The race to sell Lehman Brothers before it fell apart
Nomura in Europe: the appointments so far
"I WANTED TO pay exactly one quid [£1] but my arm was twisted, and we rounded up to $2," says Sadeq Sayeed. Something in his voice betrays the astonishment he must feel about the deal: these days that wouldn’t buy you a ticket on the London underground, a beer or most Sunday newspapers but it is what Nomura paid for the European and Middle East operations of Lehman Brothers, the failed US investment bank.
Sayeed, who will head the new Nomura Europe, was, together with Nomura COO Takumi Shibata, responsible for the Japanese firm’s victory in the negotiations for Lehman’s European and Asian businesses and he has emerged with his reputation as a dealmaker much enhanced. His negotiating style is apparently on the reserved side: recent interviews have described him as "quiet" and "taciturn".
"My friends were more shocked by that description than I was," says Sayeed, "I don’t think they think of me as being particularly quiet."
Sayeed speaks warmly of the round-the-clock work his staff at Nomura’s London headquarters put in between Lehman going into administration on September 15 after the collapse of talks with Bank of America and Barclays, and the eventual purchase by Nomura of the US firm’s European and Asian businesses after lengthy simultaneous negotiations in London and Hong Kong over the weekend of the 20th and 21st. Before the story of how the deal was done in the face of intense competition from Barclays and Standard Chartered, among others, there is the question of why Nomura was interested in the first place. The firm had turned down an earlier request to help Bear Stearns when the US investment bank went under, raising the question of just what would entice it to spend the ¥200 billion ($2 billion) it had set aside for overseas acquisitions.
|Does Nomura + Lehman = a recipe for success in Asia?|
|League tables showing Nomura’s position when credited with Lehman Brothers deals (at 27/10/08)|
|Asia-Pacific all ECM bookrunner ranking, 2008 YTD|
|Bookrunner||Deal value ($mln)||No.||% share|
|Without Nomura/Lehman consolidation - Nomura ranked 11th, Lehman Brothers ranked 129th|
|*Excludes Chinese A shares|
|Asia-Pacific G3 international DCM bookrunner ranking, 2008 YTD|
|Bookrunner||Deal value ($mln)||No.||% share|
|9||Daiwa Securities SMBC||3,606||12||5.7|
|Without Nomura/Lehman consolidation (or Barclays/Lehman Nth America consolidation) - Nomura ranked 16th, Lehman Brothers ranked 19th (and Barclays 4th)|
|Asia-Pacific announced M&A advisor ranking|
|Bookrunner||Deal value ($mln) at announcement||No.||% share|
|8||China International Capital||51,456||15||7.8|
|Without Nomura/Lehman consolidation - Nomura ranked 12th, Lehman Brothers ranked 10th|
"That was when you might say the light bulbs started flashing in both of our minds," he says.
"We had been approached just before that fateful weekend about buying the whole of Lehman but after careful consideration we decided that it just wasn’t what we wanted. When Monday rolled around and the Bank of America deal didn’t happen, and Lehman decided to pursue this strategy of keeping the US business whole and abandoning, if you like, the rest, we decided to go after the Asian business, which was going into liquidation, and the European piece, which was entering administration."
Shibata and chief executive Kenichi Watanabe took over Nomura Holdings in March when Nobuyuki Koga stepped down after five years at the helm. Koga admitted in interviews at the time that he was not the right person to pursue the firm’s ambitions of becoming a truly global investment bank, and the new management was instrumental in persuading the firm’s board that the Lehman deal was an unprecedented opportunity to fulfil that ambition.
"The board were very clear that we needed to do something internationally," says Sayeed, "and there were two factors that helped us convince them that this was the right deal. First, we ensured that we were not taking on Lehman’s balance sheet and the risks that that would have entailed, and secondly we recognized that the parts of the franchise we were pursuing were unpolluted. The teams in Asia and Europe are full of good people, who are customer focused and dedicated to generating revenues from clients, not proprietary activity."
These people were in a bad situation on September 15, a day referred to by several people interviewed for this story as "that fateful Monday". It was then that Lehman entered Chapter 11 bankruptcy after weekend talks with Barclays and Bank of America (which were considering buying all of Lehman) had collapsed. As the media surrounded the firm’s offices to capture photographs of workers leaving the building with cardboard boxes, those iconic images of corporate collapse, many working at Lehman must have feared a long stretch of unemployment. Simon Boadle, a corporate finance partner at PricewaterhouseCoopers, takes up the story.
"Over the weekend of the 13th and 14th I had been talking with Dan [Schwarzmann, a partner in PwC’s insolvency team] about the possibility of us getting involved with the Lehman situation and what would have to be done," he says. "So when the firm’s European business entered administration on the 15th we were already mobilized. The first couple of days were all about understanding what parts of the business could be sold."
Those turned out to be Lehman’s investment banking (IBD) and equities divisions, with the fixed-income business likely to be a tough sell owing to the more difficult regulatory requirements and increased risk associated with that side of the business.
Boadle continues: "We decided very quickly that it would not be possible to sell the trade books in one package: they were phenomenally complex and we needed to make a fast sale. Investment banking is a people business and if you can’t keep those people together then there’s nothing to sell. We started very early holding what at Lehman they call "Town Hall" meetings – meetings with all staff present where Dan worked to persuade them to stay together and work as a team. It was in their interests, in the interests of each other, to stick around."
Close to collapse
On Tuesday 16, news arrived that Barclays had bought the US piece of Lehman for $1.75 billion, with the rest of the firm up for grabs. The move looked likely to hasten the disintegration of the remaining businesses: with no buyer for the whole firm, it wouldn’t be long before Lehman collapsed completely.
By Wednesday, the team at PWC were in contact with a wide variety of potential buyers from commercial banks to investment banks and private equity firms across the globe, but Boadle says that the serious bids were "self-selecting" in that many firms were not of sufficient size or could not move quickly enough.
"By the Thursday [September 18]," Boadle says, "it became clear that we had a small number of seriously interested parties, including Nomura."
At this point the vultures were circling: the top people at Lehman were starting to receive job offers from former colleagues, friends and rivals eager to secure their services. If a critical mass of these offers were to be accepted, the US bank’s demoralized staff might give up and the possibility of a sale that could save their jobs would vanish. Working quickly to try to secure a deal before that happened, Schwarzmann and his team of administrators set a deadline: final offers for the Europe and Middle East operations of Lehman were due on the morning of Sunday 21 September, just six days after the firm entered administration.
Meanwhile, in Tokyo, Nomura’s Watanabe saw an opportunity to make the headline-grabbing overseas investment banking acquisition that had eluded his predecessor. The firm had plenty of capital but time was short and Nomura’s last big overseas expansion had ended in ignominy with the reporting of a sub-prime related first-quarter loss of $1.47 billion in 2008 that ended Koga’s reign as CEO. When news reached Watanabe that Lehman had filed for Chapter 11 bankruptcy, however, he saw his chance. That crucial development meant that parts of the firm could be bought separately, so that Nomura would be able to take on the US firm’s talented staff without also buying into its complex and risky trades. Shibata, Nomura’s opera-loving, anglophile COO, continues the tale.
"Once we knew that Lehman was not going to be saved, we immediately indicated our interest to the court-appointed administrator in Hong Kong," he says. "At this stage we created parallel campaigns in Asia and in Europe – Sadeq Sayeed spearheaded the deal in Europe and I headed up the effort in Asia. I was able to challenge and advocate from an internal perspective, whereas Sadeq, initially operating as an external adviser to Nomura’s board, was able to look at this primarily from the value it would bring to our shareholders.
"In Asia we were aware that it was a three-horse race among Barclays, Standard Chartered and ourselves. We were told on the Saturday that we needed to be present the following day, Sunday, for management interviews in Hong Kong. Hiromi Yamaji [a 31-year veteran of the firm, now global head of investment banking], Hiromasa Yamazaki [global head of equity] and I took the last plane out of Haneda Airport to Hong Kong. Meetings took place in Lehman’s offices on Sunday, and by the very late evening we came close to a deal. By that time, Yamaji had built up a good relationship with Glenn Schiffman, Lehman’s head of investment banking Asia-Pacific, and Yamazaki had built trust with Siggi Thorkelsson, head of equities, Asia-Pacific."
Nomura and Lehman are housed in the same building in Hong Kong, the gleaming Two International Financial Centre (2IFC), and Shibata and his team spent much time shuttling between floors as the negotiations wore on. By noon on September 22 it had become clear that Nomura’s bid was the strongest and the deal was signed and executed at once. Jasjit ‘Jesse’ Bhattal, Lehman’s chief executive for Asia-Pacific, stood with Shibata in front of all of the firm’s staff that afternoon and told them the news. The race had been close. Shibata says: "We had competitive pressures from everywhere, and the terms which we were offering were essentially no different from others. I believe we were chosen as we offered the broadest scope for retaining employees."
PWC’s Boadle says that the news that a deal had been reached in Hong Kong boosted morale in London, where negotiations continued. Shibata continues the story.
"By the time the deal was signed in Hong Kong," he says, "Sadeq was also taking the lead in the final stage of the campaign, and we all flew to London to help conclude the deal. Overnight, Lehman’s Asia people communicated with their counterparts in Europe, and the deal was signed in the afternoon. Christian Meissner and Rachid Bouzouba spoke on behalf of Lehman Europe and Sadeq and I spoke on behalf of Nomura. Thinking about what must have been difficult days for the people at Lehman, I started my speech by saying ‘The spirit of Lehman continues.’ This received very warm applause – I felt as if it lasted for a long time. I concluded my speech by saying ‘We are here to invite you into Nomura not as hired hands but as leaders, brains and more importantly as partners. So we want you to invite us as your partners.’ There was a standing ovation, which I did not expect, but it was very moving."
"By making the offer we have we can control who stays and goes rather than the market"
Sadeq Sayeed, Nomura
Nonetheless, Nomura bought into Lehman for its people, and the challenge now is to retain them. There were at the time of the deal more than 5,000 employees in Lehman’s European and Asian businesses. When most banks are looking to slash salaries and bonus pools, Nomura has offered Lehman bankers the equivalent of last year’s bonus if they stay until autumn 2009, and has confirmed that next year’s bonus pool will be the same as this year’s.
"They have been offered an incredible deal," says Simon Hayes, a Tokyo-based headhunter at executive search firm Eban. "It’s impossible to average across the industry," he says, "but as a rough figure I would expect compensation to come down this year by around 40%. These Lehman guys have gone from being out of a job to potentially earning as much as they did last year and having job security for the next two years if they want it."
The strategy will be expensive, although Nomura has the cash after paying essentially nothing for the Europe business and a paltry $225 million for the Asian arm of Lehman. It could also prove divisive in that similarly ranked executives from Lehman and Nomura working side by side in the new firm could be paid wildly differing sums. However, Hayes believes that it is a smart ploy.
"They have been criticized for the extravagance of their offer, but what Nomura has done is actually quite clever," he says. "They have given themselves a window of opportunity to convince people to stay. The Lehman guys now have a very clear path, they have two years on guaranteed pay to decide if they want to stay at Nomura and at the very least they have one year during which they might as well stay while they can see other people with a strong negotiating position."
Sayeed explains the strategy behind the pay offer further. "Had we acquired Lehman in its entirety we would have had to pay the equity holders something, and then we’d still have to pay people to stay," he says. "So what we have offered now is what we would have had to pay anyway. Other banks could afford to make lower offers than us because they already have stable platforms in place but by making the offer we have we can control who stays and goes rather than the market."
Hayes reckons that senior ex-Lehman bankers will be on at least three months’ notice, so that spring 2009 will be a critical time to watch out for departures. "Anyone senior at Lehman who was any good, and there were plenty of them, will have multiple offers coming their way," he says. "It’s up to Nomura to convince them to stay."
So far the signs are reasonably good for Nomura. In Europe, Christian Meissner and William Vereker have agreed to join from Lehman as co-heads of investment banking for Europe and the Middle East. It is difficult to determine who is leaving the firm because Nomura can’t find a role for them, and who is leaving because they’ve found a better offer elsewhere. So far, though, Euromoney understands that co-chief executive Riccardo Banchetti and co-head of investment banking for Europe Alexis de Rosnay are not taking up new roles with Nomura post-integration. At the time of writing in late October, rumours were circling that several prominent country heads in Europe were also likely to be leaving the firm shortly, and Sayeed will have to work hard in his new role as head of Europe to make the acquisition work.
|Nomura’s reliance on Japan|
|Dealogic revenue league tables show the Japanese bank’s reliance on its home market|
|Asia-Pacific core IB* bank revenue ranking, 2008 YTD|
|Bank||Net revenue ($mln)||% share|
|Asia-Pacific (ex Japan) core IB* bank revenue ranking, 2008 YTD|
|Bank||Net revenue ($mln)||% share|
In Hong Kong, Nomura is so far doing better. A senior investment banker who preferred to remain anonymous until official announcements were made told Euromoney : "Most of the product heads, the senior guys, are staying. There’s very little overlap in our businesses with what Nomura were doing in Asia, and the offer that was made to us is very compelling. What remains to be worked out is the lines of reporting and the exact delineation of who runs what."
The main question is what role there will be for Jesse Bhattal and his team of product heads under Glenn Schiffman, head of investment banking for Asia-Pacific. Nomura veteran Minoru Shinohara has been placed in charge of integrating the two firms in the region, a process further complicated by the fact that Lehman’s business across Asia-Pacific is so much larger and more established than its acquirer’s. The temptation, many senior bankers outside the two firms feel, will be for Nomura to run Lehman as a kind of parallel internal investment bank for the time being.
Eban’s Hayes says: "The key issue for me is how willing Nomura is to let outsiders, that is foreigners and/or ex-Lehman guys, participate in the running of the firm. Nomura has had international operations for a while but it is a very Japanese firm and all the senior guys are Japanese. If you genuinely want an international franchise across investment banking then you have to let some of those people into the inner sanctum. Meanwhile the senior guys from Lehman are used to gaining access to the decision makers in head office, and if they feel they’re being palmed off on some kind of international functionary they won’t stay long."
In Tokyo, where Nomura’s business overlaps more than anywhere with Lehman’s, there have naturally been more departures. So far more than a hundred professionals from the equities research and trading departments have left for other firms. Barclays Capital has so far been the chief destination for departing Lehman staff, with Koichiro Chiwata, the former head of equity research, and Kazutoshi Ohkubo, head of equity sales, among the more notable hires.
There will also be concern about the number of Asia-Pacific coverage teams from Lehman that have decamped to rival banks: so far the power sector coverage group has gone to Merrill Lynch, and the oil and gas team has joined UBS. Standard Chartered has taken on three of Lehman’s commodities trading team, including the regional head of the business.
Shibata rebuts the suggestion that the firm will end up with a divided structure, with the Japanese headquarters isolated from the old Lehman teams across Asia and Europe. "We will not go for a two-house structure," he says, "with one for domestic and the other for international businesses. We will go for a united global wholesale bank for our wholesale businesses, with a very strong franchise in retail and wholesale clients in Japan."
Still, the threat of a culture clash is on the minds of everyone connected with the deal, despite Sayeed and Shibata’s protestations that the two firms have much in common. Eban’s Hayes estimates that although managing directors at a similar level in the two firms might have comparable basic salaries, those at Lehman could expect bonuses that would take the total compensation package to a sum three or four times higher than their counterparts at Nomura. Nomura won’t want to bring its own executives up to that level of pay right away, nor can it reduce pay for ex-Lehman bankers. The only solution, then, is to have a two-tiered pay structure for the time being. Then there is the question of the two firm’s corporate cultures, with the accepted viewpoint being that Nomura is somewhat hierarchical, conservative and teamwork-based whereas Lehman was more entrepreneurial and aggressive. Shibata and Sayeed have clearly been comparing notes in answering this question: both use the word "collegiate" when describing similarities between Nomura and Lehman.
"We are finding many similarities," says Shibata. "The challenge is less outside of the US because the European and Asian businesses are multicultural by definition. Lehman had many home-grown talents and had a collegiate culture. Nomura had many home-grown talents and had a culture of teamwork. We are finding ourselves a good match. After all, they chose us and we chose them. There must have been a reason.
"In Nomura’s offices abroad, the Japanese are in a significant minority – Nomura’s London office alone has over 55 nationalities, and out of 1,500 staff, only 70 are expat Japanese. While our Japanese colleagues will remain an important link with Japan, their percentage will be diluted further as a result of the combination. On compensation, simply put, Nomura is a meritocracy. For a Japanese house, we have been aggressive in building a performance-based culture. We are convinced that the transition will be smooth. We wouldn’t have done the deal otherwise."
However significant the difference in corporate values turns out to be, however difficult Nomura finds it to retain the talented Lehman bankers who were the reason for the acquisition in the first place, the ultimate test will be to find a business model that works. That will have to be done without a significant North American presence for the time being, something that Sayeed argues is eminently possible. "We will build up the US piece of the business bit by bit," he says. "In the past, the American banks would have the US presence and then build a global business in that image. We will do the reverse, creating a US business in our own image."
Sayeed concedes that Nomura has been burnt by past attempts to break the US market – indeed he says he is intimately familiar with the problem, having headed the costly unwinding of the firm’s RMBS business in America earlier this year. Nomura will learn from those mistakes, he says, and not rush headlong into the US again.
Nomura is now the world’s largest independent investment bank at a time when the model of being such an institution without a deposit-taking commercial bank in support has been largely rejected. For Sayeed, the solution is a return to the old model of investment banking, the role as independent provider of advice and access to finance.
"The last seven to eight years were characterized by an excess of leverage," he says. "That for me began in 1998 with the bail-out of LTCM. That was the start of moral hazard, when everyone realized that if a hedge fund could be bailed out because of its importance to the financial system, then maybe anyone could be bailed out. My view is that this allowed the world to focus on winning business by providing financing, something that obviously creates an inherent conflict of interest in a time of crisis. Before the crisis, the equity holders and the bond holders all work together, but when crisis hits that’s no longer true.
"The future for our business will be characterized by a return to balance-sheet lending by the commercial banks on one side, and unconflicted advisory being provided by investment banks on the other. For Nomura, that means we’ll advise corporate clients, not using our balance sheet but renting it to them if needed, and help the buy side maximize returns from their portfolios. Our goals will be to provide derivatives and other products for risk-management purposes, cross-border best-practice advice for financing and M&A activities, and a solid trading platform. If you go back, that’s what investment banking used to be."