Attempting to cut short a potential tug-of-war among Japan's banking titans, UFJ Holdings Inc rejected a bold competing bid yesterday by Sumitomo Mitsui Financial Group to enter into merger talks.
Weighed down by bad loans, Osaka-based UFJ is already in discussions to tie up with Mitsubishi Tokyo Financial Group Inc, which would create the world's largest bank.
UFJ spokesman Akihiro Furutani said that his company was not interested in the competing bid from Sumitomo Mitsui and that it wanted to continue talks with Mitsubishi Tokyo.
"UFJ has been contacted by Sumitomo Mitsui and has rejected its offer to begin merger talks," he said.
A Tokyo court dealt UFJ-Mitsubishi Tokyo negotiations a setback this week when it granted a request from a Sumitomo Mitsui affiliate to halt talks about the trust banking part of the deal.
Sumitomo Mitsui's move was an unusually freewheeling move in Japan's conservative banking industry, but it was unclear what the bank's next move would be.
While a hostile takeover would be feasible, such mergers are extremely rare in Japan.
UFJ and Mitsubishi Tokyo, two of Japan's four banking giants, announced July 16 that they were in formal merger talks and hoped to have a basic agreement by the end of the month to complete the merger by September next year.
With combined total assets of around ?188 trillion (US$1.7 trillion), UFJ and Mitsubishi Tokyo would create the world's largest bank by assets, surpassing US-based Citigroup Inc's US$1.19 trillion.
On Tuesday, however, the banks were ordered to stop their discussions by the Tokyo District Court, which acted at the request of Sumitomo Trust and Banking. The court had said the talks violated an agreement in May that Sumitomo Trust had with UFJ to buy UFJ's trust banking operations.
UFJ, the smallest of the coun-try's "Big Four" banks, quickly challenged the court order, raising the likelihood of a long legal battle and delays to its merger hopes.
Under Japanese law, the court must consider UFJ's challenge and issue a new decision. If UFJ's appeal is rejected, the bank can ask a higher court to consider the case.
UFJ also had the option of trying to get Sumitomo Trust to drop its case by negotiating a settlement. But it's unclear if Sumitomo Trust would agree, since it stands to become the country's largest trust bank with a tie-up.
Analysts say a merger with Mitsubishi Tokyo would help UFJ resolve billions of US dollars of bad loans on its books left over from the collapse of Japanese assets in the early 1990s. The loans have plagued UFJ since it was formed from a merger of Tokai Bank, Sanwa Bank and Toyo Trust and Banking three years ago.
Merrill Lynch bank analyst Yoshinobu Yamada said Mitsubishi Tokyo and UFJ would be a good fit, because Mitsubishi Tokyo's global reach and big corporate clients wouldn't overlap with UFJ's strengths in retail banking.
A merger of UFJ and Sumitomo Mitsui -- which would have had assets of ?180 trillion -- would have combined two of the country's trust bank giants, Yamada told Dow Jones Newswires. But it would have also left them with a total ?2.8 trillion in debts they owe the government for a bailout in the 1990s.
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