18 April, 2010

Japan Bank Mergers & Acquisitions (Mitsubishi UFJ Financial Group)

Photo credit: With special thanks to my friends Don and Rupert for taking this photo of Mitsubishi UFJ Financial Group for me while visiting Tokyo, Japan in 2006.

Mitsubishi UFJ Financial Group

Mitsubishi Tokyo Financial Group

Mitsubishi Bank was one of the many industrial and commercial concerns within the massive Mitsubishi Shokai (a money clique conglomerate known as a zaibatsu). Mitsubishi started out as a shipping and warehousing business in 1870. The shipping firm’s foreign currency department began to offer banking services towards the end of the 19th century. In 1919, the group’s banking operations were formally spun off into the Mitsubishi Bank, an autonomous company with close ties to other sister firms of the Mitsubishi group.

Japan’s rapidly modernizing economy and industries in the early 20th century soon made it the dominating power in the Orient, overtaking the backward Imperial China. In 1931, Japan’s imperialistic supremacist government invaded Manchuria (North-eastern China), to be followed by a series of skirmishes between the two countries in the next several years. Using the excuse of "liberating" Asia of foreign (Western) colonialism, Japan launched an all-out war with China in 1937. Within months, Japan's better equipped and trained army took control of Beijing, Shanghai and Nanjing (hence the infamous Massacre of Nanjing). In 1941, Japan attacked Pearl Harbor and the Sino-Japanese War became part of the larger World War II. The Mitsubishi group was at the time Japan’s largest manufacturer of arms and warplanes, and used forced labour in occupied Korea and China. Mitsubishi Bank, like many other Japanese banks, also actively financed the military aggression by underwriting war bonds.

When peace finally returned in 1945, the Allied occupation authority imposed strict restrictions on the re-organization of the Japanese economy. The former zaibatsu’s were broken into hundreds of smaller companies forbidden to use their pre-war names and banned from collaborating with each other. Mitsubishi Bank was renamed Chiyoda Bank in 1948, named after the financial district in Tokyo. The regulations, however, proved too restrictive to rebuild Japan’s economy and the ban to prohibit the zaibatsu remnants to conduct business with each other was also ineffective. In 1953, as Chiyoda Bank re-opened its offices in London and New York, the bank was allowed to resume the Mitsubishi Bank name.

During the 1950s and 1960s, Mitsubishi Bank became the coordinating entity in re-establishing the links between the Mitsubishi group of companies. With its strong ties to Japan’s large enterprises, the bank focused on the corporate debt sector rather than on the personal banking market.

Mitsubishi bank began to branch out into leasing, asset management and capital markets in the 1970s. Then in 1984, the bank acquired the Bank of California (founded 1864).

Meanwhile, in the 1980s, the U.S. government started to adopt a long-running low-dollar policy, which pushed up the value of the Japanese yen, just as Japan was amassing huge trading surpluses.  Awash with excess capital and a strong currency, Japan's banks made easy credit to their clients, leading to a period of extreme domestic real estate and stock price inflation.   The ever rising prices led to more complacent lending by the banks, creating a vicious speculative cycle, which eventually pushed prices to unsustainable levels. Corporate Japan also made a number of high-profile overseas "trophy" purchases in the late 1980s, including New York City's Rockefeller Center and Columbia Pictures.  The "speculation party" ended abruptly in the early 1990s, when Japan finally raised interest rates to cool the speculation.

The asset price collapse hit Japan’s economy and banks extremely hard, and total loan losses are said to have amounted to USD $500-billion. Mitsubishi Bank suffered severe losses but still fared rather better than most rivals. As the Japanese government initially refused to let any bank go under, consolidation across the industry was encouraged instead. In 1994, the government brokered a deal under which the Mitsubishi Bank injected JPY 200-billion (USD $1.9-billion) into the ailing Nippon Trust Bank, raising its holding in Nippon Trust Bank from 5% to 69%.

In March 1995, Mitsubishi Bank and the Bank of Tokyo announced a merger agreement to form the Bank of Tokyo-Mitsubishi. The Bank of Tokyo was founded in 1880
as the Yokohama Specie Bank. In 1947, Yokohama Specie Bank was renamed the Bank of Tokyo. The bank specialized in overseas markets and had far more branches outside of Japan than within. In 1975, the Bank of Tokyo acquired a majority stake of the Southern California First National Bank and renamed it California First Bank. In 1988, California First Bank acquired UnionBancorp from Britain’s Standard Chartered plc and adopted the Union Bank name. Following the merger of parents Mitsubishi Bank and Bank of Tokyo in 1995, Mitsubishi’s Bank of California was combined with the Bank of Tokyo’s majority-owned Union Bank to form the UnionBanCal Corp.

In 2000, Bank of Tokyo-Mitsubishi, Mitsubishi Trust Bank and Nippon Trust Bank reached an agreement to combine their assets together under a new holding company called Mitsubishi Tokyo Financial Group (MTFG).

UFJ Holdings

Incidentally, UFJ Holdings was also first proposed in 2000 through the three-way merger of Sanwa Bank, Tokai Bank and Toyo Trust Bank. Of the three banks, Sanwa was the most important one.

Sanwa Bank can trace its earliest history to the 1877 founding of the Konoike Bank. Konoike Bank focused on providing personal banking to individuals in the Osaka area. In the early 20th century, as Japan’s industrial power expanded rapidly, banks such as Mitsubishi and Mitsui had the advantage as the designated banks of their respective zaibatsu groups. In order to expand its capital to compete with the zaibatsu banks, Konoike Bank in 1933 merged with Yamaguchi Bank and Sanjushi Bank and adopted the name Sanwa, meaning “tri-harmony” in Kanji Japanese.

Often shut out of the zaibatsu business, Sanwa Bank continued to focus on personal banking in the immediate post-World War II years, though in the 1950s it began to seriously break into the corporate banking market. The bank in 1959 sold its trust division to Toyo Trust & Banking, a bank that would be merged with Sanwa some 42 years later. In 1961, Sanwa created the Japan Credit Bureau (JCB), which eventually became Japan’s leading credit card issuer. (JCB eventually saw other Japanese financial institutions joining Sanwa as shareholders.)

In the 1970s, the bank expanded its international operations by establishing offices in Hong Kong, Singapore, Sydney and London, coinciding with Japan’s booming auto and electronics exports sector. The bank created the Sanwa Bank of California in 1971, and two years later bought California’s Charter Bank. Following the acquisition of Golden State Bank in 1978, Sanwa California renamed itself Golden State Sanwa Bank. In 1986, Golden State Sanwa Bank acquired Lloyds Bank California for USD $263-million, adding Lloyds’ 88 branches to its existing 29 offices. Outside of California, Sanwa’s international expansion in the 1980s concentrated in other Asian markets, with Hong Kong being the bank's most successful and profitable market in non-Japan Asia.

Like other Japanese banks though, Sanwa suffered heavy losses in the early 1990s when Japan’s speculative asset bubble burst. Due to the country’s lax accounting rules, banks were neither required to mark down the free-falling value of the repossessed properties and equities, nor to recognize the massive loan losses. The failure to face up and address the failing economy only deepened the deflation and prolonged the decade-long recession.

In 2001, in order to achieve better economies of scale, Sanwa Bank, Tokai Bank and Toyo Trust & Banking agreed to merge to form UFJ Holdings. UFJ supposedly stood for United Financial of Japan, though the bank never explained the initials.

Meanwhile, Sanwa Bank California merged with Tokai Bank of California to become United California Bank. Later in 2001, UFJ exited the American retail banking sector by selling United California Bank (with 117 branches) to BNP Paribas' U.S. subsidiary BancWest Corp. for USD $2.4-billion.

Recent transaction(s):
  • In July 2004, Mitsubishi Tokyo Financial Group agreed to buy the money-losing UFJ Holdings in a USD $29.0-billion friendly all-stock offer. In 2005, rival banking titan Sumitomo Mitsui Financial launched a competing offer with a similar value for UFJ. Mitsubishi Tokyo promised to inject JPY 700 billion (USD $6.3-billion) to strengthen UFJ’s balance sheet, whereas Sumitomo Mitsui committed to inject JPY 500-billion (USD $4.5-billion) into UFJ if its merger proposal was accepted. UFJ is said to have had JPY 3.95-trillion (USD $36-billion) in bad loans. In the end, UFJ favoured the earlier offer from Mitsubishi Tokyo Financial and the combination was finalized in 2005.
  • Following the merger, the parent company was renamed Mitsubishi UFJ Financial Group, but the retail banking arm was called the Bank of Tokyo-Mitsubishi UFJ, retaining the "Tokyo" part of the name Mitsubishi Tokyo but reversing the order. The value of the Mitsubishi Tokyo-UFJ Holdings merger was not clearly defined. While it was reported to be worth USD $29.0-billion at the time, some subsequent reports valued the transaction at a much higher USD $41.4-billion. The higher value appears to have been derived from simply summing up the market capitalization of both banks, which is not the conventional method of pricing an M&A.
  • In 2008, Mitsubishi UFJ Financial bought the 34.6% of UnionBanCal Corp. that it didn’t already own for USD $3.5-billion. Union Bank of California had 337 branches across California, Oregon and Washington states. Mitsubishi UFJ had owned a majority stake in Union Bank of California since 1996, which was formed when the Californian subsidiaries of the Bank of Tokyo and Mitsubishi Bank combined.
  • Following the burst of the U.S. housing bubble in 2007, losses from the collateralized debt obligations (CDOs) soared to hundreds of billions of dollars around the world, and the inter-bank credit market froze in the summer of 2008. Globally, banks that relied on the short-term credit market to finance their longer-term lending activities began to fail as their funding sources dried up. HBOS (Halifax Bank of Scotland), Fortis (Belgium and Netherlands) and investment bank Lehman Brothers all collapsed in September 2008. The panic rapidly spread to other highly-leveraged investment banks including Merrill Lynch and Morgan Stanley.
  • In a hastily-arranged deal, Mitsubishi UFJ Financial Group Inc. on 2008-09-29 agreed to inject USD $9.0-billion (JPY 935-billion) into Morgan Stanley in exchange for a 21% stake. The Japanese lender was to buy USD $3-billion of new common stock from Morgan Stanley, plus USD $6-billion of convertible preferred stock. With the USD $9-billion capital injection, Morgan Stanley's leverage ratio would drop from 27.6 to 22.1.
  • Subsequent to the original agreement, the global crisis worsened severely and at one point, Morgan Stanley’s entire market value fell to just USD $10-billion, making Mitsubishi UFJ's $9-billion investment for just 21% of the firm look ridiculous. The deal was re-negotiated and finalized on 2008-10-13. Under the new agreement, Mitsubishi UFJ would buy USD $7.8-billion of perpetual convertible preferred shares and USD $1.2-billion of perpetual non-convertible preferred shares. Both classes would pay a 10% interest annually.
  • On 2008-10-27, as Japanese stocks fell to their lowest level in 26 years, MUFG announced it would raise up to JPY 990-billion (USD $10.6-billion) of new capital from the market. The bank needed to replenish its capital depleted by a sudden and deep plunge in global securities prices, as well as to fulfil its commitment to invest USD $9-billion in ailing U.S. investment bank Morgan Stanley. Mitsubishi UFJ planned to sell JPY 600-billion of common stock and JPY 390-billion of non-convertible preferred stock with a yield of 4.6%.
  • In late 2008, Mitsubishi-UFJ agreed to buy NikkoCiti Trust and Banking Corp. from Citigroup for JPY 25-billion (USD $278-million).
  • In November 2009, the bank raised another JPY 1-trillion (USD $11.2-billion) in new capital by a massive securities sale.
  • Between April and June 2010, MUFG's U.S. subsidiary UnionBanCal took over the operations of Washington state's Frontier Bank and Northern Californian-based Tamalpais Bank from bankruptcy administrator FDIC. Frontier had 51 branches and Tamalpais had seven branches.
  • In December 2013, MUFG acquired 72% of Thailand's Bank of Ayudhya PCL for JPY 536-billion (THB 170-billion, USD $5.2-billion) from GE Capital International Holdings Corp. and other shareholders.  Bank of Ayudhya is also known as Krungsri and was Thailand's No. 5 bank with 600 branches and 6.2-million savings, loans and credit card accounts.
  • In January 2016, MUFG agreed to subscribe to USD $773-million worth of new shares issued by Philippine's Security Bank, acquiring a 20% stake of the bank. The investment was worth JPY 91.25-billion or PHP 37.0-billion at the time. Security Bank had a network of 260 branches in the tropical island nation.
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