The Morgan Stanley Group said yesterday that it was negotiating to buy S. G. Warburg & Co., the largest investment bank in Britain.
The combined company would be the world's largest money manager for institutions and the seventh-largest money manager over all. The combination would rival Goldman, Sachs & Co. as the world's leading adviser for mergers and challenge Merrill Lynch as the biggest global underwriter of stocks.
The deal is driven mainly by Warburg's desire to transform itself into a global investment banking powerhouse, a goal it has been denied so far because of its limited access to the U.S. market.
Morgan Stanley is attracted by Warburg's 75 percent stake in Mercury Asset Management, the largest money manager in Britain, with $100 billion in assets. Warburg also offers Morgan stable long-term relationships with European companies and a dominant position in the British bond market.
"For Morgan Stanley, this is an attractive opportunity, while Warburg must view this as more of a necessity," said Ron Chernow, author of books on the venerable families behind both firms.
Under the terms of the proposed deal, two-thirds of the combined company will be owned by Morgan Stanley's shareholders and one-third by Warburg's.
This arrangement would value Warburg at 6.64 pounds sterling a share, or 1.5 billion pounds ($2.3 billion). The company's stock shot up yesterday in London trading by 1.21 pounds, to 7.91 pounds, on speculation that another bidder would emerge for Warburg.
But people familiar with the deal played down the possibility of a rival bid, saying Warburg had not had detailed discussions with any other firm. A final deal is expected in the next two weeks.
The firm would be based in the United States. But people close to the deal say the two companies are trying to structure it as a merger of equals, with management positions split between executives of the two companies.
Analysts expect that Richard Fisher, the shrewd, statesmanlike chairman of Morgan Stanley, will run the combined company. David Scholey, who became Warburg's chairman in 1984, is scheduled to retire when he turns 60 next year. But if the merger is completed, he is likely to stay on longer.