Mitsubishi Closes $9B Investment in Morgan Stanley

NEW YORK - Morgan Stanley completed a deal Monday to receive a $9 billion investment from Japanese bank Mitsubishi UFJ Financial Group Inc., giving it a much-needed cash infusion.

The closing comes a day earlier than expected, and with revised parameters for what Mitsubishi will receive for its investment. The deal, which gives Mitsubishi a 21 percent stake in Morgan Stanley, was revised after Morgan Stanley lost nearly 60 percent of its value last week amid speculation the deal would not close.

Shares of Morgan Stanley moved sharply higher in premarket trading Monday, rising $2.72, or 28.1 percent, to $12.40.

The revised deal is more attractive to Mitsubishi, giving it only preferred stock, instead of a mix of preferred and common stock. That enables Mitsubishi to receive dividends on the entire investment. A portion of the preferred stock is convertible to common stock under the revised deal at a price lower than the initial common stock investment, allowing Mitsubishi to eventually receive more common shares.

As part of the revised deal, Mitsubishi will receive $7.8 billion in convertible preferred stock that carries a 10 percent dividend and is convertible at a price of $25.25 per share. The Japanese bank will also receive $1.2 billion in non-convertible preferred stock, which also carries a 10 percent dividend.

Last month, Morgan Stanley reached a deal for Mitsubishi to invest $9 billion in equity for a stake in the New York-based investment bank. Mitsubishi initially planned to buy $3 billion in common stock at a price of $25.25 per share and acquire an additional $6 billion in convertible preferred stock that carries a dividend of 10 percent and a conversion price of $31.25 per share.

The deal came as the credit crisis worsened and competitor Lehman Brothers Holdings Inc. filed for bankruptcy and Merrill Lynch & Co. was sold to Bank of America Corp. Morgan Stanley changed its status to a bank holding company, which will allow it to create a large deposit base.

The change was precipitated by fears that stand-alone investment banks might no longer be viable operations as credit markets continue to worsen.

Mitsubishi is one of the world's largest banks with $1.1 trillion in deposits.

Aside from the cash investment, Mitsubishi will receive one seat on Morgan Stanley's board of directors, and the pair plan to work jointly as part of a global strategic alliance.

The pair said they have already identified multiple areas for potential collaboration, including corporate and investment banking, certain parts of retail banking and asset management, as well as lending activities such as corporate loans.

The deal also helps the pair expand their global footprints.

The new capital helps Morgan Stanley increase its capital ratio and decrease its leverage ratio, two key statistics used to determine the health of a bank, especially amid the ongoing credit crisis.

On a pro-forma basis, Morgan Stanley now has a Tier 1 capital ratio of 15.5 percent, well above the Federal Reserve's 6 percent required to be considered "well capitalized."


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