Working acronyms

7 Oct 2013 By Rob Cox

When Mitsubishi UFJ and Morgan Stanley pooled their securities arms in Japan, even the two groups’ bankers worried the cat’s cradle structure wouldn’t work. Some four years on, the Mitsu-Stanley combination is at the top of Japan’s investment-banking league tables and rivals are examining the model as a possible template for their own businesses.

Crisis put the two banks together. As Morgan Stanley faced a run in October 2008, Japan’s biggest lender stepped in and bought 21 percent of the New York firm. In return for its $9 billion, Mitsubishi wanted Morgan Stanley’s help to raise its investment-banking game.

For regulatory reasons in Japan, structuring this proved complicated. What emerged were two joint ventures with crisscrossing ownership and governance. Mitsubishi UFJ Morgan Stanley Securities encompasses corporate finance and Morgan Stanley MUFG Securities includes capital markets, sales and trading and research.

Meshing the two firms’ corporate cultures, and very different compensation philosophies, was a hard slog. A 2011 derivatives prop-trading loss did not help and internal disagreements between the two partners were all that rivals in Tokyo’s financial district sniped about. Not anymore.

This year, Mitsu-Stanley has worked on $32 billion of M&A deals involving Japanese companies – more than any other bank, including global leader Goldman Sachs and local heavy Nomura, according to Thomson Reuters. The combined Mitsu-Stanley ranks just behind Daiwa and Nomura in raising equity capital, and ahead of Goldman, Mizuho and Sumitomo. It ranks third in corporate debt issuance.

Rivals at Japanese banks and global firms are wondering whether it makes sense to copycat Mitsu-Stanley. Many already have longstanding ties. Goldman and Sumitomo have owned chunks of each other at various times over the years. Mizuho invested in Merrill Lynch during the subprime crisis.

But Mitsu-Stanley isn’t easily replicable. Making the venture work required consistent support from top executives in Tokyo and New York. MUFG’s large stake in Morgan Stanley also helped, as it offered added assurance to the Japanese firm that it could capture any value their American partner created. And without the strategic imperative of a crisis, rival executives outside Japan may see the venture as more distraction than priority.

And there’s potential baggage to consider. Morgan Stanley bankers need to help longtime Mitsubishi clients on deals they might not normally undertake – such as Sharp’s $1.7 billion share sale, which may not be enough to save the troubled electronics maker.

But as a resurgent Japan, with its sizable fee pool, rears back into the consciousness of Wall Street bosses, there’s little doubt the Mitsu-Stanley model will get a fresh look.


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