Credit Suisse Attracts A Pesky Activist Who Wants To Make Swiss Cheese

Tidjane Thiam’s tenure at the top of Credit Suisse (CS) has hardly been a picnic. Big lawsuits, struggling business units and a difficult overhaul has left the stock well below where he inherited it despite strong gains this year. The company is only two years into its grand ‘3 year plan’ which entails cutting costs, reducing the size of its investment bank and growing in select areas such as wealth management. Now Mr. Thiam has a new problem: an activist clamoring to break up the bank. Rudolf Bohli’s RBR Capital thinks the giant Swiss bank should break up into three parts: an investment bank, a wealth manager and an asset manager. The full details of the plan are expected to be released later this week, but according to the FT, RBR thinks this split ‘could create businesses with an aggregate value of SFr80bn’ or about double today’s value.

Although shares rose slightly on the news, the reaction to RBR’s proposal hasn’t been so positive. That might be too kind, so lets use the words of the FT – the reaction has been ‘largely hostile’. One critique that has surfaced is that RBR only owns ~0.2% of the bank’s shares which is hardly a position to be dictating the future of the bank. It’s certainly a small stake and while the argument is understandable, it also ignores the recent trend of activists wielding influence with smaller positions, especially among large cap names. For example, Jeffrey Ubben’s ValueAct snagged a board seat at Microsoft (MSFT) with just a 0.8% stake and Nelson Peltz’s Trian engaged in a highly contested proxy battle with Proctor & Gamble (PG) despite owning <1.5% of the shares. The path forward to winning with a small stake has been to convince other institutional investors – passive and active alike – that your ideas are winners and that management isn’t listening. RBR has the support of former Credit Suisse investment banker Gael de Boissard, but it seems like they still have some work to do convincing other shareholders. Credit Suisse’s largest shareholder, David Herro of Harris Associates, certainly isn’t convinced about the breakup idea. He believes the ‘plan to turn around the bank is working and just needs more time’ and that management ‘is doing a good job’. He also took a shot at RBR by noting that the fund has ‘hardly any skin in the game.’ Not a great start, but at least Mr. Herro is supportive of at least one of RBR’s ideas. He thinks management should seriously consider moving the investment bank’s domicile to a ‘friendlier’ locale.

The bigger problem for RBR though is that the proposal of breaking up the big banks has been discussed and rejected before, even when the banks were losing boatloads of money. Some examples include JP Morgan (JPM) – which Jamie Dimon vigorously defended against in an annual letter – and UBS (UBS) which was recently pressured by Knight Vinke to spinoff its investment bank. Few believe the kind of upside hinted at by RBR could really be generated by splitting up the bank and in fact, many are of the opinion that these units are interconnected and beneficial to customers. In other words, they generate value by being together.

Additionally, there is a lot of skepticism that they would even work as a standalone business and that even if they could, the process of splitting them would be so costly that it wouldn’t add value. For example, there are questions as to whether the investment bank could stand on its own and compete due to funding issues and the WSJ notes that even the asset management arm could struggle to remain ‘relevant’ while fighting off the passive investing trend.

Vontobel’s Andreas Venditti examined a break up of Credit Suisse two years and ‘came to the conclusion it is not viable’. Going further he noted that ‘spinning off investment banking “just isn’t going to work, you have funding and capital issues and these units work together with the investment bank bringing money to the private bank” and the private bank bringing flows to the investment bank.

Some believe that Mr. Bohli still deserves a hearing, but the WSJ’s Heard on The Street column is more dismissive stating that ‘there are things about Credit Suisse that don’t make sense, but RBR seems unlikely to provide the answer.’ Harsh. With seemingly limited public support and the bank outperforming its peers, RBR has its work cut out for it. No one said being an activist was easy. Maybe his presentation later this week will help turn the tide. Of course, the conversation might be different if the three year transformation doesn’t go as planned, but I assume no shareholder is rooting for that though.

Disclosure: Author holds no position in any stock mentioned.