UBS acquires a stake in Cevian Capital. How the activist's track record with banks could help it create value.

Company: UBS Group AG (UBS)

UBS AG is a Switzerland-based holding company that operates as a wealth manager with specialized asset management and investment banking capabilities. The company's operations are conducted through its subsidiaries and are divided into four business divisions: global wealth management, personal and corporate banking, asset management, and investment banking.

Stock Market Value: $106.9B ($30.89 per share)

Activist: Cevian Capital

Percentage Ownership:  1.3%

Average Cost: n/a

Cevian Capital is a European investment firm that acquires significant ownership positions in publicly listed companies. The firm's strategy is to enhance long-term value through active ownership, and it is often referred to as a "constructive activist." Cevian Capital is the largest and most experienced dedicated activist investor in Europe, having been founded in 2002. The firm's work at companies is typically supported by other owners and stakeholders, and its goal is to help companies become better and more competitive over the long run.

What's happening

On Dec. 19, UBS Group AG revealed that Cevian Capital had acquired a roughly $1.3 billion stake in the company.

Behind the scenes

Cevian is a renowned leader in international activist investing, with over 20 years of experience. The firm is widely regarded as the benchmark for activism in Europe. Cevian typically holds significant stakes and has a long-term investment perspective. As an active shareholder, the firm will also take on board seats in many of its core portfolio holdings. Currently, Cevian's professionals serve on the boards of 10 portfolio companies in six different countries.

UBS is a global wealth manager with unique market positions and financial strength, yet it is often viewed and priced as an ordinary bank. The majority of its business is wealth and asset management, which accounts for 60% of its global revenue. UBS is one of the largest wealth managers in the United States, but it is also the largest wealth management firm in the world, with three times the assets of the second-largest firm. Additionally, 55% of its wealth management business is outside of the Americas. Twenty percent of UBS's revenue comes from Swiss retail and corporate banks, where the company is the number one player. Another 20% of its revenue comes from investment banking. However, unlike many of its peers, UBS's investment banking is primarily used to support wealth and asset management, and it is not a risk-taking business. As a result, only 25% of UBS's tangible equity is from investment banking, compared to 70% for Morgan Stanley. In contrast, Morgan Stanley is a bank with a wealth management business, while UBS is a wealth manager with a banking business. You would expect the steady, predictable, lower-risk revenue of a

UBS is currently trading at a 50% discount to the market in Europe, making it an attractive investment opportunity. Despite being in the middle of a restructuring following the merger with Credit Suisse, UBS is an undervalued but high-quality business with significant improvement potential. Long-term investors like Cevian see this as an opportunity to invest in the bank, as they believe that getting Credit Suisse integrated and optimizing performance could lead to UBS shares trading at $58 versus $30.89 today.

Cevian has a significant position worth $1.3 billion, which is almost 10% of the $14 billion it manages. Based on the firm's philosophy and history, it has likely been building this position for several months while constructively engaging with management. Currently, Cevian is not seeking a board seat, indicating that it is aligned with management and having productive discussions on matters such as profit potential. However, if Cevian decides to take a board seat in the future, it will bring with it its experience and successful track record in other banking companies, such as its current position in Nordea Bank.

Ken Squire is both the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.