NEW YORK (Reuters) – Mitsubishi UFJ Financial Group Inc (MUFG), Japan’s largest bank, said on Monday it planned to acquire as much as 20 percent of U.S. investment bank Morgan Stanley as part of a broader strategic alliance.
The investment comes a day after both Morgan Stanley and Goldman Sachs Group Inc were granted approval to become bank holding companies regulated by the U.S. Federal Reserve, effectively ending the investment banking model that has dominated Wall Street for more than 20 years.
After two weeks of financial markets turmoil, the Wall Street landscape has suffered a wrenching transformation, and the two previously freewheeling companies will now be subject to much tighter regulation by the Fed, including tough capital requirements.
The Mitsubishi investment, estimated to be as large as $8.5 billion, is the latest in a series of positive developments for Morgan Stanley, the second largest broker-dealer, after its stock price was sliced in half by anxious investors, worried if it could survive the worsening financial crisis.
After the Mitsubishi deal and Morgan Stanley’s conversion into a commercial bank, its shares soared as much as 14 percent.
Financial terms of the deal are subject to Mitsubishi’s scrutiny of Morgan Stanley’s businesses and assets. MUFG has entered into a nonbinding letter of intent for an investment that “would eventually reach 20 percent” of its equity, Morgan said in a statement.
“This is another step for Morgan Stanley’s continuing independence. Morgan Stanley has improved its bargaining position for anything it does with respect to a merger or acquisition,” said Michael Holland, who oversees more than $4 billion of investments as head of Holland & Co.
“They have a big investor now standing behind them, with a lot more assets to invest,” Holland added.
MUFG estimated it would pay $31 per Morgan share, or a total of 900 billion yen ($8.49 billion), for the one-fifth stake.
Morgan Stanley stock rose $2.54, or 9.4 percent, to $29.75 Monday on the New York Stock Exchange, where it rose as much as $31.10 earlier in the session.
In a statement, Mitsubishi said it would have the right to appoint one director to Morgan Stanley’s board.
“We are still working on the price,” a MUFG spokesman said. The bank in principle it would likely buy new shares, the spokesman said, and will pay for the stake in cash.
JAPAN ON THE RISE
The investment is the latest sign that Japanese banks are back on the offensive after struggling for decades under mountains of bad loans and public debt. It also underscores the challenges faced by U.S. banks as they struggle to restore balance sheets decimated by losses on corporate loans and subprime mortgages.
“MUFG is taking advantage of U.S. financial institutions’ financially weak health to pursue its strategy to expand overseas,” said Wataru Kasatani, a financial analyst at Meiji Dresdner Asset Management in Tokyo.
Mitsubishi recently announced plans to acquire full control of UnionBanCal Corp, a California commercial bank. Last month it sweetened its bid to $3.5 billion, to acquire the 35 percent stake it doesn’t already have.
Morgan Stanley continues to shore up its defenses after unprecedented turmoil drove No. 4 Wall Street firm Lehman Brothers Holdings Inc into bankruptcy protection last week, pushed insurance giant American International Group Inc to the brink and spurred No. 3 investment bank Merrill Ly 1852008480
Morgan Stanley has been scrambling to raise capital amid the sharp fall in its share price at the same time it has held merger walks with Wachovia Corp and other banks.
It has also been talking with China Investment Corp about the state-controlled investment fund increasing its 9.9 percent stake.
Late Sunday, the Federal Reserve announced Morgan and Goldman Sachs had applied to become bank holding companies, a move expected to offer them greater stability and government support in exchange for stricter regulation.
As part of this change, Morgan Stanley said it intends to build up its commercial bank business by attracting more deposits. MUFG is the world’s second-largest bank holding company with $1.1 trillion in bank deposits, Morgan Stanley said.
“As one of the largest commercial banks in the world, Mitsubishi UFJ would be a valuable partner as we transition to a bank holding company and build our bank services and deposit base,” Morgan Stanley Chief Executive John Mack said in a statement.
Morgan Stanley, which has one of the country’s largest private wealth management businesses, has about $36 billion in deposits in bank units.
Mack also said the investment and alliance would help Morgan Stanley expand in Asia.
(Written by Joseph A. Giannone; Reporting by Nathan Layne and Junko Fujita in Tokyo, Joseph Giannone and Dan Wilchins in New York; editing by Sue Thomas/Jeffrey Benkoe)