Morgan Stanley- Mitsubishi Deal Closes
Tuesday, October 14, 2008
U.S. officials paved the way yesterday for a private $9 billion investment into Morgan Stanley by Japan's largest financial firm by promising to protect its stake in the struggling Wall Street bank in the event of a government bailout.
Mitsubishi UFJ Financial is throwing a lifeline to Morgan Stanley in exchange for 21 percent of the company. The deal bolsters the capital position of the Wall Street firm, whose shares had declined sharply over the past few weeks as some traders bet it would collapse. Yesterday, Morgan Stanley's shares jumped 87 percent, or $8.42, to close at $18.10.
Mitsubishi had said last month it would make an investment in Morgan Stanley, but questions emerged about whether the deal would go through after Morgan Stanley's shares plunged and the Japanese stock market tanked. The new deal is more generous to Mitsubishi, offering the Japanese bank preferred stock paying a 10 percent dividend rather than a mix of common and preferred shares.
Mitsubishi also was concerned about a U.S. government plan to take equity stakes in banks, perhaps wiping out existing shareholders. Treasury officials assuaged those concerns over the weekend, pledging that if the government did make investments in banks, Mitsubishi wouldn't see its investment disappear, according to a person familiar with the conversations.
A Morgan Stanley official said company executives believed throughout the process that the bank doesn't need a capital injection from the government.
Whether the investment into Morgan Stanley would go through was seen as a sign of whether banks, especially foreign ones, would be willing to provide needed capital to struggling U.S. financial institutions. Several foreign investors made big investments in U.S. financial firms over the past year, only to see their bets go bad. Morgan Stanley said in a statement yesterday that it has more than twice the amount of capital required to be characterized as well capitalized by the Federal Reserve. The company said it also has reduced its leverage and the size of its balance sheet.
"Today's investment further bolsters our strong capital position and, together with our strategic alliance, will accelerate our transition under our new bank holding company structure and help us realize opportunities by the continuing dislocation in the financial markets," said John J. Mack, Morgan Stanley's chairman and chief executive.
Richard Bove, an analyst at Ladenburg Thalmann, has argued that assurances that financial firms are in adequate financial shape have failed to convince investors in several cases this year.
"The company must have the ability to roll over its debt and operate with counterparties in the market on a daily basis. If it can do this, it will survive and ultimately thrive," Bove wrote in a report. "If it cannot, it faces a difficult future."
Mitsubishi and Morgan Stanley said they would complement each other in several areas, including corporate and investment banking, retail banking and asset management.
"Despite a very challenging environment, [Mitsubishi] and Morgan Stanley have demonstrated our mutual commitment to this strategic alliance," said Nobuo Kuroyanagi, Mitsubishi's chief executive.
Morgan Stanley, founded in 1935 as an investment bank, last month converted into a bank holding company along with Goldman Sachs. The new status gives the companies greater government protections but requires them to undergo closer scrutiny.
The other big three investment banks -- Bear Stearns, Lehman Brothers and Merrill Lynch -- have disappeared. Bear Stearns was sold in a fire sale to J.P. Morgan Chase in March, while last month Lehman Brothers filed for bankruptcy protection and Merrill Lynch was sold to Bank of America.
Through the crisis, Morgan Stanley maintained that it had a strong capital position, but investors and creditors would not take a risk on the company. The firm's costs to raise funding through the capital markets skyrocketed.