TOKYO/HONG KONG Jan 16 A joint venture between U.S. investment bank Morgan Stanley and Japan's Mitsubishi UFJ Financial Group, which suffered from a culture clash in its early stages, looks to have found its footing.
The venture, spawned from MUFG's $9 billion investment in the Wall Street firm during the financial crisis, is a big winner from Suntory Holdings Ltd's $13.6 billion deal this week to buy U.S. whiskey maker Beam Inc.
That deal involves a bridge loan of up to 1.4 trillion yen ($13.5 billion) by MUFG, say people familiar with the matter - one of the biggest such loans in Asia - and will earn the two banks almost $34 million in advisory fees alone, according to Thomson Reuters/Freeman Consulting Co estimates.
Teaming up with MUFG - just before Japanese companies embarked on a series of overseas deals - helped Morgan Stanley take the top spot on Japan's M&A league table last year for the first time in more than a decade.
When the venture was born in 2010, skeptics warned it would be a messy clash of Japanese and Western corporate cultures and a difficult marriage of commercial and investment banking. People involved with the venture said at the time that the U.S. bank's style of deal-hungry investment banking clashed with MUFG's conservative, commercial lending practices.
Others, however, said Morgan Stanley's investment banking prowess, coupled with MUFG's sizeable lending book, would be a winning combination.
The pairing did struggle from the start, and had to ditch plans to merge their investment operations into a single entity in Japan due in part to regulatory reasons.
As a result, there are two joint ventures: Mitsubishi UFJ Morgan Stanley Securities and Morgan Stanley MUFG Securities - the names alone point to the complicated structure of the partnership. Questions were raised about how efficiently they could work. Plans to share each other's trading book also fell by the wayside.
In its first year, Mitsubishi UFJ Morgan Stanley Securities reported a 144.9 billion yen ($1.4 billion) net loss due to trading losses on positions held by Mitsubishi before the venture started, stoking tensions within the tie-up.
Those look to have eased, say people familiar with the venture, helped in part by a resurgence in Japanese overseas dealmaking.
The venture has succeeded in large part because MUFG, aware of its limitations, has conceded some control to Morgan Stanley bankers in managing investment banking operations, say people at the banks and those who watch them closely.
"We're commercial bankers. We don't delude ourselves that we can do investment banking business," said a senior MUFG executive.
TIES THAT BIND
The companies bring complementing strengths to the venture: Morgan Stanley's global network helps those seeking overseas acquisitions and deals, while MUFG has a strong balance sheet and deep-rooted ties with Japanese companies.
Before the Suntory/Beam coup, the venture advised on advertising agency Dentsu Inc's 395.5 billion yen acquisition of Britain's Aegis Group in 2012, with MUFG again providing finance. That deal, in particular, registered with bankers as Dentsu had historical ties with MUFG's rival Mizuho Financial Group.
"It's thanks to Morgan Stanley. We're not even the main lender for Dentsu," an MUFG executive told Reuters at the time.
A string of debt-funded overseas acquisitions from Asia underscores the importance for Wall Street banks in having a strong local partner in the region.
Japan was Asia's biggest investment banking market last year, generating $4.6 billion in fees, Thomson Reuters data show. Mergers and acquisitions contributed $881 million to that fee pool, though its share of the total dipped to below a fifth from 26 percent in 2012 as Japanese outbound deals slowed.
The tie-up still has room to improve. MUFG officials say they want the venture to have a bigger M&A advisory role for smaller companies - a notion that could run counter to Morgan Stanley's hunger for big deals.
"Nomura dominates in medium- and small-sized business advisory," said one MUFG official. "We would want to have a bigger presence there."