Sept. 22 (Bloomberg) -- Morgan Stanley plans to sell as much as a 20 percent stake for $8.4 billion to Mitsubishi UFJ Financial Group Inc., Japan's largest bank, to shore up capital as it prepares to convert from a securities firm to a bank.

Mitsubishi UFJ, Japan's largest bank, agreed to buy 10 percent to 20 percent of Morgan Stanley, the bank said in a statement today, explaining that it will start due diligence before determining a final price.

John Mack, Morgan Stanley's chairman and chief executive officer, is trying to remain independent after Lehman Brothers Holdings Inc. filed for bankruptcy protection and Merrill Lynch & Co. agreed to sell itself to Bank of America Corp. Morgan Stanley and bigger rival Goldman Sachs Group Inc. yesterday won approval from the Federal Reserve to become banks.

``Mitsubishi UFJ would be a valuable partner as we transition to a bank holding company and build our bank services and deposit base,'' Mack said in a statement. ``This alliance also would build on Morgan Stanley's deep ties and market leadership in Japan and throughout Asia.''

Morgan Stanley rose $2.47, or 9.1 percent, to $29.68 at 12:13 p.m. in New York Stock Exchange composite trading. The shares have lost 44 percent this year.

The deal marks an about-face for Mitsubishi UFJ Chairman Ryosuke Tamakoshi, who last week said he would avoid any immediate investments in U.S. banks following the Wall Street upheaval of the past 10 days. Mitsubishi UFJ will appoint a representative to Morgan Stanley's board as part of the investment.

Mack `Confident'

As recently as Sept. 16, Mack, 63, said he was ``confident'' in the company and Chief Financial Officer Colm Kelleher, 51, told investors that the firm believed in its own business model. Kelleher said, ``Depository institutions do not necessarily better enable us to execute our business and in fact may bring with them their own set of complications.''

When the company's stock and bonds plummeted over the next two days, Morgan Stanley executives started talks with Wachovia Corp. Chief Executive Officer Robert Steel about a merger and with China Investment about adding capital to the firm, according to a person familiar with the situation.

The deal with Mitsubishi UFJ may mark the biggest overseas acquisition by a Japanese financial company, according to data compiled by Bloomberg. Nomura Holdings Inc., Japan's largest securities firm, agreed to buy Lehman's Asia-Pacific unit, according to a statement today.

Japan's Economy

Like Nomura, Mitsubishi UFJ has struggled to expand outside Japan, leaving it vulnerable to a slowing domestic economy. The bank was formed in October 2005 after a merger between Mitsubishi Tokyo Financial Group Inc. and UFJ Holdings Inc.

Morgan Stanley ranks sixth globally in advising on mergers and acquisitions, 47 slots above Mitsubishi UFJ, according to Bloomberg data. In equity underwriting, Morgan Stanley is fifth while the Japanese bank is No. 100.

Mitsubishi UFJ agreed last month to pay $3.5 billion in cash to take full control of UnionBanCal Corp., California's second-biggest bank. The Tokyo-based bank is also raising its stake in Japanese consumer lender Acom Co. to 40 percent from 16 percent for about $1.4 billion.

A 20 percent stake would make Mitsubishi UFJ the biggest shareholder in Morgan Stanley, followed by State Street Corp. with 16.4 percent, Bloomberg data show. Morgan Stanley approached Mitsubishi UFJ on Sept. 19, the Japanese company said.

Market Opportunity

Last week's market turmoil reshaped Wall Street and provided Asian and European firms with an opportunity to grab market share in trading, underwriting stock sales and advising companies on takeovers.

On Sept. 18, as the credit crunch threatened money-market funds with losses, Morgan Stanley's shares dropped as low as $11.70.

The mayhem led the U.S. government to propose a record- setting bailout of the financial system and markets reversed course. Securities regulators in the U.S. and the U.K. also banned short-selling financial companies' stocks, a practice that Mack had blamed for the decline in his firm's shares.

Morgan Stanley has withstood the dive in credit markets better than most of its competitors. Bear Stearns Cos., the smallest of the top five independent investment banks, was forced into a cut-price sale to JPMorgan Chase & Co. with help from the government, which took over some of Bear's assets. While Morgan Stanley's profits declined, the firm hasn't reported losses this year, unlike Lehman and Merrill.

At the end of August, the company reported it held about $27 of assets for every $1 of shareholder equity, down from more than $30 earlier in the year. Sales and trading revenue fell 17 percent in the first nine months of 2008 compared with a year earlier and investment-banking revenue slid 31 percent.

To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net; Takahiko Hyuga in Tokyo at thyuga@bloomberg.net.

Last Updated: September 22, 2008 12:15 EDT