It was portrayed as both a godsend for Morgan Stanley and something of a coup for Mitsubishi MUFJ Group, Japan’s biggest bank, when in October 2008 it emerged that MUFG would take a 20 per cent stake in the US bank for $9bn. The two sides agreed to merge their brokerage operations in Japan to create a new securities firm.
The deal — which saw the Japanese group become Morgan Stanley’s biggest investor through its holding of preference shares — was described as a neat move to shore up the US bank’s finances while allowing MUFG to extend its global reach.
In fact, Finance Asia among others summed it up thus:
The Japan franchise of the elite US investment bank looks set to be absorbed by the country’s largest bank. Whichever way you spin it, it appears that Japan’s premier commercial bank has taken its pound of flesh in return for the historic $9 billion capital injection into Morgan Stanley in November 2008 – if, that is, the memorandum of understanding (MOU) signed on Thursday becomes reality.
Indeed, the “if” on the MOU was very big — as subsequent negotiations proved to drag into 2009. Even as the two sides continued to tussle over the structure of the union, they announced in late June a further venture, in US corporate lending, that they said would give the Wall Street bank extra firepower to compete with rivals.
Under the additional deal, Morgan Stanley and MUFG agreed to pool their lending resources in an effort to gain a stronger position when dealing with US companies. The new venture, as the FT reported, would draw on MUFG’s existing US loans of about $70bn and Morgan Stanley’s $30bn.
But Morgan Stanley’s fortunes have taken a radical turn for the better this year, and its share price has climbed from a low of $6.71, reached in October 2008, to above $30. By September this year, it was clear that all was not quite right with the progress of the JV deal.
On Wednesday, it became a little clearer following early reports from the Japanese financial daily Nikkei, that the joint venture would be rejigged to keep some key operations such as stock-dealing with the US company — in other words, to cut back the “merger” part of the deal and more narrowly limit the scope of the new Japanese join-venture broker.
Ahead of MUFG’s first-half earnings announcement due out later on Wednesday, the Wall Street Journal reported that the merger would be postponed from the end of March until around May. The report cites people close to the deal saying that the changes from the earlier plan “responded to regulatory concerns in both the US and Japan that included questions about which of the two global banks will take on risks associated with the joint venture’s trading book”.
Adds the Journal:
The two firms have been working on deals more often recently, with MUFG assisting on a Morgan Stanley bond offering this week, and Morgan expected to advise on a new share offering by MUFG. According to another person familiar with the situation, that new MUFG offering could be worth up to ¥1 trillion ($11 billion), and could also be announced later Wednesday.
Under their initial plan, MUFG and Morgan Stanley agreed to merge the whole units, but now the joint venture will have a two-company structure.
One of the companies will be called Mitsubishi UFJ Morgan Stanley Securities and will be 60%-owned by MUFG and 40%-owned by Morgan Stanley. Morgan Stanley’s investment banking business will come under the umbrella of this company.
The second company in the joint venture will be controlled by Morgan Stanley and will include the equity and bond trading businesses of Morgan Stanley.
We also think a steady exodus of traders, analysts and investment bankers from Morgan Stanley in Japan might hint at some deeper problems in integrating staff and certain key business divisions.
But all will be revealed, soon…
Related links:
An MUFG merger for Morgan Stanley Japan? Well yes, no, sort of – FT Alphaville
Analysts focus on share sale plans ahead of MUFG results – FT
Daiwa SMBC: more consolidation in Japan – FT Alphaville
Daiwa could face tough future when SMFG ties dissolve – WSJ
Morgan Stanley/MUFG – Lex