LONDON - Morgan Stanley & Co.'s efforts to acquire Barclays Global Securities Service would provide a powerful boost to the New York investment bank's global custody business.
But observers also speculate that sale of the entity could result in a significant backlash to London-based Barclays Bank PLC, and that recent accounts might jump ship.
The addition of Barclay's 203 billion pounds($325 billion) client base could more than triple Morgan Stanley's $135 billion asset base, giving the firm critical mass in the rapidly consolidating global custody business. In Great Britain, the Royal Bank of Scotland recently entered into a joint venture with SBC Warburg, while Lloyds Bank PLC purchased NatWest Group's custody business.
In addition, a purchase would give Morgan Stanley a strong foothold in the U.K. custody market, where Barclays ranks second only to Midland Securities Services. It also would expand Morgan Stanley's custody operations in key African markets. Barclays already serves as subcustodian for Morgan Stanley in Britain and elsewhere, mainly in Africa.
The catalyst to talks, some speculate, might have been Barclays' purchase last year of Wells Fargo Nikko Investment Advisors. Wells Fargo Nikko was Morgan Stanley's first client and still represents a significant chunk of its custodied assets, with $22 billion in non-U.S. securities investment at yearend 1995. Buying Barclays' custody business would eliminate the risk of Barclays shifting custody of the former Wells Fargo Nikko assets to the bank's own custodial arm.
"For Morgan Stanley, it's a big coup if they can pull it off and can retain the business," said one competitor, who asked not to be named. "They take out a competitor, establish a U.K. client base, and deal with the Wells Fargo problem," he said.
Simon Thomas, partner in Thomas Murray Ltd., a London custody consultant, said a purchase would be "a defensive move from Morgan Stanley's point of view." Added William Imhoff, principal at Alliance for Fiduciary Consultants, Parsippany, N.J.: "You have to buy it to keep your competition from getting it."
Barclays officials said a sale is only one possible outcome of the talks with Morgan Stanley. A joint venture or other business combination or doing nothing at all is possible, they insisted. A jointly issued press release said the two firms "are in discussions to explore the potential for future co-operation" in global custody. An announcement is expected in the next few weeks.
However, observers believe a sale is the most likely outcome, especially now that news of talks between the two parties has leaked out.
Some also questioned whether Barclays was willing to continue investing in its custody business, with the high demand for technology improvements and low profit margins.
Some others questioned the wisdom of Barclays' exiting the custody business. "Barclays is taking on significant risk in deciding to get out of this business at this time," said Robert Kay, managing director of Global Securities Consulting Services Ltd., Chertsey, England.
The news came as a shock to many.
The bank's recent strategic review would have retained the custody operation. This summer, executives of BZW Asset Management, the holding company for the bank's money management arm, reportedly had been discussing folding the custody operation into the holding company.
Separately, Barclays announced Oct. 15 that it would eliminate its traditional active management unit, BZW Investment Management, with some 37 billion pounds in asset under management, to focus on quantitative strategies. That unit was combined with the firm's quantitative unit, BZW Barclays Global Investors, to form Barclays Global Investors. Eleven BZWIM employees were let go.
Some predicted that institutional investors who recently selected Barclays as custodian would be upset by any moves by the bank to quit the custody area, after having affirmed their commitment to the business. Accounts where Barclays leveraged its banking relationships might be particularly vulnerable.
Barclays has won major custody accounts in the past year, including Baring Asset Management, the British Airways Pension Scheme, Refuge Assurance PLC and The National Farmers Union Mutual Insurance Co.
Colin Wood, investment manager for the 4 billion pounds National Farmers Union Mutual, Stratford-upon-Avon, said it is too early to predict the consequences, because it is not yet known what form a deal between Barclays and Morgan Stanley might take. He said he wouldn't reject Morgan Stanley as a custodian just because it's not a U.K. clearing bank.
Echoed another Barclays pension fund client, who asked not to be named: "I have no qualms about that deal if it is going to be owned by a company that is committed (to global custody)."
But many British institutions clearly have favored hiring a U.K.-based bank as custodian. That has some competitors anticipating some major shifts.
"We are actively courting ones they have picked up based on banking relationships," particularly among insurance companies, said John Stubbs, Midland Securities Services' head of sales for U.K. institutions.
Experts also said expansion of Morgan Stanley Trust fits into the vision of its parent company to develop its fee-based businesses in asset management and securities lending.
The custody business also complements Morgan Stanley's other businesses, said Ross Whitehill, a director at Thomas Murray who previously was in charge of Morgan Stanley Global Custody's London operation. An expanded amount of custodied securities increases stock-lending capabilities with hedge fund clients, who often take short positions.
In addition, Morgan Stanley can try to sell custody products to money managers who subscribe to Morgan Stanley Capital International index products.
"It's a strategic business for them," Mr. Whitehill said.
But one big question is whether Morgan Stanley would make the commitment to fully service U.K. accounts. Mr. Thomas doubts whether Morgan Stanley would be interested in servicing all of these accounts, particularly because most ban stock-lending, a significant source of fee income.
Mr. Kay, however, said margins on securities lending are very narrow in the United Kingdom.
