It is eight months since Nomura plucked the European and Asian limbs from the Lehman Brothers carcass. Nomura increased its headcount by some 8,000 people in a period when most banks were firing not hiring. The man in charge of Nomura in Europe, the Middle East and Africa is 55-year-old Sadeq Sayeed, who was formerly a special adviser to Nomura’s executive committee. Sayeed has also worked at CSFB and has undergraduate and master’s degrees from MIT.
In a press interview last December, Sayeed claimed that the integration was going well: "It’s like going out to dinner and expecting a fantastic meal and it turns out to be Gordon Ramsay. It exceeds even what you expected it to be." Sayeed is obviously not a fool but I hear rumblings that the path to Nomura nirvana may be rocky. A canny commentator whispered: "It’s the tale of the haves and the have-nots."
It is widely known that Nomura gave two-year guarantees, equivalent to 2007 compensation levels, to many of Lehman’s staff. In other words, lucky Lehman lovelies locked in to peak numbers last autumn, at the absolute trough of the investment banking market. I hear sums such as $15 million for a co-head of a European division and a range of $2.5 million to $10 million for senior coverage bankers. Lehman staff have also won most of the key front-office jobs in Europe. For example Barry Nix, Nomura’s formerly powerful European co-head of global markets, lost out to the Lehman infiltrators.
Commentators worry that with such high fixed costs, Nomura will find it hard to achieve profitability. Indeed results for the year ending March 2009 showed a ¥708 billion ($7.2 billion) loss, and compensation costs for the fourth quarter more than doubled from a year earlier to ¥161.7 billion, reflecting Lehman staff costs. Mr Sayeed is on record as stating that he hopes his business will break even by 2010. Barclays, which purchased the US broker/deal operations of Lehman, has fared better. In its first quarter 2009 interim management statement, Barclays wrote: "The acquisition and successful integration of the Lehman business resulted in a transformational change in Barclays Capital where profit before tax was very substantially ahead of last year, rising 361% to £907 million." A source said: "Barclays bought the essence of Lehman – its US franchise. Nomura bought the rest."
Source may be a little cynical, because I recall that in 2007 over half of Lehman’s revenues derived from the international operations. So obviously there were some robust business lines outside the US. However, an insider explains that much of the international pitch to clients was based on the allure of Lehman’s US distribution. This no longer exists. A senior banker at another firm told me: "To be in the top league, Nomura will need to add a critical-mass US operation. It’s not clear how they achieve that without being a forced buyer." Another issue is that, as a securities firm, Nomura does not have the balance sheet to compete with major commercial banks. At the moment, most banks are capital-constrained, wary of potential future write-downs and thus cautious about making large capital commitments, even to big clients. But this risk aversion might change over the next 18 months and Nomura will then be at a disadvantage.
Sources murmur that results so far are mixed. Asian cross-border M&A work as well as the associated capital-raising is faring well. In fact, Nomura was ranked first in the first quarter 2009 league table for cross-border Asia (ex-Japan) M&A. But in Europe, despite heavyweight investment bankers such as Christian Meissner and William Vereker, deal-flow is patchy. According to Dealogic, the firm ranks number 16 in the 2009 year-to-date, announced European M&A league table. And in fixed income, Nomura has not won a single public European corporate mandate denominated in dollars, euros or yen. This dearth of deals is gruesome news given that the corporate bond market has been the sweet spot for bank revenues in early 2009. A disgruntled Nomura mole mutters: "I hear an awful lot of talk from Lehman bankers about whether we have the ability to execute leveraged and structured finance deals. They don’t seem to realize that those products may never come back." A more positive former Lehman banker said: "Good money is being made in equities and fixed income but European M&A is more difficult. It will take time to sell the new Nomura brand and build relationships."
A Nomura insider pointed out that the firm ranks as the eighth-largest trader for UK equities on the London Stock Exchange and is a corporate broker to four FTSE 100 clients. "We see ourselves as a winner in the downturn. We have not taken government money, we acted decisively to execute a major deal and the Lehman Brothers integration has gone well. We are extraordinarily well positioned to take advantage of cross-border opportunities between Asia and Europe on behalf of our clients."
I agree that a powerful Asian presence will be important in the future. However, it is conceivable that the Lehman acquisition might turn out to be an expensive mistake for the Japanese. Nomura faces hurdles in its battle to build a global investment banking presence – a high cost base, a limited balance sheet and a lacuna for US distribution. Maybe Nomura is not aiming for global domination and will be content with a more niche approach. I look forward to meeting Sayeed and hearing his views. Indeed, the Japanese tend to take the long view, so with patience the house that Dick demolished can be rebuilt. But I always worry when loyalty is purchased with hefty financial guarantees. What do you think?
In the past two years, we have witnessed the unthinkable and we have seen accepted platitudes pulverized. Remember the mantra of decoupling? Remember the truism that house prices would always rise? Do you also recall how keen banks were to purchase asset management companies on the grounds that these divisions would prove a counter-cyclical source of stable earnings? The past year has shown how hard it is to make money in asset management unless you are one of an inner circle of very large asset gatherers. The growth businesses are exchange-traded funds and alternative assets, everything in between is pedestrian. Credit Suisse recognized this when it sold part of its traditional asset management business to Aberdeen Asset Management last December. The astute Jean-Pierre Mustier, head of the investment management and services division at Société Générale, has done something similar. He sold the London-based asset management subsidiary to the hedge fund group GLG, and in January 2009 Crédit Agricole and Société Générale signed a preliminary agreement to combine their asset management operations. The combined entity will have €638 billion of assets under management (as of September 30 2008) and will be the fourth-largest asset manager in Europe and the ninth largest on a global basis. This trend is an interesting backdrop to the potential sale by Barclays of its world-class BGI asset management operation. It is not clear to me why strategically if you own a market leader you would want to sell it. Although a source told me: "Barclays may feel they have taken this business as far as they can under the Barclays umbrella." BlackRock and Bank of New York Mellon are tipped as potential purchasers of BGI. My instinct is that Larry Fink, the canny chief executive of BlackRock, might make off with the prize. Fink and Bob Diamond, the president of Barclays, know each other as they are both members of the powerful Credit Suisse alumni network.
