Japan’s track record of successful partnerships between domestic and international financial institutions is not a long one.
Merrill Lynch’s takeover of the stricken Yamaichi Securities in 1998 failed to give the US bank a firm footing in the country’s retail banking business. Citigroup also had a stop-start relationship with Nikko Cordial Securities, before it was forced to sell in 2009.
So when Mitsubishi UFJ Financial Group wrote a US$9bn check to rescue Morgan Stanley and announced a “strategic alliance” at the height of the global financial crisis in September 2008, few expected the deal to amount to much.
By the time the two partners officially launched their joint venture in Tokyo in 2010, it was already clear that Nomura was struggling to integrate the 3,000-odd staff it acquired from the wreckage of Lehman Brothers around the same time.
Fast forward seven years later, and the MUFG-Morgan Stanley partnership has silenced even the most hardened cynics. In Japan, it has combined the strengths of a global investment bank with a sprawling domestic distribution network, while in the global arena the combination of Morgan Stanley dealmaking and MUFG balance sheet has paid off for both firms. The M&A and financing work around Suntory Holdings’ US$13.6bn acquisition of US whiskey maker Beam in 2014 is a case in point.
Another major vote of confidence came in October 2014 when Mitsubishi UFJ Morgan Stanley was appointed one of the underwriters for the ¥1.435trn initial public offerings of Japan Post, the largest government sale since 1999.
Not only did MUMSS have equal economics with national heavyweight Nomura, but some detail-oriented bankers went as far as pointing out that MUMSS was named before Nomura in the finance ministry’s online announcement.
“For a foreign firm, it is everybody’s dream to have access into the Japan domestic retail market,” said a source familiar with the joint venture’s thinking. “Unless you successfully do that, you will not be able to compete head-to-head with Nomura.”
This is a scenario that competitors, the media and even clients did not envisage at the start, given a lack of successful precedents. The JV’s two similarly named entities – Mitsubishi UFJ Morgan Stanley Securities (MUMSS) and Morgan Stanley MUFJ Securities (MSMS) – also added to the early confusion. MUFG consolidates MUMSS, in which it owns 60% and Morgan Stanley 40%. Meanwhile, the US bank consolidates MSMS, in which it has a 51% voting interest and MUFG has 49%.
Internally, the focus was on making sure there were clear boundaries between different products and businesses when it came to assigning deals and distributing fees.
“We made one thing very clear – it was very obvious that MUFG will take the majority from the economic point of view because of the background of this transaction,” said the source.
“However, we should give credit to MUFG for understanding the strength of MS on the IBD and capital markets business, and therefore being prepared to rely on MS management of the business.”
MUFG and Morgan Stanley combined their respective investment banking businesses in Japan under MUMSS, while giving Morgan Stanley the right to appoint its CEO. Meanwhile, capital markets were split between the two entities of the JV in order to serve distinct groups of clients.
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