September 30, 2004
What is going on with the UFJ merger?
For some time now, I have been hoping that something exciting would “break” on UFJ’s impending merger with Mitsubishi Tokyo Financial Group and shafting of Mitsui Sumitomo. But it’s been a month since the Supreme Court ruled in UFJ’s favor, allowing the merger to proceed as planned, and Mitsui Sumitomo has done nothing other than to say it still has not changed its position.
But the burning question that still remains is what can Mitsubishi Tokyo (or Mitsui Sumitomo for that matter) possibly be thinking? To the best of my knowledge, aside from Bloomberg's William Pesek Jr. and University of Chicago Economics Professor Anil Kashyap, no one has even dared ask this question publicly. (Happily, the commentary provided by these gentlemen has asked many of the right questions and pointed fingers in the right direction – more on this below.)
So, what’s happened so far?
First, for the most part, Sumitomo’s original offer made sense. They were hoping to buy UFJs Trust Bank operation in an effort to strengthen their own trust banking business. This might have been the only part of UFJ that was worth buying, so separating it from the rest of the group was only going to make what remained of UFJ that much less attractive to potential buyers.
Then along comes Mitsubishi Tokyo and offers to buy the whole thing, including the trust division. It probably didn’t take UFJ (or government financial authorities) too long to realize this was an easy way to avoid another publicly funded bailout, so they jumped at the chance.
But Sumitomo wasn’t done yet, because they counter with an offer of a one for one share exchange with UFJ – deal worth some 3.2 trillion yen or a 23% premium on UFJ’s share price at the time. Who knows what motivated Sumitomo to go whole hog on this one. Perhaps as the media has been reporting, part of the drive really has been fear of losing out to larger competition.
In any case, it doesn’t really matter why they wanted it, because after the courts had done their work Sumitomo didn’t have a chance in hell of getting UFJ anyway. But why have Mitsubishi Tokyo and UFJ have gone so far out of their way to ensure that nothing interferes with this merger?
Returning to Pesek’s and Kashyap’s commentary on this, Pesek’s article appeared in the IHT at the beginning of August, before things began to heat up in the courts, and took the form of a series of questions. Among the most trenchant (and still largely unanswered) are, “why would anyone really want UFJ anyway?” and, “is the government driving this, or is it merely an interested party?”
With respect to the first query, who knows? The popular explanation is of course that which ever bank can claim the UFJ prize will hold the title of largest financial institution in the world, never mind the fact that bigger is not always better when it comes to bank mergers in Japan. Just look at Resona Bank, formed in March 2003 from the merger between Daiwa and Asahi Banks. Bad + bad = worse, as everyone found out a short two months and $17 billion dollars later.
Or look at UFJ for that matter. Since its formation from the merger of ------ and ------, total employment has actually risen for the holding company although increasing costs by employing more workers (even if many of them are part-time) undercuts the logic behind such a merger. As Kashyap points out, "against that backdrop, I just don't see how MTFG gets in there and just starts slashing and getting rid of people if they haven't been able to do it when you took two very sick, weak banks and couldn't find reasons to cut there."
Hazarding a guess on the second question, it’s a relatively safe bet that the government is involved in this somehow, though proof at this point may be scare. Alluded to in Kashyap’s interview with the Daily Yomiuri is the fact that Mitsubishi Tokyo is deciding not to wait until UFJ goes under, is nationalized, and then buy it up in parts at a discount. One reason for this could be the presence of Sumitomo's offer. On the other hand, it seems more likely given the history of government involvement in the Japanese financial system that some kind of "guidance" is being given here. The merger essentially saves UFJ from an almost certian death (one hopes!) and saves the government from having to use any (more) of the public's money to bail out another unsuccessful bank.
Time (and more experience with such matters!) may prove me wrong on this but...
But the burning question that still remains is what can Mitsubishi Tokyo (or Mitsui Sumitomo for that matter) possibly be thinking? To the best of my knowledge, aside from Bloomberg's William Pesek Jr. and University of Chicago Economics Professor Anil Kashyap, no one has even dared ask this question publicly. (Happily, the commentary provided by these gentlemen has asked many of the right questions and pointed fingers in the right direction – more on this below.)
So, what’s happened so far?
First, for the most part, Sumitomo’s original offer made sense. They were hoping to buy UFJs Trust Bank operation in an effort to strengthen their own trust banking business. This might have been the only part of UFJ that was worth buying, so separating it from the rest of the group was only going to make what remained of UFJ that much less attractive to potential buyers.
Then along comes Mitsubishi Tokyo and offers to buy the whole thing, including the trust division. It probably didn’t take UFJ (or government financial authorities) too long to realize this was an easy way to avoid another publicly funded bailout, so they jumped at the chance.
But Sumitomo wasn’t done yet, because they counter with an offer of a one for one share exchange with UFJ – deal worth some 3.2 trillion yen or a 23% premium on UFJ’s share price at the time. Who knows what motivated Sumitomo to go whole hog on this one. Perhaps as the media has been reporting, part of the drive really has been fear of losing out to larger competition.
In any case, it doesn’t really matter why they wanted it, because after the courts had done their work Sumitomo didn’t have a chance in hell of getting UFJ anyway. But why have Mitsubishi Tokyo and UFJ have gone so far out of their way to ensure that nothing interferes with this merger?
Returning to Pesek’s and Kashyap’s commentary on this, Pesek’s article appeared in the IHT at the beginning of August, before things began to heat up in the courts, and took the form of a series of questions. Among the most trenchant (and still largely unanswered) are, “why would anyone really want UFJ anyway?” and, “is the government driving this, or is it merely an interested party?”
With respect to the first query, who knows? The popular explanation is of course that which ever bank can claim the UFJ prize will hold the title of largest financial institution in the world, never mind the fact that bigger is not always better when it comes to bank mergers in Japan. Just look at Resona Bank, formed in March 2003 from the merger between Daiwa and Asahi Banks. Bad + bad = worse, as everyone found out a short two months and $17 billion dollars later.
(Chart Source: Economist.com)
Or look at UFJ for that matter. Since its formation from the merger of ------ and ------, total employment has actually risen for the holding company although increasing costs by employing more workers (even if many of them are part-time) undercuts the logic behind such a merger. As Kashyap points out, "against that backdrop, I just don't see how MTFG gets in there and just starts slashing and getting rid of people if they haven't been able to do it when you took two very sick, weak banks and couldn't find reasons to cut there."
Hazarding a guess on the second question, it’s a relatively safe bet that the government is involved in this somehow, though proof at this point may be scare. Alluded to in Kashyap’s interview with the Daily Yomiuri is the fact that Mitsubishi Tokyo is deciding not to wait until UFJ goes under, is nationalized, and then buy it up in parts at a discount. One reason for this could be the presence of Sumitomo's offer. On the other hand, it seems more likely given the history of government involvement in the Japanese financial system that some kind of "guidance" is being given here. The merger essentially saves UFJ from an almost certian death (one hopes!) and saves the government from having to use any (more) of the public's money to bail out another unsuccessful bank.
Time (and more experience with such matters!) may prove me wrong on this but...
UFJ - Not looking so hot...
# posted by Saru : 6:42 PM
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Thanks for reading it. As for your girlfriend's professor, I would take it with a grain of salt. I remember last year when I was in Osaka and the Hanshin Tigers looked like they might go all the way, all anyone could talk about was how a Hanshin victory would reignite the stagnant Osaka economy. So much for that.
I don't know that it's possible to judge the state of the economy in Japan by visual observation alone. I don't know what it was like to be in Japan during the bubble, so I could be missing the point of comparison, but even though signs of the slowdown were more obvious during my last visit (shuttered stores, empty lots, etc...) to me overall Japan has never felt on the surface as bad as the numbers indicate it might.
I don't know that it's possible to judge the state of the economy in Japan by visual observation alone. I don't know what it was like to be in Japan during the bubble, so I could be missing the point of comparison, but even though signs of the slowdown were more obvious during my last visit (shuttered stores, empty lots, etc...) to me overall Japan has never felt on the surface as bad as the numbers indicate it might.
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