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Tokyo: bankers say a plunge in the Nikkei may be the best thing that could happen here |
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“The worse the economy gets, the more opportunity for us,” proclaims a senior European banker. “And the best thing that could happen is for the Nikkei to plunge through the floor, say below 10,000, and stay there for a year. It would shake the hell out of the place.” It’s a sentiment held – although not often expressed in such strong terms – by many of the foreign bankers based in their impressive office blocks looking down across the sprawling mass of Tokyo.
Thierry Porté, Morgan Stanley Dean Witter’s tall and hawkish-looking president, takes a softer line – although not in his forthright delivery: “To an extent, the problems in the economy are creating a large number of opportunities. And they play to our strengths.
But it would be dangerous to say: ‘Let’s hope that these conditions prevail for a long period of time’ because at some point things will become too difficult.”
But at the moment the foreign banks are licking their lips in anticipation of the juicy morsels that will be thrown their way. Japan is, according to the gaijin invaders, an exploding investment banking market.
“Whatever you hear about Japan, the reality is that the place will restructure at some point,” begins Mark Chiba, UBS Warburg’s president and CEO. “It will make the transformation to a shareholder-value based economy. And when it does, that will throw up a huge volume of investment banking business. It’s a market of opportunity.”
The banks however seem unsure as to when exactly the potential will become reality. They are all waiting for somebody to push the button to make it happen. For now, there is more talk about restructuring than action on the part of government and corporate Japan. But if the government, the archaic LDP, did decide to put its finger on the button would it have enough strength in its arthritic wrist to actually push it?
The pressures to repair the capital structure, to clear up the bad debts and to unwind underperforming non-core business cross-shareholdings are building. Globalization, consolidation and distress are strong forces and can prove irresistible when all are pushing together. The foreign banks know this. And all believe change is bubbling just below the surface. They are all vigorously working out and building muscle.
The great recruitment drive
With the exception of Goldman Sachs – which has already bulked up and will go from growing its human capital at a rate of 30% last year to 0% this year – all foreign banks are expanding their operations. Morgan Stanley Dean Witter and Merrill Lynch are both searching aggressively for the necessary people to add to their businesses. Credit Suisse First Boston is on the look-out, wanting to add to the equity capital markets team it bought from Schroders last year. Deutsche Bank, now boasting 1,400 people, has tripled in size over the past three years. There are 850 individuals now dedicated to the investment-banking arm. And Nikko Salomon Smith Barney, not one to buck the trend, slipped another 26 new hires into position during January, with more to follow.
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“The call we are having to make is when do we need to be in the market in order to secure it,” says Leigh Hopkins, a director in Dresdner Kleinwort Wasserstein’s corporate finance division. “If you take the view that in five years the level of activity is even half that of Europe when in those five years do you need to make that investment?” The answer is now.
But there’s a problem. The lack of experienced, talented people.
“It’s a big issue for us. And inevitably we all end up talking about the people problem,” says one banker. “There’s no investment banking culture here. We’re in the midst of a boom but there aren’t enough people to allow us to do the business properly. Nobody has an embarrassment of riches when it comes to human resources.” The banker explains that since Japan’s economy fell off a cliff at the beginning of the 1990s many of the bankers have done nothing for a decade. “You ask them for their deal list and its pretty scary,” he says. Their CVs are, on the whole, blank. He believes Japan has lost a generation of investment bankers. “The old guys are good. And you can invest in the young ones. But in the middle, who knows?”
Porté – one of the grand old men of the foreign investment banking community in Japan, having been based there for much of the past decade – disagrees. “It may affect others but it’s not much of an issue for us.” Sprawled out in the armchair of a MSDW meeting room, he continues: “They might not all be at the same level of experience but we have the prerequisite base to get things done.”
The Japanese bankers’ inexperience has one manager at a European investment house slightly twitchy. He describes himself as half banker and half compliance officer. “We have to keep a pretty close eye on things,” he says.
Jun Kiseki, executive officer of Daiwa Securities SB Capital Markets’ strategic advisory department is also anxious. He explains that, no sooner do they train someone up to a reasonable standard, than the foreign banks parachute the headhunters in with large chequebooks in an attempt to lure them onto their side. “[The foreign banks] are always looking for good-quality people and it’s us who supplies them,” he complains. “They offer large salaries and bonuses, and our employment system is not as sophisticated.” For a moment it’s hard not to feel a twinge of pity. But just for a moment. “We will modify our payments and promotional system in order to keep them. We will establish new benchmarks but continue to make money,” he adds.
More M&A on the way
There is one area in particular where the foreign investment banks are focusing their efforts: M&A advisory. It’s coming to the boil. The foreign banks are hoping that they have at last found the Trojan horse necessary for a market that is infamous for being so tough to break into. The belief is that once sound advice has been provided to a client it will open many more doors. It’s the all-important relationship builder. Koji Fusa, CSFB’s managing director and head of the investment banking division, says: “If you provide a solution to a corporate in trouble, you’ve hit a home run. Pure M&A advisory may not help you break even but it’s important to make friends with the CEO.” Masayoshi Nakamura, Morgan Stanley Dean Witter’s managing director and head of M&A, explains further: “M&A advisory puts us in a position to better understand the company, which in turn leads to larger activities, for example equity financing or underwriting.” And it’s these activities that provide the million dollar fees.
| Thierry Porté | ||||||
The year 2000 was a banner year for mergers and acquisitions in terms of volume. It was the merger of some of Japan’s financial institutions that helped hike up the statistics – in particular the Mizuho transaction. The multi- billion dollar merger of Industrial Bank of Japan, Fuji Bank and Dai-Ichi Kangyo Bank accounted for half the total in dollar terms of pure domestic mergers. It also resulted in the creation of the world’s largest bank in terms of assets. But as one banker points out, you never hear its name mentioned when talking about global banking competitors.
MSDW’s Nakamura says: “Just because we’ve had these large transactions doesn’t mean M&A activity will decrease to previous levels. Now the non-banking sectors are coming. That means tens of billions of dollars of M&A activity. I don’t have any worries that M&A will shrink.”
The consolidation that has begun in the telecom and financial sectors is now spreading into the older manufacturing industries. The chemical industry is next, with Sumitomo Chemical Company and Mitsui Chemicals Inc leading the way. And the pharmaceutical industry won’t be far behind.
Although most bankers are extremely positive that the trend is upwards and will continue apace, meaning more advisory opportunities, there is one voice in the crowd that preaches caution. Toru Mio, Nikko Salomon Smith Barney’s managing director of mergers and acquisitions, says that M&A activity is increasing, but perhaps not as fast as some enthusiasts believe. He explains: “The Thomson [Financial Securities Data] league tables count for a lot these days, so many institutions are now counting every piece of advisory related work and reporting it. When you start collecting new information a phenomenon can occur.” So is the increase in M&A activity that all the banks are talking about not actually as dramatic as they would have us believe? “Obviously the trend is up,” answers Mio, “but the increase in new information is helping to bump up the figures and we don’t think there will be so many multi-billion dollar transactions in 2001.”
The Thomson M&A league table for Japan has been a bone of contention ever since the Mizuho transaction. Goldman Sachs, Merrill Lynch and Arthur Andersen were all asked to provide fairness opinions for the three banks. The other banks believe that this should not have been included in the tables since it artificially massaged the rankings. “Did they educate the client?” asks a banker from one of the bulge-bracket US firms. “Or did they just issue a letter? In my opinion issuing a fairness opinion means nothing. It’s a very disappointing situation and has caused a huge argument. We should be spending time educating potential future clients about the role independent investment banks can play during a merger, not just issuing pieces of paper for league table status.” Goldman Sachs was unable to find anyone to comment on this banker’s opinion, which is shared by the vast majority of banks.
But it’s not only the domestic consolidation and fairness opinions that have helped boost the M&A statistics. Cross-border transactions have been driven by hard economics. “Things happen at a pace that many don’t like,” says Gary Stead, Merrill Lynch’s managing director of investment banking. “But if you put your arms around what has been done, it’s a lot. If we had sat down two years ago and said Renault will take Nissan, DaimlerChrysler will take Mitsubishi and AXA, AIG and GE Capital will all come in, most would have said it will never happen. Things have been moving in the last couple of years.” And the trend for these multi-billion acquisitions looks set to continue.
Corporate shopping lists
Many US and European companies have Japanese corporates on their shopping lists. Up until recently, they would never have approached them because of the frustrating processes involved. Japan was stamped with the too difficult mark. Hopkins says: “Before, a conversation with a Japanese corporate would have consisted of a ‘thank you very much for showing interest, please don’t come back’. But now they want to know. It’s still painful and slow, but the fact that dialogue is now happening is very positive. Deals will happen.”
| Gary Talarico | ||||||
He continues: “2001 will see a lot more M&A transactions. And if by the year-end there hasn’t been a couple of epoch deals I’ll be stunned.” Deals of such a nature will also challenge assumptions about Japan and the ability to do deals in the country. That will lead, no doubt, to further deals being done off the back of the groundbreaking ones.
Japanese corporates are just beginning to understand that a new standard is coming into play. Shareholder value, as opposed to just capturing market share and employment, is the order of the day.
According to Deutsche Bank’s managing director and head of global investment banking – Japan, Gary Talarico, the realization is, by Japanese standards, occurring fast. Japanese financial leaders and company managements now know, after 10 years of pain, that big basic industries with no focus just don’t work any more. And the know that the shareholder who’ll hold on to a corporate’s stock, no matter what, or who will buy the stock no matter how much it stinks, is rapidly disappearing. They can no longer rely on shareholder loyalty unless they start offering the necessary returns. “Before there was no corporate strategy,” says Daiwa’s Kiseki. “Now the strategy is how to survive. And M&A is one of the solutions.”
What excites the foreign banks so much is the fact that, after years of shutting them out in the cold, Japanese company managements are increasingly turning to the foreign banks and asking them to dine at the advisory table.
They want their help not only in cross-border transactions but also in the purely domestic deals. Japanese companies are finally having to come round to the idea that value-added, independent financial advice, running alongside sectoral expertise and tactical and strategic knowledge, are more of a necessity than the procedural capability and relationship models offered by domestic banks. And these are areas in which foreign investment banks, especially US houses, have made their names.
Domestic banks lose ground
In the past, a corporate would traditionally use one of the domestic banks as an intermediary. The bank would be asked to negotiate on their behalf and try to come up with a package that suited both parties. Very little regard was given to the perspective of the shareholder. But that was then. Now a sea change – very much the in-phrase for Tokyo bankers – is all too evident. In the upcoming domestic $10 billion Mitsui-Sumitomo Chemicals tie-up, Goldman Sachs has been handed the mandate to advise Mitsui and MSDW is leading the negotiations for Sumitomo. And it’s a trend that is set to continue. “It’s like flying with an airline,” says Merrill’s Gary Stead. “Do you care about the flag of the carrier or do you want the safest airline which offers the best service and value for money?”
| Mark Chiba | ||||||
Mark Chiba says: “We are the people who are trained to provide the right kind of advice and to do the work. Also the Japanese banks treat the bank-corporate relationship as a master-and-servant one. The banks are the masters. They have had such market power that they could treat their clients with non-transparency and arrogance. We can’t. So once the corporate has had experience with us they stay.”
What is also helping the foreign banks to become involved in the Japanese market is the increase in cross-border transactions: an area where the domestic banks are at a distinct disadvantage. The foreign banks have the global industry knowledge, the global experience and the global relationships developed and in hand: expertise and reach that they are bringing to bear on the Japanese markets for the Japanese clients. Because the advisory market was pretty much non-existent until a couple of years ago, the domestic banks haven’t had time to build up the necessary skill sets. They also have little experience of dealing with global consolidation. One only has to look at their sparse, often non-existent, overseas personnel. Talarico says: “We have industry expertise – autos, telecoms and high-tech – globally. The Japanese firms don’t. We can deliver global expertise and the global investor to the Japanese company.”
“If Japanese corporates only limited their activities to Japan then we’d be OK,” says Kiseki, “But now they are exploring abroad. And to stamp their brand globally they are asking the foreign banks to help. We cannot cope with such kind of things.”
The picture that Kiseki paints is true to a certain extent, but the Japanese banks still wield tremendous power and influence in the domestic market and could get in the way of the foreign banks’ aspirations, especially those of foreign investment banks from below the global bulge bracket. But it’s a fact that the number of companies more willing to challenge the old corporate code of going to the bank that has lent them the most money is growing. And it is guaranteed that, behind closed doors, executives at Nomura and Daiwa are scratching their heads and discussing the loss of market share.
And it is Nomura Securities that several of the foreign banks are gunning for.
Hiromi Yamaji, managing director and head of global investment banking for Nomura Securities, based in his besieged fortress, the impressive looking Urbannet Otemachi Building situated in Tokyo’s financial district, does not seem unduly concerned by the foreign pretenders. “I am not worried. The foreign banks are very focused on specific areas. But if the situation of losing market share becomes a reality than I’ll be concerned and we will rethink our strategy.”
It sounds a rather complacent attitude to an obviously growing threat. But such a wait-and-see approach is only to be expected. It has been the bane of the Japanese economy and companies for the past decade. It’s just disappointing that the House of Nomura also suffers from the same disease. But the façade of confident complacency slips for a moment and Yamaji makes some concession to reality. “Traditional relationships are much less important, and less comes from the relationships we have enjoyed in the past,” he says. “We have to offer total solutions and show firms we have the capability to solve their problems. But there are companies that have the same traditional thinking and we should think of those.” He continues: “Once you recognize what the market wants you have to change.”
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Tokyo: the opportunities for the foreign banks are getting bigger and better |
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Yamaji admits that it is difficult for Nomura to change. However he does add that the aggression of some of the US banks plays to Nomura’s advantage. “We may not be as aggressive as some of them, but some corporates are scared away from the US banks just because of this aggressiveness.”
Many corporates obviously aren’t scared away. And perhaps this aggression should rub off. Will a Japanese corporate eventually put its foot down and initiate a hostile takeover? Opinions vary, but all market participants are quick to point out that you can never say never.
Toru Mio says that in order for hostile takeover bids to flourish, a missing ingredient must be added. Japan lacks the same fiduciary duty for institutional money managers that exists in the US and so the same investor discipline is missing. He says: “In the US, if a hostile buyer’s offer exceeds the price of the friendly offer then the institutional investor is obligated to sell. That still does not exist in Japan. But when it is introduced that will definitely change the landscape.”
Porté gives other reasons for the lack of unsolicited takeovers in the past and no sign of any on the horizon. He believes that first, the emotions and attitudes necessary are still missing. And second, there are still gaps in disclosure and information on any given company. Although there have been improvements in due diligence, a greater sense of responsibility to the demands of shareholders and a general acknowledgement that corporate behaviour really does have to improve, it hasn’t gone far enough. “If you do not have all the necessary information to make an informed bid, you would have to think very hard as to whether it would be the right thing to mount such an effort. And anyway, I feel it’s still distant thinking for the corporate management to think in this manner,” concludes Porté.
Defensive strategies
Although they may not be planning on mounting such strategies themselves, Japanese corporates fear that they could become the targets of such action in the not too distant future from barbarian invaders. “A company has just hired us as a defence adviser,” claims one of the smaller foreign banks. “It is concerned that it is a possible takeover target. Larger companies too believe that they are susceptible to bids and are harbouring defensive options.”
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So with all the M&A advice that is, and will be, dispensed, are the banks actually making money out of it? Or is it for now a question of getting the foot in the door and building relationships? Indeed are they buying deals to do it? Chiba answers: “We haven’t bought a deal yet. I don’t think it’s a long-term solution, and the Japanese corporates are not going to kill the provider. Also the Japanese are very brand conscious, brand is a key issue. If you offer something cheap they’ll run a mile.”
Yet stories abound of Japanese companies approaching banks and quoting advisory fees as low as 25% of the global standard and, according to Deutsche’s Talarico, being met with a resounding no. But he says the corporates are now coming back and agreeing to pay more. He says: “The M&A environment has changed. Japanese companies recognize the need for competent financial and strategic advice.”
The good news for the banks is that the fees they can now command are at or above global levels. “In some deals we have been able to put in incentive structures,” explains one banker, “which means that if we do a good job we can earn three or four times the global standard.”
He continues: “There is a lot more domestic M&A that we can get involved with but the fees are terrible, for example the bank mergers. My question is: why bother? The fairness opinions are after-the-fact justifications with no value added. And the chances of making somebody angry for a small fee as opposed to making a friend are pretty high. They are all about league table status.”
Investment bankers not involved in the forthcoming chemical merger are curious about the kind of fees Goldman Sachs and MSDW will be receiving.
When Nakamura is asked if MSDW will be getting paid the global standard for the work that it will be doing, he pauses and feels it is necessary to qualify the term global standard. “The definition of global standards is very smokey,” he says. “We know that, because it is us who is creating it. So when you think of global standards you must think of two components. First, what is the size of the transaction? Second, what is the scope of the work? By these measures are we being paid the global standard? The answer is absolutely definitely yes.”
The answer to the question is perhaps in there somewhere, but since Nakamura does not discuss the scope of the work, the global standard remains smokey. One senior banker at another US bank reckons that it’s all just about fairness opinions.
Doubts about profitability
“The great thing about Japan is that the size of the deals on offer is immense and it doesn’t take many scores to get over the line,” says Hopkins. “The cost of putting on an operation here is very high . But so are the potential returns. We are not having any difficulty negotiating fees which are regarded as being in line with the US and Europe.”
The foreign banks have seen an opportunity and are grasping it with both hands, but Japan is complex, and it takes time to develop the necessary relationships. Some of the banks, such as Merrill Lynch, set up base camp 30 years ago. Slowly they are overcoming the prevailing wisdom that foreigners in Japan are like oil in water.
But when it comes to questions about profitability, a straight answer is hard to find. Only one banker actually answers: “If you look at us as a legal entity basis you will find that we are not profitable, not many are. But we have a high ROE. It’s more than 40%. We are doing very well here.”
It is Gary Talarico who has the last word and successfully sums up the positive sentiment felt by the foreign banking community: “Our Japan-related investment banking businesses are among our most successful globally. We are very bullish on the opportunities in Japan to deliver our global and local capabilities to Japanese clients and investors.”
| M&A league table | ||||
| Rank | Adviser | Rank Value ($mn) | Market Share | No. of deals |
| 1 | Goldman Sachs & Co. | 44,156.00 | 32 | 29 |
| 2 | Merrill Lynch & Co, Inc. | 40,325.70 | 29.3 | 19 |
| 3 | Morgan Stanley Dean Witter | 23,659.00 | 17.2 | 18 |
| 4 | Salomon Smith Barney | 23,123.20 | 16.8 | 23 |
| 5 | Bank of Tokyo Mitsubishi Group | 16,198.30 | 11.8 | 42 |
| 6 | Lehman Brothers | 15,147.90 | 11 | 11 |
| 7 | Nomura Group | 12,916.60 | 9.4 | 71 |
| 8 | Mizuho Financial Group | 10,592.10 | 7.7 | 79 |
| Source: Thomson Financial Securities Data | ||||
