How’s this for a wonky bit of deal-making. In confirming that it wants to buy a stake of up to 20 per cent in former investment bank Morgan Stanley, Japan’s Mitsubishi UFJ Financial said on Monday that it believes the target company is worth $31 a share, based on reported net asset value.
That, when the stock was sat at $27.21 on Friday, having already participated in the Great TARP Rally that day.
That’s known as bidding up the price of the thing you want to buy – something that is usually to be avoided in all markets, not just financial.
Still, we are talking about an alliance here – not simply a straightforward investment by the Japanese. MUFG itself is the product of the serial bank mergers in Japan from the late 1990s onwards, finally creating the biggest bank in the world by assets in 2005. From an MS standpoint, this Japanese partner has perfect form.
For what it’s worth, not everyone in the market is ready to follow MUFG’s valuation model. Here’s a raw (anonymous) valuation metric doing the rounds on Monday:
As Goldman/Morgan become banks, they start Fed mandated process of de-leveraging to commercial bank levels. This means their leverage ratio will go from 26~30x to 18x at least, which is the Citi level.
This deleveraging implies that 767bl of assets need to move off their balance sheets. Assuming Goldman and Morgan will achieve commercial banking ROEs of around 12.5% and they take a 5% haircut on assets to be sold, Goldman fair value is $158 and Morgan $27 at 10x P/E.
Related links
MUFG to buy 10-20% of Morgan Stanley – FT.com
Path opens for MTFG to pursue UFJ merger – FT story from 2005