Morgan Agrees to Revise Terms of Mitsubishi Deal
By LOUISE STORY and ANDREW ROSS SORKIN
Published: October 12, 2008
The embattled investment bank Morgan Stanley announced Monday morning that it had closed its deal to sell a 21 percent stake to a large Japanese bank, securing a $9 billion lifeline.
The deal had fallen into question last week as Morgan Stanley’s stock lost about 59 percent of its value. It completion was considered a crucial step in the federal government’s strategy for revitalizing the financial system by luring outside investment while it considers buying stock in banks directly.
Mitsubishi UFJ, the world’s second-largest bank, invested $9 billion in Morgan Stanley as planned, but the Japanese bank demanded better terms. The two banks spent the weekend in negotiations to come up with a plan that could be announced before the markets opened on Monday morning. The hope is that Mitsubishi’s backing will stem the tide of doubt about Morgan Stanley’s future.
The original terms said that Mitsubishi would purchase $3 billion in common stock and $6 billion in convertible preferred stock. In the new deal, all of the investment is in preferred stock. Though the total investment remains the same, the Japanese bank is paying lower prices per share — $25.25 instead of $31.25. Morgan Stanley will pay Mitsubishi a 10 percent dividend on the entire investment instead of paying a dividend on only part of the investment, as previously planned.
A portion of the Japanese investment is now in nonconvertible preferred stock, a departure from the previous plan to issue common equity and convertible preferred stock.
The chief executive of Mitsubishi UFJ, Nobuo Kuroyanagi, said Monday in a statement, “Despite a very challenging environment, M.U.F.G. and Morgan Stanley have demonstrated our mutual commitment to this strategic alliance and have revised the terms of our investment in the best interests of both companies and our shareholders.”
Under the new deal, half of the convertible preferred stock automatically converts after one year into common stock when Morgan Stanley’s stock trades above 150 percent of the conversion price for a certain period and the other half converts on the same basis after year two. The non-convertible preferred stock is callable after year three at 110 percent of the purchase price.
Announcement of the revised deal might help calm markets worldwide, which sank last week because of escalating concerns about the fate of financial institutions. Investors might read the investment as a sign of confidence in the bank’s future.
The announcement came after federal officials assured Mitsubishi UFJ late Sunday that its planned investment would be protected, according to people involved in the talks.
The Treasury’s assurances amount to another extraordinary move by the government and could serve as a model for future deals. The tense, weekend talks were so critical to the financial markets that they drew in both the Treasury and the Japanese government.
Mitsubishi and the Japanese government pressed the Treasury Department to guarantee that if the United States were to inject money into Morgan Stanley at a later time — a step the Treasury has ruled out for now — the move would not wipe out Mitsubishi’s investment.
Investors suffered deep losses when the government effectively nationalized the nation’s largest mortgage finance companies, Fannie Mae and Freddie Mac. The Treasury has said it might use some of the $700 billion bailout package authorized by Congress to take direct stakes in banks, but it has not spelled out how it would do so. Many prospective investors, like sovereign wealth funds, have been sitting on the sidelines, reluctant to invest in financial services companies while the government’s plans remain uncertain.
Officials from the Treasury Department declined to comment Sunday night.
Analysts estimate that Morgan Stanley has more than $100 billion in capital, but the firm has struggled to regain investors’ confidence since the collapse of Lehman Brothers last month. Investors have become so unnerved about the health of the financial industry that Morgan Stanley’s stock has plummeted nearly 82 percent this year, closing at $9.68 on Friday.
Henry M. Paulson Jr., the Treasury secretary, had urged both companies to devise a private-market solution and has indicated that he does not believe that Morgan Stanley needs capital from the government. However, Treasury officials privately hinted to members of both companies that the government would back Morgan Stanley if it came to that, these people said, suggesting that he does not want to repeat the troubles that resulted from allowing Lehman Brothers to go bankrupt.
George Soros, the prominent investor, wrote in a column in The Financial Times that the United States government needed to rescue Morgan Stanley.
“The Treasury should offer to match Mitsubishi’s investment with preferred shares whose conversion price is higher than Mitsubishi’s purchase price,” Mr. Soros wrote. “This will save the Mitsubishi deal and buy time for successfully implementing the recapitalization and mortgage reform programs.”
Morgan Stanley converted itself into a bank holding company one week after Lehman Brothers collapsed. That business model makes it easier for Morgan Stanley to borrow from the Federal Reserve. The firm has also lowered its debt-to-capital levels to under 20 times.
Mitsubishi has large ambitions for expansion into the United States. It recently bought the remaining shares of UnionBanCal, a bank in California, for a premium over its share price. Mitsubishi had owned the majority of UnionBanCal since 1996.
Edmund L. Andrews and Eric Dash contributed reporting.