Investment banking: MS and MUFG pluck confusion from complexity

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By:
Lawrence White
Published on:

Full merger plans become two subsidiaries; Alliance prevents sale of stake in MS for now.

Morgan Stanley and Mitsubishi UFJ Financial Group have scaled back plans to fully merge their securities operations in Japan, citing "recent trends in the global financial regulatory environment" in a jointly released November 18 update to the original plan announced in March. Rather than create a single joint venture, the parent firms will continue to operate two subsidiaries.

The first, Mitsubishi UFJ Morgan Stanley Securities (already being referred to as MUMSS), will contain the existing wholesale and retail business of Mitsubishi UFJ Securities while gaining the investment banking operation of Morgan Stanley Japan.

The second, Morgan Stanley MUFG Securities (MSMS), will include the remaining non-investment banking operations of Morgan Stanley Japan – namely capital markets underwriting, sales and trading, securitization and prime brokerage. The idea is that MUMSS will take the role of deal origination through a combination of Morgan Stanley’s investment banking expertise and MUFG’s deep client networks in Japan, with the resulting underwriting, sales and trading duties shared between the two entities – both of which will retain those capabilities – according to criteria dictating priority that have yet to be determined.

"We had been talking to MUFG
for a long time before the
current arrangement was decided, the turmoil last year
just gave us an opportunity
to reset these talks and
then come to an agreement"

A senior official at Morgan Stanley, who did not wish to be named but was authorized to respond to
Euromoney’s questions about the announcement, said when asked why the firms had changed their plans: "The reasons for this decision are complex if you drill down, but from a broad perspective quite simple: our goal is to take full advantage of both firms’ networks and strengths, and the easiest way to do that is through a two-company structure."

The reference to the global regulatory environment in the press release suggests another reason for the decision. The two banks are concerned that any new regulations on the extent to which owners of a venture must be in control of its transactions could make life difficult under a single-entity structure. US regulators, in other words, might worry that Morgan Stanley did not have sufficient control of the balance-sheet exposure arising from the single entity while regulators in Japan might have similar fears given MUFG’s seemingly continuous need for fresh capital.

Several informed observers of both firms in Tokyo independently suggest one interesting idea: given that Morgan Stanley is now relatively well capitalized and MUFG is not, in a reversal of the situation they found themselves in when MUFG invested in the US bank, why does the Japanese firm not sell back some of those shares?

The official from Morgan Stanley did not wish to comment on the record about whether MUFG might sell back Morgan Stanley’s preferred shares. A spokesperson for the firm instead referred Euromoney to comments made by MUFG chief executive Nobuo Kuroyanagi when he was asked the question by a Japanese reporter at MUFG’s earnings conference. Kuroyanagi said that he did not expect a sell-back for now because both firms regard their global alliance as important.

Rejection

Asked whether the new arrangements are the result of a change in the fortunes of Morgan Stanley and Mitsubishi UFJ Financial Group relative to when the latter invested in the US firm, the Morgan Stanley official told Euromoney: "We would categorically reject that suggestion. Remember that we had been talking to MUFG for a long time before the current arrangement was decided. The turmoil last year just gave us an opportunity to reset these talks and then come to an agreement."

Adding further complexity to the situation are the issues of ownership and leadership. Briefly, MUFG will own 60% of MUMSS and appoint its president and chief executive; Morgan Stanley will own 40% and appoint a chairman and a chief executive of investment banking. MUFG will own 60% of MSMS but take just 49% of voting rights, with Morgan Stanley taking the balance of the ownership and voting rights. MUFG will appoint the chairman and Morgan Stanley the chief executive.

Asked whether clients might not be confused by the new arrangements and which entity they ought to be dealing with, the Morgan Stanley official conceded that there would be a lot of work to do in that regard but did not offer further details.