Will Morgan Stanley / Mitsubishi UFJ Financial Group Deal Go Through As Planned?

The Morgan Stanley / MUFG deal was the talk of the trading floor on Friday. On September 29th, MUFG agreed to buy a large 21% stake in Morgan Stanley. The deal called for a $3 billion dollar purchase of Morgan Stanley's common stock at $25.25 per share, and a $6 billion dollar investment in perpetual, noncumulative, convertible preferred shares that have a conversion price of $31.25 per share. The preferred shares have a 10% dividend.

The investment was seen as "a strong endorsement of Morgan Stanley's world-class global franchise and future potential", according to Morgan Stanley CEO John Mack. The investment in Morgan Stanley will provide the company much-needed capital to "pursue investment opportunities, bolster capital and increase its liquidity."

This is all well and good, however, have you seen the price of Morgan Stanley's shares lately?

Morgan Stanley closed at $9.68 on Friday, after hitting an intraday low of $6.71. The latest round of selling was triggered by a fear that Morgan Stanley's credit ratings may be cut, as well as a general black cloud that was hanging over the markets on Friday. There was also some thought that short-sellers were renewing their attacks on financial stocks after the short-selling ban ended earlier in the week. Talk of bear raids and short-selling cabals filled chat rooms and message boards on Friday.

Morgan Stanley's stunning collapse over the past few weeks has many investors openly wondering if MUFG will either walk away from their deal with Morgan Stanley, or at least attempt to re-negotiate the terms of the deal. The deal is expected to be finalized on Tuesday, and MUFG is insisting that it will still inject $9 billion dollars of capital into Morgan Stanley. However, MUFG spokesman Takashi Takeuchi was a bit more guarded when he was asked if MUFG would seek to renegotiate the terms of the deal - he declined to comment. However, according to an article titled "MUFG To Push Ahead with Morgan Stanley Deal" that was published in the WSJ on Friday morning, MUFG will not be seeking to re-negotiate the terms of the deal, according to "several people" in the bank.

Morgan Stanley might seem especially vulnerable at this point, and a casual market observer may think that MUFG would be crazy not to pull out of the deal, or at least re-negotiate the deal with much more favorable terms for themselves. However, MUFG is walking a very fine line and would likely draw the ire of the US government if they pulled out of the deal at this point. The US government recently lifted a restriction on MUFG's application for holding company status in the United States, and pulling out of the deal at this point certainly wouldn't score MUFG any points with the United States government, especially given how vulnerable Morgan Stanley and the rest of the financial sector is at this point. For that reason, MUFG will very likely push forward with the agreed-upon terms of the deal and eat the immediate multi-billion dollar loss. They'll lose short-term money (on paper), but score long-term points.

Another question is - how will MUFG shareholders react if management doesn't re-negotiate the terms of the deal? According to the same WSJ article that I mentioned earlier, one MUFG shareholder predicted a "backlash" and a "wave of selling" if the original deal terms are finalized.

MUFG continues to insist that the deal will close on Tuesday, October 14th. We'll soon find out if this is indeed the case, and if the finalized terms of the deal are the same.

Edit: This deal was in fact closed today, with MUFG receiving a sweetened deal. MUFG will now receive $7.8 billion of perpetual non-cumulative convertible preferred stock with a 10% dividend and conversion price of $25.25 per share, as well as $1.2 billion of perpetual non-cumulative, non-convertible preferred stock with a 10% dividend.


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