that UBS Warburg takes in about 3.7 percent of global corporate finance fees now, compared with 7 to 8.5 percent apiece for Goldman Sachs and Morgan Stanley.

Currently, UBS Warburg revenues are dominated by sales and trading. Globally, some 75 to 80 percent comes from institutional clients, versus 20 to 25 percent from corporate clients. Half of this is from M&A. "The culture is trading-centric," says Moelis. "Equities rule." But if UBS Warburg can somehow achieve its ambitions, it will more than double the revenue from its U.S. corporate finance business, to $1.5 billion, according to Costas.

The field of battle that UBS Warburg has chosen for itself is extraordinarily rugged. Not only is there less high-margin M&A and equity business to go around because of the weak markets, but the terrain has shifted. Traditional commercial banks enjoy some profound - but only now fully appreciated - advantages over their more traditional investment bank rivals. Chiefly, these consist of the sheer size of their balance sheets and their experience in wielding them, particularly in extending credit to companies. Investment banks with commercial banks for parents have been known to tie corporate loans on favorable terms to getting underwriting and M&A mandates, not unlike auto salesmen offering cheap credit to clinch car deals.

UBS certainly has an ample balance sheet, and it's not averse to credit risk per se. But it is being careful about doling out loans to support its investment banking efforts - though UBS Warburg did get in on the Kraft Foods IPO no doubt in part because UBS had lent considerable sums to Kraft parent Philip Morris Cos. "We've never seen a cycle where credit has been rewarded," says Arnold. "It's a lousy business usually."

As he sees it, "there are two fundamentally different models [for a big bank like UBS]. In the universal bank model, you have to like credit, which we do not, and you need to like retail, which outside of Switzerland we do not. We are not a universal bank, and we have no intention of becoming one." Nevertheless, UBS will readily enough make loans in connection with deals when those loans make sense on their own merits, irrespective of the deals. That gives UBS Warburg bankers at least some leeway to leverage the bank's immense balance sheet to pursue deals. "With underwriting risk, we will take it, and we will end up with it because clients like us to be committed. But we want it to be as liquid as possible," says Arnold.

Is it enough? If Marcel Ospel and Luqman Arnold are really serious about making it into the bulge bracket, perhaps the deal their bankers should be pursuing most aggressively is the takeover of an existing bulge-bracket firm.

LA confidential

A few days before Thanksgiving, Kenneth Moelis called a meeting in the 130-person Los Angeles office of Credit Suisse First Boston. The popular head of corporate finance and junk bond rainmaker stunned the investment bankers by telling them that he was joining UBS Warburg. But Moelis couldn't say any more, because his contract barred him from soliciting any of his former colleagues for three months after he left.

However, no contract clause said that UBS Warburg president John Costas could not recruit Moelis's old gang. So the next week Costas flew to LA with a team of bankers and set up shop across the street. About this time The Wall Street Journal ran an intriguing ad: UBS Warburg, it said, was hiring bankers in select cities, including LA, and it gave an 800 number.

CSFB soon got wind of what was happening. A contingent of senior bankers led by CSFB co-heads of investment banking Charles Ward and Tony James descended on LA just in time for the office Christmas party. There they sought to persuade bankers that CSFB was the place to be. "It was really emotional," says one young attendee.

CSFB's top brass offered more than just encouraging words. Several senior bankers were enticed to stay with fancy new titles and generous pay packages. And when UBS Warburg offered junior staffers signing bonuses, CSFB countered by calling an emergency meeting around midnight on a Sunday to unveil special bonuses for all first-year analysts.

The gold dust hasn't settled completely, but UBS Warburg bagged 33 bankers in 48 hours. "I have found the center of capitalism," said one senior banker.