LONDON -- The proposed merger of the Morgan Stanley Group and the S. G. Warburg Group collapsed yesterday, scuttling plans by the companies to create one of the world's most powerful investment banks.
The talks foundered after Warburg's independently run fund management subsidiary, Mercury Asset Management, held out for a better deal and Morgan Stanley refused to pay its price.
Mercury, Britain's largest fund manager, is 75 percent owned by Warburg, and according to people involved in the negotiations, the chance to acquire it without paying a big premium to the market value was the primary attraction of the deal for Morgan Stanley.
But Mercury, which has its own board, insisted that its public shareholders receive a premium for agreeing to transfer control.
Morgan Stanley, which is based in New York, and Warburg, Britain's leading investment house, announced last week that they were negotiating to merge in a straight pooling of interests that would have left Morgan Stanley shareholders with two-thirds of the combined company and Warburg shareholders with a third.
Morgan Stanley has expanded rapidly in Europe in recent years with reasonable success and said it now generated nearly half its revenues outside the United States.
Morgan Stanley executives said that the negotiations with Warburg had developed almost spontaneously and that there was no plan to seek another merger partner.
"Our full energies will be devoted to finding new opportunities for our clients and growing our businesses worldwide," said Richard Fisher, Morgan Stanley's chairman.
The deal's collapse deprived Morgan Stanley of a chance for a greater presence in European fund management and investment banking. But it may prove a greater setback for Warburg, which, analysts said, must find an American partner if it wants to realize its goal of joining the world's pre-eminent investment firms.
Indeed, by saying that it was Mercury that attracted interest all along, Morgan Stanley implied that it did not consider investment banking to be Warburg's strength.
The deal as outlined would not have paid Warburg shareholders any premium above the market price.