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Opinion

Abigail on Nomura: an ugly end to a messy episode

Abigail Hofman has consistently called for Nomura to rethink its global strategy. What was behind the sudden departure of Jesse Bhattal, and what needs to happen next?



 

Was Jesse Bhattal fired from Nomura? Did he jump? Or was it a mutual parting of the ways?


In investment banking, senior executives are rarely fired. Just as politicians leave to “spend more time with their families”, top bankers leave “to pursue opportunities outside the firm”. Or they “retire”, often only to reappear in a new role at a different firm after a period of reflection.


For Bhattal’s departure, the official announcement settled on the retirement option. But in this case, there could be more to meet the eye than is normally the case.


What’s clear is that Nomura’s poor performance meant there were some tough decisions to be made at the firm.


As I wrote in my October 2011 column: “An impeccable source told me: ‘Nomura has to fire Jesse Bhattal (the current head of wholesale and deputy president of the firm who used to be Lehman’s chief executive in Asia) and bring in someone who is unemotional about the past and prepared to make drastic cuts. They need to get out of all wholesale businesses that are not profitable and shrink back to areas that build on their core expertise as Japan’s leading brokerage firm.’ Source is correct and after wasting billions of dollars of shareholders’ money, Nomura should swallow hard and follow his suggestions.”


Bhattal was an experienced operator, although one source who knows him well says: “Jesse is a fantastic salesman, but he was never so good at the strategy side.”


Despite this, could it be true that he had been pressing Nomura’s senior management to make deep cuts to the business, which were more than the paymasters in Tokyo were prepared to stomach? Or did he, as another source suggests, want to pull back from Nomura’s costly equities division and reinvest in its fixed income franchise?


Such discussions are never easy, and even harder to bring to a conclusion that suits both parties. It’s perhaps fair to say that there are often two sides to the story. Here, the reality would appear to be that Nomura and Bhattal were under severe pressure and on different paths.


The pressure was exacerbated by Moody’s decision in November to place the firm’s credit rating on review for a possible downgrade. A parting of the ways became inevitable – whoever instigated it, and however it was concluded.


Nomura has reached an unpalatable crossroad: what to do with the wholesale division that it substantially expanded when it acquired the European and Asian operations of Lehman Brothers in October 2008?


The press release announcing Bhattal’s decision to retire from his position as president and CEO of the wholesale division states: “Mr Bhattal’s responsibilities will be assumed on an interim basis by Nomura group COO and chairman for wholesale, Takumi Shibata, who will also determine the strategy to appoint his permanent successor.”


The press release also talks about Nomura being well-positioned to establish itself as “Asia’s number one global investment bank.” I would take that with a generous pinch of salt.


What should we make of all this? I was probably one of the last financial journalists to sit down with Bhattal.


My October article did not go down well with the Japanese firm.


Nevertheless, in early November, (after Nomura had announced a poor set of second quarter results: the wholesale division lost $1 billion), I was ushered down to Nomura’s gleaming new London headquarters to meet Jesse Bhattal.


We spent an hour together and got on well. In my January 2012 column, I wrote: “Jesse was charming but adamant that Nomura was on the right track. I asserted robustly that the $1.2 billion of announced cuts would prove insufficient and more drastic action was needed. This year will prove which of us had read the runes correctly. I may be a killjoy but I remain cautious on the Nomura story.”


Perhaps I was too cautious about just how desperate the situation was.


Any chief executive who leaves a firm voluntarily before the annual bonus round could be accused of letting his colleagues down. However, Bhattal may have felt that he was losing traction with the Japanese paymasters and would not be able to deliver for his people. A source muses: “Jesse must have known things were going badly, and perhaps he wanted to get out while he had some dignity left.”


And compensation goes to the heart of many of the problems at Nomura, according to one banker who used to be part of the business: “That’s one of the main things that’s wrong over there – everyone focused on personal gain rather than doing the right thing for the firm. If ever one wanted to make an example of the impact of the wrong compensation culture on a firm, this is it.”


This criticism may be valid, but Nomura might have to shell out still more money. Many of the key staff in the wholesale division were close to Jesse and may demand guarantees to stay. I expect further senior staff turnover.


Indeed Tarun Jotwani, head of global markets, left Nomura this week. This additional departure contributes to the impression that the firm is floundering. One banker close to the situation says Jotwani might have expected to take on Bhattal’s role as head of the wholesale business, although a Nomura source insists that Jotwani was let go as the firm sought to unwind the global markets division that he headed.


Jotwani was a FOB or “a friend of Bhattal”. Last March, he was promoted from head of fixed income to head of global markets, which included both the equities and fixed income divisions.


Jotwani may have become a bit big for his boots. A mole murmurs conspiratorially about “Jotwani alienating some colleagues and developing a rock-star mentality: metaphorically demanding pink pillow-cases and freshly squeezed guava juice like Beyoncé or Madonna.” Another source is more positive: ”He’s very capable and hard-working...a solid performer.”


Shibata, a long-term and highly rated-Nomura employee, is now running the wholesale division. The decisions that he makes will be of crucial importance – not least for the firm’s long-suffering shareholders. The world is a very different place to what it was in 2008 when Nomura embarked on its quest to be Asia’s global investment bank. Senior managers need to rethink the tired mantra about being a global anything.


A huge amount of capacity is going to leave the industry in the next 18 months. Firms such as Commerzbank, RBS, SocGen, UniCredit and even UBS are going to become much more parochial.


Stuck in the middle – which is where Nomura is - is not a good place to be. I envisage that, in the future, there will be a few global investment banks but only a handful – JPMorgan, Goldman Sachs, and maybe Deutsche, Morgan Stanley and Barclays.


Nomura’s senior management and Shibata now have a chance to re-think their strategy and get ahead of the game rather than clinging stubbornly to a plan which has failed and which is probably unworkable if markets remain difficult.


Is an all-singing, all dancing global wholesale division in the best interests of Nomura’s shareholders? Remember Nomura has also been trying to build a US presence organically which no foreign firm has ever succeeded in doing. Might Nomura finally see the light and scale the wholesale division back?


A commentator muses: “What is so wrong with niche? Nomura could have a great business in Japan, do some stuff outside which has synergies with Japan (perhaps Asian M&A) and actually make a decent return for shareholders.”


The other issue that will preoccupy commentators and employees is how to replace Bhattal. Will Nomura look outside for a new leader of the wholesale business?


If it decides to go this route, and wants to be more than just a Japanese securities firm, the best person would probably be Jeremy Isaacs, who used to be Lehman’s chief executive in Asia, Europe and the Middle East. Isaacs obviously knows where the bodies are buried but has been away long enough to have gained objectivity.


Isaacs is tough but approachable and very smart. He would help the Japanese work through their options but more importantly I believe he could execute the plan. Isaacs left Lehman Brothers shortly before the firm capsized. Isaacs now runs a private equity firm, JRJ Group, which focuses on the financial services sector and owns the commodity broker, Marex Spectron.


I’m not sure Jeremy would want to retrace his steps. But after six years of writing about the vicissitudes of the financial industry, I have learnt the phrase: “Never say never!”




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