Reuters reports that Morgan Stanley (NYSE: MS) will sell between 10% and 20% of its equity to Mitsubishi UFJ -- Japan's largest bank. It is not sure how much it will buy because it has not yet conducted due diligence. "MUFG said it would decide on the amount it would pay after carrying out due diligence," according to Reuters.
This -- combined with the announcement this morning that Morgan Stanley would change into a Bank Holding Company (BHC) -- increases the odds that it will remain independent. But its survival depends on raising more capital. In order to boost its ratio of assets to equity from 30.3:1 to 11:1 to meet the BHC capital standard, for example, Morgan Stanley would either need to reduce its assets or raise $60 billion in capital. If MUFJ bought a 20% stake at the current market price -- for $6 billion -- it would only go 10% of the way to reaching the $93.7 billion in capital needed to support its $1,031 billion in assets at an 11:1 ratio.
Nevertheless, investors are happy about the news, driving Morgan Stanley up 13% in pre-market.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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