Merger
Illustration: Adam Fitzcharles

What doest the future hold?

Brief thoughts on the MUFG and Morgan Stanley alliance

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 percent of itself for $9 billion and partner with MUFG. This deal was announced on Oct 13, 2008.

It has been about 8 months since Morgan Stanley and MUFG entered into a mutual agreement to form a “strategic alliance.” 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 percent of ownership and 40 percent for Morgan Stanley. This is the first such move in the so far rather quiet “strategic alliance” between the two banks.

What’s in it for both partners?

Well, Morgan Stanley got a white knight to save them. Without this help, the consensus was that Morgan Stanley could well have gone bankrupt and cease to exist as a firm like what happened to Lehman Brothers. or end up being purchased by someone else like what happened to Merrill Lynch. In those dark days of October 2008 the sky was falling, the world was coming to an end and everyone was just trying to stay alive to fight another day. Morgan was one of the successful survivors.

So aside from just surviving, what else did Morgan Stanley gain? Well, hopefully Morgan will gain access to commercial and retail banking expertise and this will help them better convert to a bank holding firm and expand their deposit taking activities which was one of their strategic goals at the end of 2008.

For MUFG, it is harder to see what they got out of it. First of all, they paid $9 billion for a 21 percent 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 for if I were an MUFG shareholder, I would be more than a little upset and demand to see major returns for the money spent. So what exactly is MUFG getting then?

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 percent 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. There is no reason for MUFG to co-brand operations in Japan with any company. Such a move would actually dilute their brand in their home market so full acquisition is most certainly the best choice.

Second, MUFG will probably 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. This is the “strategic” part of the alliance that MUFG stands to benefit from and the part that will help them become a global player. Nomura has the parts of Lehman Bros. it wanted to help it become a global player so MUFG must follow suit to keep up.

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. For example, MUFG still tends relies on a lot more on manual processing for a lot of it’s operations than do non Japanese banks like Morgan Stanley.

This is one of the biggest areas where MUFG can gain real value and a real advantage. In the markets milliseconds count, the faster the system and the more automated it is the more competitive the bank is. MUFG should be able to gain some nice cost saving measures out of the technology that they will inherit which in some ways helps justify the high price that they paid. MUFG will be in a nice spot should they choose to adapt the systems that Morgan Stanley has spent years developing. In fact I expect that this is what will happen in the near future.

Mergers and “strategic alliances” are touch and go and the difference between success and failure is usually very slight. We need not look further than AOL and Time Warner to see a poster child example of what happens when things go wrong. It remains to be seen what will happen with MUFG and Morgan Stanley, but we will be watching.


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