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Morgan Stanley gets lifeline, is ready for deals

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NEW YORK — Morgan Stanley averted disaster with a $9 billion lifeline from a major Japanese bank, and on Monday declared it will use that money to pick off smaller rivals.

Just a few days ago, some on Wall Street openly questioned if the embattled investment bank would be the next to collapse amid a deepening global credit crisis. Now, Morgan Stanley appears emboldened by the 21 percent stake taken by Japanese lender Mitsubishi UFJ _ and, for now, seems to have regained the market's confidence.

Investors poured back into Morgan Stanley shares, which last week plunged 60 percent. Shares recouped $8.42, or 87 percent, to close at $18.10.

"This is Darwinism finance, literally the survival of the fittest for the banks," said Chris Johnson, chief investment strategist at Johnson Research Group. "This is Wall Street's version of the Amazing Race where these companies are going to jump through hoops and rings of fire to rebuild their businesses as quickly as possible."

The closing of the Morgan Stanley deal, which was agreed upon last month, came as Spain's Banco Santander SA said it was in talks to acquire Pennsylvania's Sovereign Bancorp Inc. Forging ahead with similar takeovers appears to be exactly what John Mack, Morgan Stanley's chairman and chief executive, plans to do now that the nation's No. 2 investment bank is on more solid footing.

Mack, 63, laid out his plan by telling employees in a memo that he "will be looking at acquisitions that might make sense for the firm." Since Morgan Stanley has now converted its structure to a safer retail bank model, the firm wants to expand its network of 500 branches and 8,500 financial advisers.

Analysts believe he will scour the market, looking for faltering retail banks around the country. And with the buyouts of Wachovia Corp. and Washington Mutual Inc. in recent weeks, it appears Morgan Stanley won't have a problem finding a target.

That's not to say the investment bank is out of the woods. The company's book value, the company's total assets minus liabilities, still remains stunningly low.

Also, there still remains reluctance on the part of banks to do business or borrow from one another as the credit crisis deepens. The U.S. government hopes to boost struggling financial companies through a $700 bailout plan, of which some of the money would be used to recapitalize hobbled U.S. banks through direct investments.

But, for the most part, analysts appeared relieved.

"Worst case, if confidence does not return, we believe Mitsubishi would likely step in to protect its investment by buying a majority stake in Morgan Stanley," said James Mitchell, an analyst with Buckingham Research Group. He said such a transaction would combine "Morgan Stanley with the deposit-rich balance sheet of Mitsubishi."

The government was instrumental in ushering through a deal for Morgan Stanley by assuring Mitsubishi UFJ that its investment would be protected. The Japanese lender, the world's second-largest bank, agreed late Sunday on amended terms that were slightly more favorable to it.

"Despite a very challenging environment, (Mitsubishi UFJ) and Morgan Stanley have demonstrated our mutual commitment to this strategic alliance and have revised the terms of our investment in the best interests of both companies and our shareholders," said Nobuo Kuroyanagi, the Japanese bank's president and CEO, in a statement.

Under the revised deal, Mitsubishi will receive only preferred shares, with $7.8 billion eventually convertible to common stock. The original deal called for Mitsubishi to receive a mix of preferred and common stock.

The new deal enables Mitsubishi to receive a dividend on the entire investment, and calls for a lower conversion price when the preferred stock is eventually converted to common stock.

The deal came last month as the credit crisis worsened and competitor Lehman Brothers Holdings Inc. filed for bankruptcy and Merrill Lynch & Co. was sold to Bank of America. Morgan Stanley and Goldman Sachs, the last two major Wall Street investment banks standing, changed their status to bank holding companies to obtain the kind of large deposit base that analysts believe helps add stability.

The change was precipitated by fears that stand-alone investment banks might no longer be viable operations as credit markets continue to worsen.

Aside from the cash investment, Mitsubishi will receive one seat on Morgan Stanley's board of directors, and the pair plan to work jointly as part of a global strategic alliance.

The pair said they have already identified multiple areas for potential collaboration, including corporate and investment banking, certain parts of retail banking and asset management, as well as lending activities such as corporate loans.


AP Business Writer Sara Lepro contributed to this story from New York.