This month, Guest Contributor Michael Green, looks at the tie up between MUFG and Morgan Stanley. Is it a match made in heaven?
It has been about 7 months since Morgan Stanley and MUFG entered into a mutual agreement to form a “strategic alliance”. First of all let’s call a spade a spade. The unfortunate truth is that Morgan Stanley was forced into this deal which was marketed to the world as a "strategic alliance" or a “strategic partnership” but the reality is that it was a move of desperation. I am not criticizing Morgan’s moves indeed it did what it had to survive.
Back at the end of 2008 Morgan Stanley and many of its peers faced a dire situation. They needed capital badly. Morgan Stanley approached several institutions for help over a period of 2-3 weeks including Citibank and the Chinese sovereign wealth fund for help. There was none to be found. About a week or two later Morgan Stanley found help in the form of MUFG. The agreement was that Morgan would sell 21% of itself for $9 billion USD and “partner” with MUFG. This deal was announced on Oct 13, 2008.
Since then not much happened with this partnership until March of 2009 when it was announced that the Japanese operations of Morgan and MUFG will merge by 2010 with MUFG calling the shots with 60% of ownership and 40% for Morgan Stanley. This is the first such move in the “strategic alliance”.
What’s in it for both partners?
Well, Morgan Stanley got a white knight to save them. Without this help, the consensus was - and I agree - that Morgan Stanley could well have gone bankrupt and cease to exist as a firm. Also, Morgan gains access to commercial and retail banking expertise and this helps them better convert to a bank holding firm.
For MUFG, it is harder to see what they got out of it. First of all, they paid $9 billion for a 21% stake in a firm that was worth around $11 billion or so in total when the deal closed. I think MUFG vastly overpaid for what they got and I see future problems from their side.
If I were an MUFG shareholder, I would be more than a little upset and demand to see major returns for the money spent.
What does the future hold for MUFG?
I think it will be just a matter of time before they rightfully start to push for more concessions from Morgan Stanley. The first could be the full acquisition of Morgan’s Japanese operations. So far MUFG has just 60% of the total but over the next 2 years or so I can see Morgan losing their stake in the joint operation and it will be fully integrated into MUFG. This would fit in with MUFG’s plan to “bulk up” in order to go head to head with rival Nomura.
Second, MUFG should push for access to Morgan Stanley’s overseas operations. MUFG is known as a domestic bank and does not have a strong overseas operation. In order to be an international player, they would need to gain access to Morgan Stanley’s large list of global clients.
Third, one final area of potential benefit is in Technology. This is usually overlooked by mainstream media. After all a bank is about money and not technology, right?
However, when you consider that about a quarter of the employees at firms like Morgan Stanley are involved in creating new technologies to support the business and the firm spends billions on “in house” technological solutions, it is not hard to see these firms as “financial technology” firms. MUFG lags behind Morgan Stanley in some key technological process areas, ranging from back office operations to cutting edge algorithmic trading systems. MUFG would benefit greatly by adapting some of the systems created by Morgan Stanley.
Mergers are touch and go and the difference between success and failure is usually very slight. It remains to be seen what will happen with MUFG and Morgan Stanley, but we will be watching.
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Guest Contributor, Michael Green, has been living in Japan for 9 years and resides in Tokyo. He has worked in the Financial industry for most of his career. He is a specialist in Business Process Re-engineering and Project Management.
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