On Tuesday, the two leading entities, Morgan Stanley (MS) and Mitsubishi UFJ Financial Group Inc. (MTU), together announced the merger of their brokerage operations in Japan by arriving at a final agreement according to which their joint venture (JV) operations are expected to start from May 1, 2010. 

The JV follows the global strategic alliance entered in Oct 2008, whereby MTU closed a $9 billion equity investment in MS, owning a 21% stake in the company on a fully diluted basis. The MTU investment further bolsters MS’s already strong capital position, also accentuating its market position in Japan. 

Both the companies have collaborated to form two JVs namely, Mitsubishi UFJ Morgan Stanley Securities Co. Ltd. (MUMSS) and Morgan Stanley MUFG Securities Co. Ltd. (MSMS). Through these merger vehicles the companies will expand their already industry leading position along with their extensive global client network, by offering a broadened range of products and services in investment banking, capital markets, institutional as well as retail brokerage businesses.
 
While MUMSS will undertake Japan’s retail, middle markets, capital markets and sales and trading businesses of Mitsubishi UFJ Securities Co. Ltd. (MUS), the investment banking unit of Morgan Stanley Japan Securities Co. Ltd. (MSJS) will be merged with the investment banking team of MUS. 

On the other hand, MSMS will undertake the sales and trading and capital markets operations of MSJS. Consequent to this arrangement, MTU will hold 60% share in MUMSS and MSMS while MS shall own the remaining stake, including management participation from both the companies. Additionally, MS will have a 51% voting interest in MSMS while MUFG will boast the remaining 49% interest, thereby placing MSMS in the consolidated MS entity.
 
Overall, the strategic alliance has accelerated MS’s transition into the new bank holding company structure, helping it realize opportunities created by the prolonged dislocation in the financial markets. Conversely, collaboration with an industry leading global investment bank, MTU enjoys the benefits and prospects of global expansion, widened clientele base and an increase in domestic market share in Japan. The alliance is expected to be accretive to the earnings of both the companies in the medium to longer term.
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