The deal market is being upended while potential buyers and sellers assess the sweeping government plan to buy illiquid financial assets and weigh options created by the Federal Reserve's decision to let Morgan Stanley and Goldman Sachs Group Inc. become commercial banks.
"All this rapid change, it completely changes the landscape" for deals, James Gardner, the head of investment banking at Commerce Street Capital LLC in Dallas, said in an interview Monday.
Though its details are still being hashed out, the Treasury Department's plan to buy up to $700 billion of troubled assets, if approved, plus the Securities and Exchange Commission's moratorium on the short-selling of financial stocks, could give beleaguered companies a period of calm in which to assess a wider range of suitors while markets are steady.
Struggling financial companies looking to sell, including Washington Mutual Inc., might be able to unload the soured mortgages crippling their balance sheets. This could give sellers new hope and more options. But it could also tempt buyers to wait for federal assistance to sweeten a deal's prospects.
Time may not be on Wamu's side, however. Moody's Investors Service late Monday cut its rating on the preferred stock of Wamu's Washington Mutual Bank further into junk territory, to Ca from B2, and downgraded its view of the bank's financial health, to E from D-plus. Moody's analysts said their bleak outlook on Wamu's condition is a strong indicator that it will sell itself, probably with federal assistance.
Though Morgan Stanley was talking late last week with Wachovia Corp. about a possible merger, it, too, now has more options, and a Wachovia deal might be on hold. CNBC, citing a Morgan Stanley source, said deal talks were at least temporarily shelved Monday.
"I don't think you can call it 'likely' right now, but I don't think it's completely off the table," Mr. Gardner said. "Goldman and Morgan Stanley still just might have to find partners to be able to compete" with the large commercial banks that have investment banking operations, like Citigroup Inc.
That circle got wider this year as JPMorgan Chase & Co. bought Bear Stearns Cos. and Merrill Lynch & Co. Inc. agreed to be bought by Bank of America Corp.
At least one analyst said Merrill Lynch's sale to B of A could face growing investor concern because it is difficult to judge whether prices are fair, a development that could force companies to alter deal terms in order to win shareholder approval.
Glenn Schorr, an analyst at UBS AG, wrote in a research note Monday that Merrill's shareholders might "be less interested" in a deal because, if assisted by the federal bailout, both buyer and seller might have to further write down their mortgage-related assets if they are sold at a steep discount to an entity operated by the Treasury.
There is no doubt that this combination of circumstances is giving both Goldman and, more immediately, Morgan Stanley reason to seek out commercial bank partners.
Observers are not ruling out a Morgan Stanley-Wachovia pairing, but both companies, and others, have reason to reassess their options, which could include tapping the markets to raise capital instead of, or before, making any deal.
"Given the possible benefits of government intervention, investors may be more open to this, and I would not be surprised to see more banks come to market to raise capital," Terry McEvoy, an analyst at Oppenheimer & Co., said in an interview Monday.
Indeed, Mitsubishi UFJ Financial Group Inc. said Monday that it plans to buy up to a 20% stake in Morgan Stanley, which like Goldman said it had sought government approval to operate as a commercial bank to give it flexibility to pursue new opportunities. The Japanese bank, which is in the midst of buying up the stake in UnionBanCal Corp. that it does not already own, has made it known it wants to expand its U.S. presence.
However, David Lazar, a managing director and the head of Middle Atlantic bank M&A for Stifel, Nicolaus & Co. Inc., said in an interview Monday that buying a bank could help Morgan Stanley as it tries to "transform" itself into a banking company along the lines of JPMorgan Chase and Citi. It will take a little time to assess what Morgan Stanley's needs are, but he said adopting a more conservative commercial bank model that is more heavily regulated means the bank will have to create more lines of revenue, probably through merger. Or it will have to persuade shareholders to accept smaller returns on their investments because of the company's diminished ability to leverage high-risk investments, Mr. Lazar said.
Bankers and analysts said it appears that Morgan Stanley and Goldman voluntarily sought the sweeping changes — as opposed to yielding to informal insistence from regulators. This apparently proactive stance indicates that each is open to deals with commercial banks, they said. Or given the shakeup caused by the Treasury's bailout plan, they might try to buy another bank's retail business — if the seller has first unloaded its toxic mortgage assets to the government.
"It's fast-moving and hard to read," but merging with or buying certain assets of commercial banks "is where they were bound to end up," Brian R. Sterling, a principal and the co-head of investment banking at Sandler O'Neill & Partners LP, said in an interview Monday of Goldman and Morgan Stanley.
David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, agreed on a conference call Monday that the former investment banks' sudden shift to commercial banking "basically fast-forwards what was inevitable."