Japan's Mitsubishi Tokyo Financial Group clinched a deal to take over troubled bank UFJ Holdings Inc on Thursday, edging out a rival in a take-over tussle to form the world's biggest bank.
But the country's third-biggest bank, Sumitomo Mitsui Financial Group, said it would press on with a rival bid for loss-making UFJ, whose market value is around $23 billion.
Under the terms of the deal unveiled in a joint statement, MTFG, the country's second-biggest bank, and fourth-ranked UFJ will form a holding company - Mitsubishi UFJ Holdings Inc - to merge the two groups' holding companies, commercial and trust banks, and brokerages from October 1, 2005.
MTFG would be the surviving company, with shares in the new firm to be listed in New York, London, Tokyo, Osaka and Nagoya.
As part of the merger, two brokerage units, Mitsubishi Securities and UFJ Tsubasa Securities, are also to merge, creating Mitsubishi UFJ Securities Co Ltd.
Current MTFG President Nobuo Kuroyanagi will be president of the new holding company, while UFJ Holdings President Ryosuke Tamakoshi will take the chairmanship.
UFJ said a merger with MTFG would enable it to keep its vow to deal with a string of large, troubled borrowers such as retailer Daiei Inc and trading company Sojitz Holdings Corp before September's half-year earnings reports.
"Taking into account the possibility we might need more capital to deal with our large borrowers before September, we thought there was more certainty for a capital injection with MTFG," UFJ's Tamakoshi told reporters at the press conference.
The two banks said their merger will enable them to realise well-balanced loan portfolios, as 53 percent of MTFG's loans are extended to big firms and overseas, while 64 percent of UFJ loans are made to individuals and small businesses.
They also emphasised the benefits to their branch networks, with 77 percent of MTFG's domestic branches located in eastern Japan, while 62 percent of UFJ branches are in the central and western part of the country.
But analysts said some benefits could be offset by the risks of forming a large bank. Mizuho Financial Group, currently the country's biggest bank, sprang from a three-way merger that nearly fell apart due to management squabbles.
"MTFG is strong in wholesale and UFJ in retail, meaning they have totally different business aspirations and skills to achieve their goals," said Yoshimasa Nishimura, a former Finance Ministry banking bureau head and now at Tokyo's Waseda University.
The banks said they would set the merger ratios later, but Goldman Sachs analyst David Atkinson said he expected a merger ratio of between 2.2 to 2.5 UFJ shares for one MTFG share, valuing UFJ at up to $27 billion.
MTFG pulled ahead in the rare Japanese take-over battle when a court gave UFJ the green light to include its profitable trust bank in the talks with MTFG.
UFJ's preferred merger partner then trumped SMFG with an offer to inject up to 700 billion yen ($6.3 billion) into UFJ by the end of September.
An MTFG-UFJ combination would create a bank with assets of about $1.7 trillion, roughly equal to the gross domestic product of Britain and eclipsing current world No 1 Citigroup's assets of $1.3 trillion.
The take-over battle comes as Japanese banks clear up years of accumulated bad debts and seek new ways to boost profit to replace the slowing traditional corporate lending business.
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