Investment banking: Can Nomura’s Lehman buy make the firm a force in Asia?

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By:
Lawrence White
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Is the new Nomura a threat to the dominant investment banks in the Asia-Pacific region?

Nomura deputy president Takumi Shibata

Nomura deputy president Takumi Shibata is said to be the brains behind the Lehman acquisition

When Nomura’s new chief executive, Kenichi Watanabe, wrote in the firm’s annual report this year that it would "invest aggressively in markets with prospects for future growth", neither he nor his readers back in March could have guessed that the bank would be the owner of the Asian and European investment banking units of Lehman Brothers just six months later. What does the acquisition mean for Nomura?


The bank beat Barclays and Standard Chartered in the bidding for Lehman’s Asian and EMEA units on the strength of its proposal to take on all of the US firm’s employees. In Asia-Pacific, Nomura will take on 3,000 Lehman employees across 11 offices in eight countries: it is this human capital that the Japanese firm is interested in, and its ability to retain and successfully deploy that capital will decide the fate of its attempt to build an Asia-based global investment banking firm.

Nomura is regarded as the dominant (indeed the only) independent domestic investment bank inside Japan, and as a minnow outside the country. League tables from Dealogic show that Nomura ranked 17th in Asia-Pacific M&A for the financial year ended March 2008, with deals worth a total of $25.1 billion. Remove the $23.8 billion of that total that came from Japan-based deals, however, and the total slips to $1.3 billion — roughly 70th place on the league table. Lehman Brothers placed 12th in the same period, with $29 billion-worth of deals, much of it from ex-Japan operations including the $14 billion Chinalco/Rio Tinto transaction. A combined Lehman and Nomura would have worked on Asia-Pacific deals with a total value of $55 billion in M&A and $13 billion in equity capital markets, good for eighth and seventh place respectively.

So is the new Nomura a threat to the dominant investment banks in the Asia-Pacific region? The challenge will be for Nomura to integrate and retain the top talent from its new acquisition, something that Japanese firms have always found difficult because of differing ideas over pay structures, the autonomy afforded to local managers and other key cultural issues.

"Everyone says that the compensation issue is important," says Syed Ehsan, an analyst at Fitch Ratings who covers Nomura, "and it’s true that if they want to keep the top bankers in London and Hong Kong they will have to pay them market rates. On the plus side the deputy president [Takumi] Shibata, who is said to be the brains behind this acquisition, is a very international guy and very well regarded internally."

Figures for Lehman Brothers Japan show that the unit had net operating revenues of ¥90 billion ($847 million) for financial 2008, and that "compensation expense" (pay) accounted for ¥40 billion of the firm’s ¥78 billion expenses for the year.

"My guess is that the corresponding ratio of compensation to total expenses would be much lower at Nomura," says Ehsan, "even though they are among the better-paying Japanese financial institutions."

"Given that the scale of the acquisition is not especially
large, we doubt it will have any repercussions in breaking
down Nomura’s
enterprise value"

Syed Ehsan, Fitch Ratings

Ehsan notes that Nomura has been careful in its statements about the deal to refer to itself as an "Asia-based investment bank", and the new strategy is focused on the London-Hong Kong-Tokyo axis, with the former as the product development centre. Nomura retreated bruised from its most recent failed US venture earlier this year, and the lack of a viable US operation might hurt the firm’s prospects. Azuma Ohno, an analyst at Credit Suisse, says of the deal in a research note: "There are major differences in corporate culture, remuneration systems and business practices, including differences in Japanese and overseas foreign capital holdings, between the two entities. Moreover, with Lehman’s US operations set to be inherited by Barclays, we believe one key issue will be maintaining business development capabilities after connections with the US are eased. Given that the scale of the acquisition is not especially large, we doubt it will have any repercussions in breaking down Nomura’s enterprise value. Nonetheless, depending on how operations proceed, risks that value could be lower than before the acquisition need to be recognized."


Bankers at foreign firms in Tokyo are divided on whether Nomura will be able to solve the problem of integrating Lehman employees used to the forthright US style of investment banking into the more consensus-driven Japanese banking culture, although several note that Nomura is among the more internationally minded and aggressive Japanese financial institutions. Nobody is sure whether this venture will succeed: one banker calls the deal a "CEO ego trip that looks sure to fail," while a debt capital markets banker at a different foreign investment bank notes that Nomura "bought some good bankers at a good price" and did well to beat off rival bids from Barclays and Standard Chartered.

Nomura has announced that it will rebrand Lehman’s offices around Asia under its own name, removing all traces of the Lehman name from global investment banking. The Japanese bank aims to succeed in finally becoming a force in Asia, and the rate at which it is able to hold on to ex-Lehman bankers in the coming months will suggest whether that aim is likely to be realized.

Top M&A transactions by the Finance Sector in the Asia-Pacific into the European and North American Finance Sector 2006 to 2008 YTD
Announcement dateTargetTarget nationalityAcquirorAcquiror nationalityDeal Value $ (m)
24 Dec 07Merrill Lynch (13%)United StatesTemasek; Davis Selected AdvisorsSingapore6,200
27 Mar 06Standard Chartered (11.55%)United KingdomTemasekSingapore4,045
12 Aug 08UnionBanCal (34.6%)United StatesMitsubishi UFJ Financial GroupJapan3,511
28 Jul 08Merrill Lynch (Stake%)United StatesTemasekSingapore3,400
21 May 07Blackstone Group (10%)United StatesChina Investment CorpChina3,000
23 Jul 07Barclays (2.64%)United KingdomChina Development BankChina2,981
23 Jul 07Barclays (1.77%)United KingdomTemasekSingapore2,005
11 Mar 08Sintonia (14.3%)ItalyGovernment of Singapore Investment CorpSingapore1,537
7 Mar 07Standard Chartered (3.74%)United KingdomTemasekSingapore1,416
2 Nov 06Instinet CorpUnited StatesNomura Holdings IncJapan1,200
25 Jun 08Barclays (2.07407%)United KingdomSumitomo Mitsui Banking CorpJapan983
19 Dec 06Fortress Investment Group (15%)United StatesNomuraJapan888
29 Nov 07Great Western BankUnited StatesNational Australia BankAustralia798
19 Mar 08Banco Popular Espanol (3.3%)SpainPrivate Investor (Indian private investor, Ram Bhavnani)India695
17 Mar 08Bank CenterCredit AO (23%)KazakhstanKookmin BankSouth Korea497
23 Sep 08Lehman Brothers (European equities and investment banking businesses)*United KingdomNomuraJapanN/A
*Note:Deal value is unknown and thus, does not rank in the top 15.
Source: Dealogic