Posted by: Kenji Hall on March 26, 2009
This week was a busy one for Japan’s biggest bank, Mitsubishi UFJ Financial Group. On March 23, the bank announced that it would lay off 1,000 employees and shut 50 branches. The reason: The bank had been hurt by the country’s slide into recession and falling stock markets globally. But on March 26, another possible rationale emerged.
At a hotel in downtown Tokyo, Mitsubishi UFJ (MUFG) Chief Executive Officer Nobuo Kuroyanagi and Morgan Stanley Co-President Walid Chammah announced that they plan to merge their securities businesses in Japan. MUFG will own 60% of the new joint venture and the right to pick its CEO, while Morgan Stanley will own the remaining 40% and will appoint the chairman. They will decide on a new name by the end of June.
Combined, the new entity will be Japan’s second-largest brokerage firm behind Nomura Securities. (They will rank third in merger advisory in Japan, trailing Nomura and Goldman Sachs, according to data analyzed by Bloomberg.) The deal comes five months after Mitsubishi UFJ Financial Group bought a 21% in Morgan Stanley for $9 billion, becoming the U.S. bank’s biggest shareholder.
Many of Japan’s megabanks had managed to avoid the worst of the U.S. subprime mortgage market’s collapse, and had taken advantage of the chance to invest in big Western rivals that were strapped for cash. Lately, though, even Japanese firms have been hammered by the deepening global recession and a drop in stock prices. Last month, Mitsubishi UFJ Financial Group (MUFG) lowered its full-year profit forecast by 77%, after reporting a $1.37 billion quarterly loss through Dec. 31. “We hope the deal with Morgan Stanley will put us closer to turning a profit,” said MUFG’s Kuroyanagi.
Japan’s financial sector has been in a state of flux lately. Last year, Nomura acquired the Asian unit of bankrupt U.S. financial firm Lehman Brothers. Meanwhile, Citigroup, Deutsche Bank, Goldman Sachs and Morgan Stanley have been eliminating jobs in Japan, to trim losses and lower costs. Last year Morgan Stanley posted only its second quarterly loss ever and has received $10 billion in financial aid from the U.S. government. (Separately, MUFG also announced today that it would delay its planned acquisition of Citigroup’s Japanese trust bank, NikkoCiti Trust.)
The timing of the Mitsubishi UFJ Securities-Morgan Stanley merger is important because new Japanese financial rules that go into effect in June will allow banks and brokerages to share client information and services—something that has been legal in the U.S. and Europe but not in Japan.
Mitsubishi UFJ and Morgan Stanley would seem a good match.
The Japanese firm has a massive Rolodex of blue chip corporate and individual clients in Japan while Morgan Stanley has the global reach and resources of a top-tier investment bank. For most of the past decade, Morgan Stanley, which became a bank in September, had been searching for a Japanese partner to improve its local business, Chammah said. Mitsubishi UFJ’s brand in Japan gives Morgan Stanley instant credibility, while Mitsubishi UFJ’s Japanese clients will get access to a broader range of global investment options, according to the two firms.
The two will draw up a plan to “rationalize”—as they delicately put it—their operations by March 2010. That’s no small task. Morgan Stanley’s Chammah ruled out language as a problem since the majority of employees in Japan are Japanese. Even so, the two sides remain far apart in other areas, such as pay and corporate culture. Western financial firms pay higher salaries and bigger bonuses than Japanese companies. What’s more, Morgan Stanley’s Wall Street risk-taking culture could clash with the ultraconservative investment views of MUFG. “It will be tough,” Kuroyanagi said. “But we see the challenges in a positive light and will devise ways to overcome them.”
Morgan Stanley could also lose some business that it now has with MUFG’s Japanese competitors. And in overseas markets, the two will likely reorganize some of their operations. Morgan Stanley has a bigger presence in China but MUFG has an A-list of Japanese corporate clients in Southeast Asia. MUFG’s Kuroyanagi said they were reviewing about 10 different overseas areas where the two might collaborate. “You would expect that at least half of them would come to fruition,” Chammah said.