Morgan Stanley's Gamble Pays Off -- WSJ

Value of MUFG's alliance with the U.S. firm on full display in Bristol-Myers deal

By Liz Hoffman

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 5, 2019).

When Morgan Stanley sold one-fifth of itself to Mitsubishi UFJ Financial Group Inc. in 2008, naysayers said it had sold out too cheaply in the panic and shackled itself to a sleepy Japanese bank.

"People thought we'd made a mistake," Colm Kelleher, Morgan Stanley's No. 2 executive, said recently.

Today, the alliance between Morgan Stanley and MUFG, as it is known, has done for both banks what neither could have accomplished alone. It has created a leading investment bank in Japan and given Morgan Stanley the added muscle of a $2.8 trillion balance sheet to compete with larger rivals at home, as lending takes on bigger import on Wall Street.

The partnership's value was on clear display Thursday when pharmaceutical giants Bristol-Myers Squibb Co. and Celgene Corp. announced their merger. Morgan Stanley and MUFG will together lend $33.5 billion to back the deal, one of the biggest bridge loans on record.

Morgan Stanley couldn't write a check that size by itself. Even behemoths like JPMorgan Chase & Co. tend to max out around $25 billion to a single borrower. Goldman Sachs Group Inc. and Barclays PLC raised eyebrows in 2017 by each lending $20 billion to finance CVS Health Corp.'s takeover of Aetna Inc.

By bringing in MUFG, Morgan Stanley keeps the loan's fees -- and bragging rights -- away from U.S. rivals. Freeman Consulting Services estimates the two firms could split up to $170 million, on top of millions more Morgan Stanley will earn as an adviser to Bristol-Myers.

The partnership traces to September 2008, when MUFG bought a 21% stake in Morgan Stanley after skittish investors dumped the bank's stock. The $9 billion investment was a badly needed lifeline and helped calm investors who had worried Morgan Stanley would follow Lehman Brothers into bankruptcy. Morgan Stanley shares rose after the deal was announced.

The pair later set up two joint ventures to combine their strengths: Morgan Stanley's in international deal-making and stock underwriting, MUFG's in Japanese corporate and retail banking.

With an $865 billion balance sheet -- one-third the size of JPMorgan or Bank of America Corp. -- Morgan Stanley struggles to compete in situations where clients want money, not just advice. MUFG's Yen306 trillion ($2.8 trillion) balance sheet has helped.

Last year, the two firms teamed up to provide a $27 billion loan for Cigna Corp.'s takeover of Express Scripts Holding Co., which was Morgan Stanley's largest lending commitment until this week. "That is not something typically you would expect from Morgan Stanley," Mr. Kelleher said at the time. "You'd expect that from one of the big lending banks."

In MUFG's 24% stake, Morgan Stanley Chief Executive James Gorman also gets a steadying presence in turbulent moments -- for example, when an activist investor took a stake in the bank in 2016.

MUFG, meanwhile, has gained a foothold on Wall Street, avoiding the pitfalls of other Japanese banks that have struggled to crack the U.S. market, or done so in fits and starts. "Building from scratch takes too long," MUFG CEO Nobuyuki Hirano said in a recent interview.

MUFG also gets to record a chunk of Morgan Stanley's profits -- up 40% since 2014 -- as its own. Mr. Hirano, who worked as a young investment banker at Morgan Stanley covering big paper companies, sits on Morgan Stanley's board and meets twice a year with top executives including Messrs. Gorman and Kelleher.

The partnership has succeeded in Japan, too, where Morgan Stanley underwrites securities and distributes to MUFG's millions of retail clients. The firm, which ranked 10th in Japanese M&A in 2009, has been No. 1 four of the past six years, and won roles on high-profile initial public offerings of Japan Airlines and Japan Post.

Mr. Gorman said in 2017 that his firm and MUFG had teamed up for about 500 transactions globally to date since starting their partnership. "Being partnered with...the monster in the marketplace has been tremendously advantageous," Mr. Gorman said.

The two banks have discussed ways to broaden their partnership, including by selling Morgan Stanley's retail brokerage services to MUFG's customers in Japan. Morgan Stanley largely got out of overseas wealth management in 2014 after retreating from Europe.

Write to Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

January 05, 2019 02:47 ET (07:47 GMT)

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