Merrill Goes Long Japan
By Matthew Goldstein
Senior Writer
02/14/2003 12:20 PM EST
URL: thestreet.com
Merrill Lynch (MER:NYSE - news - commentary) Friday became the latest Wall Street firm to see a business opportunity in the struggling Japanese banking industry, reportedly investing $1 billion in a new division of UFJ Bank. The division will help revive the business prospects of some of the companies UFJ has lent money to over the years and which have seen their fortunes turn sour.
Japanese bankers for years have watched as problem loans accrued on their books and have lately faced government pressure to start cleaning up their acts.
The Merrill investment in Japan's fourth-largest bank comes on the heels of a similar deal announced in January between Goldman Sachs (GS:NYSE - news - commentary) and Sumitomo Mitsui Financial Group. In that transaction, Goldman will invest up to $1.27 billion in Japan's second-largest bank by purchasing an equivalent amount of convertible preferred stock. The Japanese lender plans to use the infusion of cash to strengthen its balance sheet and tackle its own mountain of bad loans.
The deal between Merrill and UFJ seems to be structured similarly, although details are still sketchy. The news of the transaction was announced by UFJ, which said Merrill would buy preferred stock in the bank's new division. Merrill, as of Friday morning, had not yet officially commented on the deal.
In making the deals, Merrill and Goldman are both betting their Japanese partners will be able to get their fiscal houses in order and provide them with entree to other business opportunities. The risk is that the banking outlook in Japan worsens and the value of their investment declines.
"This is another example of U.S. brokerage firms identifying Japanese financial institutions as an opportunity," said Brad Hintz, brokerage analyst for Bernstein & Co. "But the Street has bet on Japan before and each time disappointed."
Indeed, even as Merrill and Goldman are going into Japan, some U.S banks and securities firms are doing the exact opposite. Bank of America (BAC:NYSE - news - commentary) recently announced it is scaling back operations in Tokyo and closing its distressed-debt business venture in Japan. Other banks and brokers that have reduced operations in Japan include Lehman Brothers (LEH:NYSE - news - commentary) and J.P. Morgan Chase (JPM:NYSE - news - commentary) .
Credit agencies, meanwhile, have been less than enamored with the prospect of a U.S. bailout. Fitch Ratings recently downgraded the credit rating of four of Japan's largest banks, including UFJ and Sumitomo. And Standard & Poor's has said it's troubled by the practice of Japanese banks' reliance on selling preferred shares to raise capital. |
