Morgan Stanley Jumps After Mitsubishi-UFJ Deal Closes

 Morgan Stanley soared 85 percent in New York trading after the firm sealed its $9 billion investment from Mitsubishi UFJ Financial Group Inc., giving the Japanese bank preferred stock paying a 10 percent dividend.

Mitsubishi UFJ, Japan's biggest lender, will get 21 percent of the New York-based company as previously agreed, the firms said today in a joint statement. Terms were renegotiated because Morgan Stanley's shares fell 60 percent last week. The transaction closed today, one day earlier than planned.

Morgan Stanley Chief Executive Officer John Mack, 63, is seeking to regain investor confidence after shares dropped to 62 percent below the price Mitsubishi UFJ had agreed to pay. The decline ignited concern the transaction wouldn't be completed, jeopardizing Morgan Stanley's credit rating. The shares surged $8.24 to $17.92 at 4 p.m. in New York Stock Exchange composite trading after rising as high as $19.06.

``It shows that there's nothing fundamentally wrong with the franchise, but we have a confidence issue,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York.

Under the revised deal, Mitsubishi UFJ receives $7.8 billion of preferred shares that convert to stock at a price of $25.25, down from the previous level of $31.25.

The remaining $1.2 billion is in non-convertible preferred stock. Both classes pay a 10 percent dividend, providing Mitsubishi UFJ with $900 million a year in income from Morgan Stanley. That's about 16 percent of Morgan Stanley's adjusted net income next year, based on the average of nine analysts' estimates.

Common Stock Dividend

The dividend payout ``limits your ability to reallocate capital, you don't want to tie yourself to a high dividend,'' Hintz said. He said he thinks Morgan Stanley may consider lowering its common stock dividend as a result.

``The global news isn't good yet, and investors will continue to question and focus on renegotiating deals where they can,'' said Tom Murphy, managing partner at Family Office Research & Management Ltd. in Sydney. ``Japanese capital will be a significant player in this crisis, and it won't be shy capital when it comes to deal-making.''

Treasury Secretary Henry Paulson said Oct. 10 that the government will buy equity in a ``broad array'' of financial institutions to restore market stability and ensure economic growth. ``Such a program would be designed to encourage the raising of new private capital to complement public capital,'' Paulson said.

Fed Assurance

Federal officials assured Mitsubishi UFJ late yesterday that its investment in Morgan Stanley would be protected, the New York Times reported, citing unidentified people involved in the talks. Today's statement from the two companies didn't say anything about the U.S. government providing protection.

Brookly McLaughlin, a spokeswoman for the U.S. Treasury, declined to comment.

``Despite a very challenging environment, MUFG and Morgan Stanley have demonstrated our mutual commitment to this strategic alliance and have revised the terms of our investment in the best interests of both companies and our shareholders,'' Nobuo Kuroyanagi, Mitsubishi UFJ's president and CEO, said in the statement.

Morgan Stanley stock was raised to ``buy'' from ``neutral'' by Guy Moszkowski, an analyst at Merrill Lynch & Co, in a note to investors today. He said the share price, at less than 50 percent of the firm's $31.25 book value at the end of August, discounts the ``weak'' outlook for 2009 earnings and the stock is ``cheap.''

`Critical' For Ratings

``We believe that even in a recessionary 2009, Morgan Stanley should be able to produce return on equity near 10 percent, which would return the stock much closer to book value,'' Moszkowski wrote.

George Soros, the billionaire chairman of Soros Fund Management, wrote in the Financial Times today that the U.S. government should buy preferred stock in Morgan Stanley that converts to shares at a price above what Mitsubishi UFJ agreed to pay.

Closing the investment from Mitsubishi UFJ is ``critical'' for Morgan Stanley to keep its current credit ratings, Moody's Investors Service said in a statement Oct. 9, when it placed Morgan Stanley's A1 long-term debt rating on review for downgrade.

Mitsubishi UFJ is the second overseas investor to take a significant stake in Morgan Stanley. In December, China Investment Corp. paid $5.58 billion for equity units in Morgan Stanley that pay 9 percent a year and convert to common stock in 2010, granting CIC about 10 percent of Morgan Stanley.

`Ebullience'

Moody's in August cut Morgan Stanley's long-term credit rating from Aa3. At A1, the firm now has the fifth-highest investment-grade rating.

``It's kind of hard to know how they're going to come out of this and how long the ebullience is going to be reflected in the price'' of Morgan Stanley stock, said Douglas Ciocca, managing director of Renaissance Financial Corp., which manages $1.7 billion and doesn't own Morgan Stanley. ``I certainly wouldn't go into it today.''