Morgan Stanley is considering a merger to revive investor confidence after its shares sank 42 per cent this week following the collapse of Lehman Brothers Holdings Inc.
John Mack, Morgan Stanley’s chief executive officer, got a call from Wachovia Corp yesterday indicating interest, said a person with knowledge of the matter, declining to be identified because the talks aren’t public and may end without an agreement. The New York-based firm is also seeking ways to limit short sales of its stock, the person said.
Morgan Stanley and Goldman Sachs Group Inc tumbled the most ever yesterday as the deepening credit crunch fuelled concerns about their ability to fund themselves without the access to deposits that banks have. A deal involving Morgan Stanley would leave Goldman Sachs as the only independent Wall Street investment bank, after Merrill Lynch & Co sold itself to Bank of America Corp to avoid the fate of bankrupt Lehman.
“John Mack certainly needs the stability of the core deposit base at Wachovia at this point, so I can see some of the broad outlines of such a deal, but I think investors would greet that one with some incredulity,” Nancy Bush, founder and analyst at NAB Research LLC, said in an interview on Bloomberg Television. “This is a very extraordinary time.”
Morgan Stanley rose 2.3 per cent to $22.25 in New York trading, after falling 24 per cent yesterday.
Hard to Duplicate: Mack tried unsuccessfully earlier this week to persuade Vikram Pandit, CEO of Citigroup Inc, to combine their two companies, the New York Times reported today, citing people briefed on the talks.
“The smartest people at this firm are focused on solutions,” Morgan Stanley spokesman Mark Lake said. Wachovia spokeswoman Christy Phillips-Brown said it was bank policy not to comment on “market rumors or merger speculation.”The New York Times reported that Wachovia contacted Mack.
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Wachovia, the fourth-largest US bank, plunged 21 per cent after saying it would support $494 million of Lehman credits held by its Evergreen Investments money market funds. The lender, based in Charlotte, North Carolina, has a market value of $19.7 billion, 18 per cent less than Morgan Stanley’s $24.1 billion.
Wachovia Chief Executive Officer Robert Steel, hired in July to replace Kennedy Thompson, is cutting $1.5 billion of expenses and reducing risk to cope with mounting losses from Wachovia’s $122 billion of option adjustable-rate mortgages.
‘Very Valuable’: “If you can create a merger between Morgan Stanley and another bank, that franchise will be very valuable because there are not a whole lot of other international investment-banking platforms out there that can duplicate that,” said Charles Peabody, partner and research analyst at Portales Partners LLC in New York. “Marrying that funding structure, which Wachovia does have, is a positive.”
Morgan Stanley and Goldman have defended their business model, saying they have adequate capital and don’t need the deposit funding that banks have. Mack, 63, lambasted short sellers for pushing his firm’s shares lower.
In a memo to employees yesterday, Mack said the management committee is “taking every step possible to stop this irresponsible action in the market,” and he urged employees to contact clients to reassure them that the firm is performing strongly and has plenty of capital.
‘Fear and Rumours’: “There is no rational basis for the movements in our stock or credit-default spreads,” Mack wrote in the memo. “We’re in the midst of a market controlled by fear and rumours, and short sellers are driving our stock down.”
The US Securities and Exchange Commission may require hedge funds to disclose their short-sale positions and plans to subpoena the funds for their communication records, Chairman Christopher Cox said in a statement late yesterday.
CNBC reported Morgan Stanley is in talks to possibly be acquired by China’s Citic Group, citing an unidentified person.
Beijing-based Citic Group, China’s largest state-owned investment company, was established in 1979 by former Chinese Vice-Premier Rong Yiren to attract foreign capital as the nation began free-market reforms. It has 44 subsidiaries spanning industries from brokerage and banking to oil exploration.
Citic Securities Co., 23.4 per cent owned by Citic Group, in March abandoned a proposed $1 billion investment in Bear Stearns Cos after the Wall Street brokerage was bought by JPMorgan & Chase Co Citic Group Chairman Kong Dan didn’t immediately respond to an e-mail seeking comment, and calls to his secretary’s mobile phone went unanswered.
China Investment: Jeanmarie McFadden, a spokeswoman at Morgan Stanley in New York, declined to comment on the CNBC report about Citic, which also said that HSBC Holdings Plc was a possible suitor.
China Investment Corp, the state-controlled investment fund, which bought a 9.9 per cent stake in Morgan Stanley in December, is in discussions with the securities firm, the Financial Times reported earlier today, citing an entry by a Beijing correspondent in its Alphaville blog section. Bai Xiaoqing, a spokeswoman at Beijing-based CIC, declined to comment.
London-based HSBC, Wells Fargo & Co and JPMorgan Chase & Co are among the potential bidders for a Wall Street firm, according to Anton Schutz, president of Mendon Capital Advisors. Goldman and Morgan Stanley have both done deals with Chinese companies. Goldman invested in Industrial & Commercial Bank of China Ltd in 2006.
HSBC Not Interested: HSBC, Europe’s largest bank, is not in talks with Morgan Stanley and isn’t interested in pursuing a deal with the company, people with knowledge of the London-based bank’s plans said today. HSBC spokesman Donal McCarthy declined to comment.
Julia Tunis Bernard, a spokeswoman for Wells Fargo, the largest US bank on the West Coast, declined to comment. Joseph Evangelisti, a spokesman for JPMorgan, the second-biggest US bank, also declined to comment.
Credit-default swaps on Morgan Stanley, which insure against a default of the company’s debt, rose to levels typical of companies in distress.
Morgan Stanley’s plunge may add impetus to calls from Democrats in Congress for a broader effort by policy makers to address the financial crisis, including setting up a government agency to take on devalued assets.
“The private market screwed itself up and they need the government to come and help them unscrew it,” House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, told reporters late yesterday after top lawmakers met with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S Bernanke.
Frank this week proposed considering an agency to “deal with all the bad paper out there” and get financial markets “out of the box” they are in.