Top Ten Questions About Japan's UFJ Merger
Reviewed by Hitoshi URABE
"Top Ten Questions About Japan's UFJ Merger"
(William Pesek Jr.) Bloomberg
The article is a neatly summarized questions - and hints on possible answers - perhaps foreign analysts experienced in corporate mergers might ask in examining the turmoil over the proposed merger of UFJ. But there seem to be some points in the article where a little more knowledge or research would have provided for a clearer scope, so here are some of them.
Since last fall, UFJ was the target of scrutiny the authorities, namely the Financial Services Agency (FSA) which supervises financial institutions. It was reported that the classifications, hence the volume, of bad loans initially reported by the bank was not acceptable to the FSA, demanding UFJ to evaluate its exposure more cautiously.
Toward the end of May, when the banks were scheduled to sum up their performance for the fiscal year ended in March, the feud between UFJ and the FSA erupted. The FSA disapproved the financial results proposed by the bank for the reason that it does not suffice the criteria considered by the FSA to be of sound banking operation. UFJ, effectively being forced to put up significantly more loan loss provision than anticipated, had to book a huge loss for the term. Distrust by the FSA was so strong that it even hinted prosecuting the bank for destruction of evidences required for its inspection.
At that point, UFJ decided that it was no longer in the position to retain the necessary level of respect and confidence a financial institute needs to stay in business, and began to seek various options. From this point on, the term "merger" became a casual way of expressing, so as not to excite the relevant people, various forms of sales or acquisitions of the bank.
The first plan emerged was to sell a segment of the operation. In May, UFJ agreed to sell its trust subsidiary, UFJ Trust to a rival, Sumitomo Trust & Banking Co. (STBC), and signed a preliminary agreement. STBC is, although carrying the name of Sumitomo, a totally different and independent institution from the Sumitomo Mitsui Financial Group (SMFG), claiming to focus on and enhance trust-bank business on their own. In July, STBC and UFJ have even announced the timing and the format, which said by the end of fiscal 2005, they would establish a holding company to operate the two trust banks.
Then, on July 16, the plan for the Mitsubishi-Tokyo Financial Group (MTFG) to buy – or "merge" - the whole of UFJ, including UFJ Trust was announced. It was a genuine surprise for the STBC, and in order to guard its interest, it applied to obtain an injunction to halt the merger negotiation between UFJ and MTFG. The Tokyo District Court on July 27 ordered UFJ and MTFG to halt their negotiations - on the part where it involves the disposal of UFJ Trust (only) - for the reason that the negotiation is a breach of STBC's exclusive negotiation rights to buy UFJ Trust. The decision was challenged by UFJ for reconsideration, and the final decision by the District Court is due any minute. UFJ reportedly intends to appeal the decision to the Tokyo High Court, if necessary, to have the injunction removed.
In the meantime, as has been reported, STBC approached Sumitomo Mitsui (SMFG) lead by Yoshifumi Nishikawa, suggesting them to make an offer to by the banking segment of UFJ, whereby seeking the possibility for STBC and SMFG each to acquire their interested portions of UFJ. It is also speculated in the market that although the idea initially came from STBC, SMFG realized that the proposal would be beneficial for them no matter what the outcome. It would, of course, be more preferable if the SMFG-STBC proposal to purchase UFJ succeeds, but even if it fails, making the proposal itself would bring the traditionally independence-seeking STBC closer to SMFG, laying a route for a closer relationship, which could provide SMFG an access to the large volume of trust business STBC manages.
The tangle is expected to drag on for a while. One thing to be noted though, is that no one is concerned about the safety of their money deposited in any of the institution participating in the tournament, including UFJ. If this is a result of people's restored confidence toward the financial system, it could perhaps be said that the financial reform has virtually succeeded, and that the current phenomenon is not a backward consolidation but a healthy competition among liberalized banks in the way to achieve a better position in the global financial framework.