Mitsubishi to buy up to 20 percent Morgan Stanley stake

NEW YORK Mon Sep 22, 2008 1:31pm EDT

The trading price of $16.03 for Morgan Stanley (MS) rolls across the stock ticker on the Morgan Stanley headquarters building in New York's Time's Square September 18, 2008. REUTERS/Brendan McDermid

The trading price of $16.03 for Morgan Stanley (MS) rolls across the stock ticker on the Morgan Stanley headquarters building in New York's Time's Square September 18, 2008.

Credit: Reuters/Brendan McDermid

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NEW YORK (Reuters) - Morgan Stanley sold an equity stake of as much as $8.5 billion to top Japanese bank Mitsubishi UFJ Financial Group Inc (MUFG) on Monday, speeding up its transformation into a commercial bank and improving its survival prospects in turbulent times.

The investment comes a day after both Morgan Stanley and archrival 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.

The deal with Mitsubishi, the world's No. 2 bank by deposits, helped send its shares soaring as much as 14 percent, even as the Securities Broker-Dealer Index fell by 7 percent.

In the past two weeks, unprecedented turmoil has led to wrenching change for Wall Street's top firms. Once-freewheeling traders and investment bankers, humbled by losses on mortgages and buyout financing, now face stricter regulation by the Fed in exchange for their long-term survival as more stable if less lucrative companies.

"Once Morgan Stanley made the judgment that it wanted to remain independent, it needed capital," said Marshall Sonenshine, chairman of investment bank Sonenshine Partners.

The Mitsubishi investment, expected to be as large as $8.5 billion, is the latest in a series of positive developments for Morgan Stanley since last Thursday.

Last week, Morgan's stock price was sliced in half by investors who questioned if broker-dealers could survive the financial crisis. Morgan Stanley launched deal talks with a number of potential partners, such as commercial bank Wachovia Corp, and investors such as China Investment Corp.

Financial terms of the Mitsubishi deal are subject to the Japanese bank's scrutiny of Morgan Stanley.

BOOK VALUE

MUFG will acquire a stake equal to 20 percent of Morgan Stanley, paying $31.75 a share -- Morgan's book value at the end of August -- in cash, according to a person familiar with the talks. By exceeding the 9.9 percent threshold, MUFG must secure U.S. regulatory approvals.

The Mitsubishi talks have been ongoing since last week alongside other discussions, but took on greater urgency after the Fed approved Morgan's bid to be structured as a commercial bank on Sunday. The deal would bring Morgan closer ties with Mitsubishi.

"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.

Earlier Monday, MUFG said it would pay about $31 a share, or 900 billion yen ($8.49 billion), for a one-fifth stake. A MUFG spokesman had said the bank was "still working on the price."

Morgan Stanley stock rose $1.06, or 4 percent, to $28.27 on the New York Stock Exchange, where it rose as high as $31.10.

Mitsubishi would appoint one director to Morgan's board.

The investment is the latest sign Japanese banks are back on the offensive after struggling for decades under 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, an analyst at Meiji Dresdner Asset Management in Tokyo.

JAPAN PLAN

Mitsubishi recently announced plans to acquire full control of UnionBanCal Corp, a California retail bank. Last month it sweetened its bid to $3.5 billion, to acquire the 35 percent stake it doesn't already have.

Morgan Stanley is shoring up its defenses after last week's turmoil drove No. 4 Wall Street firm Lehman Brothers Holdings Inc into bankruptcy, pushed American International Group Inc to the brink and spurred Merrill Lynch & Co Inc to merge with Bank of America Corp.

Morgan Stanley has held merger walks with Wachovia and other banks. It also has 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 will seek out more deposits through its extensive retail brokerage network. MUFG is the world's No. 2 bank holding company with $1.1 trillion in bank deposits, Morgan Stanley said.

"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 CEO John Mack said.

Morgan Stanley, which has one of the country's largest private wealth management businesses, has about $36 billion in deposits in bank units. Mack said the investment and alliance would help Morgan Stanley expand in Asia.

(Reporting by Nathan Layne and Junko Fujita in Tokyo, Dan Wilchins and Megan Davies in New York; editing by Sue Thomas/Jeffrey Benkoe)

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