Japan: Amid turmoil, Morgan Stanley gains local clout

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By:
Lawrence White
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Daiwa, Nikko split from commercial partners; Kirin/Suntory shows corporate Japan’s pragmatism

Morgan Stanley Japan Securities president Jonathan Kindred, Morgan Stanley co-president Walid Chammah, MUFG president and CEO Nobuo Kuroyanagi and Mitsubishi UFJ Financial Securities president Fumiyuki Akikusa shake hands in Tokyo on March 26

From left to right: Morgan Stanley Japan Securities president Jonathan Kindred, Morgan Stanley co-president Walid Chammah, MUFG president and CEO Nobuo Kuroyanagi and Mitsubishi UFJ Financial Securities president Fumiyuki Akikusa shake hands in Tokyo on March 26

UPDATE: Morgan Stanley/MUFG agreement goes from potential feast to dog’s dinner
19 November 2009

Morgan Stanley’s new tie-up with Mitsubishi UFJ Securities has begun to bear fruit for the US bank, amid yet another period of turmoil for Japan’s local investment banking franchises.


The joint venture gives Morgan Stanley access to clients of Mitsubishi UFJ Financial Group (MUFG), Japan’s largest banking conglomerate and the owner of the similarly named subsidiary with which Morgan Stanley has partnered. Bankers at rival firms in Tokyo are forced to admit that they are already feeling the effects of Morgan Stanley’s new clout with local clients.

The US investment bank is advising beverage maker Kirin on its proposed merger with smaller privately owned Suntory, and for one capital markets banker at a rival US institution this is merely a sign of more to come.

"I have to concede that despite criticisms at the time, the Morgan Stanley-Mitsubishi deal looks pretty brilliant now," he says. "From MS’s perspective they’re now tied to the leading corporate banking franchise in Japan, and from MUFG’s perspective they can now promise clients access to a world-class M&A franchise. Morgan always had a good M&A presence in Japan but I don’t think they’d have normally been at the table on this particular deal; they’re now going to earn a pretty sizeable fee on the back of their newfound corporate banking relationship."

Others take a different view, arguing that while Morgan Stanley might win business as a result of closer ties to MUFG clients there’s a danger it will be viewed as less independent than it was before and that its rivals might therefore be able to gain market share with non-MUFG-affiliated firms. Morgan Stanley still has some way to go in the league tables this year. It is ranked ninth by volume in Dealogic’s table for 2009, with 11 deals worth just over $10 billion.

Competitive landscape

Meanwhile the competitive landscape in Japanese investment banking is changing: Citi has sold its stake in local broker Nikko Cordial Securities, and Sumitomo Mitsui Financial Group (SMFG) has announced that it will sell its stake in its joint venture, Daiwa Securities SMBC, effectively reducing the latter’s access to SMFG’s commercial client base. Thus two of Japan’s more prominent alliances of commercial banks and securities firms have ended, and with foreign firms cutting back in Tokyo as well there are ample opportunities for firms looking to increase market share in investment banking.

New challenges

Those firms that have been cut adrift from their corporate banking parents will have to adapt fast. In revising Daiwa Securities Group’s ratings outlook to negative, a report from Fitch Ratings claimed that: "The breakdown of DSGI’s partnership with SMFG may result in lower business volumes... with the changing landscape of the investment banking industry in Japan that resulted in several completed and proposed M&As and alliances involving its rivals, DSGI will be challenged to draw up a new strategy and realign its business model to compete."

Daiwa Securities, like Nikko, has strong franchises in both retail brokerage and asset management, businesses that should be able to survive the lost affiliations with larger commercial banks.

"From MS’s perspective
they’re now tied to the leading corporate banking franchise in Japan, and from MUFG’s perspective they can now promise clients access to a
world-class M&A franchise"

Will there be much advisory business for Morgan Stanley and other firms that remain committed in Japan to fight over in the near future? Uncertainty over the direction that the country’s new leadership will take and the weak economy mean that few bankers in Japan are brimming with confidence. While some see the possibility for more outbound M&A as firms look to expand beyond a congested domestic market, this potential has been discussed for years without the expected boom ever taking off in a sustained fashion. There are reasons to be positive, however. For Yuichiro Wakatsuki, head of M&A at Bank of America Merrill Lynch, the planned beverage sector merger demonstrates an encouraging pragmatism on the part of corporate Japan in the face of a tough domestic market. "The proposed Kirin-Suntory merger has affected a lot of people’s mindsets in Japan," he says. "Not just in the consumer sector but across all industries that depend on domestic consumers, for two such strong and stable companies to think of such a deal is very interesting."


The deal, which if completed would create a globally competitive brand with annual sales of more than $40 billion, is complicated by several factors.

Suntory is still a private, family-owned company – making valuation tricky – and it is also in parallel talks to buy Orangina from private equity firms Blackstone and Lion Capital for a sum reported to be around €2.6 billion. The Kirin-Suntory deal was under the scrutiny of Japan’s Fair Trade Commission at the time of writing, with most local observers believing the companies would receive approval since Japan’s authorities are thought to be keen to encourage the creation of national champions.

Wakatsuki’s cautious optimism is borne out by the figures: data from Dealogic show an increase in Japan-related M&A volumes in the third quarter of this year, with the total of $41.1 billion in deals the highest since the first quarter of 2008.