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CIC to Expand Morgan Stanley Stake
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ShareOn Tuesday, the Federal Reserve Board approved Chinese Investment Corporation’s (“CIC”) bid to buy up to 10% voting stake in Morgan Stanley (MS - Analyst Report) as part of an agreement signed in 2007. The Fed allowed the stake purchase after CIC stated that it will not seek controlling interest and will not occupy more than one seat on the board of directors of the company. CIC’s current stake in the company is 2.49%.
CIC, a wealth fund wholly owned by the Chinese government for investing its forex reserves, was established in 2007. As of June 30, 2010, China had $2.454 trillion as foreign reserves with CIC’s investments valued at $300 billion.
The present stake that CIC holds in Morgan Stanley was bought in 2009. Actually, CIC’s association with the company dates back to December 2007. It had invested $5.6 billion in units of trust preferred securities and signed a purchase deal to acquire voting common stock of the company by August 2010.
With the 10% stake acquisition, CIC will become Morgan Stanley’s second largest common shareholder after State Street Corp. (STT - Analyst Report), which holds an 11.44% interest in the company. However, if the preferred shares are taken into consideration, then Mitsubishi UFJ Financial Group Inc. (MTU - Analyst Report) is the company’s largest shareholder, with a 20% stake.
The Fed stated that the approval will not have any adverse impact on competition in the U.S. banking sector. Morgan Stanley, on its part, stands to benefit from new business in China’s booming economy as a result of CIC’s association with the Chinese government.
We believe that CIC’s investment in Morgan Stanley is a part of a big expansion plan by Chinese government-owned companies and financial institutions in the global stage. In 2009, CIC had invested $1.5 billion in a Canadian resource company Teck Resources Limited (TCK - Snapshot Report).
At present, Morgan Stanley is facing major headwinds to stay competitive and regain its industry leading position in the backlash of the financial crisis. However, we believe that the company has the potential to realize the full benefits of its strategic and cost-cutting measures, increase of workforce, and inorganic growth initiatives.
Morgan Stanley shares currently retain a Zacks #3 Rank, which translates into a short-term 'Hold' rating. Also, considering the fundamentals, we are maintaining a long-term Neutral recommendation on the shares.
Read the full analyst report on MS
Read the full analyst report on STT
Read the full analyst report on MTU
Read the full analyst report on TCK
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