March 26 (Bloomberg) -- Morgan Stanley and Mitsubishi UFJ Financial Group Inc. will merge their Japanese securities businesses to create the nation’s third-largest brokerage.

The two companies will put Mitsubishi UFJ Securities Co. and Morgan Stanley Japan Securities Co. into a new venture by March 31 next year, they said in a joint statement. Mitsubishi UFJ, Japan’s biggest bank, will own 60 percent and New York- based Morgan Stanley will own the rest.

Mitsubishi UFJ Chief Executive Officer Nobuo Kuroyanagi is seizing on the $9 billion investment he made in Morgan Stanley in October to gain ground on local rival Nomura Holdings Inc. Together, the two banks would rank third in merger advisory in Japan, behind Nomura and Goldman Sachs Group Inc., according to data compiled by Bloomberg.

“The combination will have a complementary effect as Mitsubishi UFJ is not so strong on overseas business, whereas Morgan Stanley is,” said Nana Otsuki, an analyst at UBS AG in Tokyo. “Mitsubishi UFJ will be taking the initiative within the new company, judging by the merger ratio.”

Overseas acquisitions by Japanese firms tripled to a record $70 billion last year, according to Bloomberg data. New York- based Morgan Stanley advised Mitsubishi UFJ on its takeover of San Francisco-based UnionBanCal Corp. in November and had revenue of 214 billion yen ($2.2 billion) in Japan in the year ended March 2008.

‘Strong Commitment’

The merger further alters the landscape for the Japanese securities industry after Nomura acquired failed Lehman Brothers Holdings Inc.’s Asian businesses last year and as foreign financial firms including Citigroup Inc., Goldman Sachs, Deutsche Bank AG and Morgan Stanley cut jobs in the country after posting losses on investments in toxic debt.

Mitsubishi UFJ acquired a 21 percent stake in Morgan Stanley in October as the U.S. company was trying to regain investor confidence after a stock rout. The Japanese lender’s securities arm has 116 branches and more than 6,500 employees, according to the company’s Web site. Revenue for the unit totaled 85 billion yen in the quarter ended Dec. 31.

The venture agreement is “one of many areas of collaboration that we are pursuing with MUFG,” Morgan Stanley Chief Executive Officer John Mack said in a statement. “Today’s understanding also underscores our strong commitment to Japan.”

Mitsubishi UFJ’s Kuroyanagi and Morgan Stanley Co-President Walid Chammah will attend a press briefing on the agreement at 4:30 p.m. local time.

Raising Capital

Morgan Stanley, the second-biggest U.S. securities firm before converting to a bank in September, reported the second quarterly loss in its history last year and has taken $10 billion in government aid.

The company, which posted a $2.2 billion loss in the quarter ended Nov. 30, bought control of Citigroup’s Smith Barney brokerage unit in the U.S. in January for $2.7 billion.

Mitsubishi UFJ has raised 1.3 trillion yen in capital in the past six months by selling shares, bonds and securities to bolster a balance sheet ravaged by rising bad loans and losses on investments. The bank cut its full-year profit forecast by 77 percent in February after a loss of about 134 billion yen in the third quarter ended Dec. 31.

The company plans to cut 1,000 jobs and close 50 branches as Japan heads for its worst recession since World War II.

NikkoCiti Deal Delayed

Separately, Mitsubishi UFJ said today it will postpone its purchase of Citigroup’s trust banking unit in Japan.

Mitsubishi UFJ delayed the plan to acquire NikkoCiti Trust & Banking Corp. for about 25 billion yen around April 1, it said in a statement e-mailed to Bloomberg News.

NikkoCiti lent several tens of billions of yen to bankrupt financial services company SFCG Co., Japan’s Mainichi newspaper reported yesterday, without saying where it obtained the information. Mitsubishi UFJ is delaying the acquisition while reviewing the impact of the bankruptcy, the newspaper said.

New York-based Citigroup, the recipient of $45 billion in bailout money from the U.S. government, is trimming its workforce and cutting back operations in Japan. The company is selling off assets after reporting $88 billion of credit losses and writedowns, according to data compiled by Bloomberg.

NikkoCiti trust had about 130 employees in Japan as of December 2008 and posted a 152 million yen profit for the six months ended Sept. 30, down from 495 million yen a year earlier.

To contact the reporters on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net; Takako Taniguchi in Tokyo at ttaniguchi4@bloomberg.net

Last Updated: March 26, 2009 03:30 EDT