TT-488 -- Will Nomura Get Indigestion From its Lehman Purchase? Ebiz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, October 5, 2008 Issue No. 488


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So Japan's biggest investment bank, Nomura, is buying
out the operations and staff of Lehman Brothers' European,
Middle Eastern and Asia-Pacific operations. On the face of
it, Nomura has got itself a good deal, especially the
highly-publicised two-dollar purchase of the European and
Middle East investment banking and equities operations
business. But of course, the price is low for a reason...

Specifically, because Lehman has very little assets of
value left on its books that haven't already been earmarked
to sell to pay out its creditors. So what Nomura is really
paying for with their two dollars is the rather hefty
salaries of the many staff that Lehman employs in those
parts of the world, as well as in the Asia-Pacific region.

Indeed, even Nomura is saying that what they are buying is
really just the Lehman staff and some sundry Asia-based IT
assets. According to a recent Nikkei interview with Nomura
President Kenichi Watanabe, the Nikkei concludes that
Nomura has "steered clear of Lehman's risk-laden balance
sheet and focused instead on the financial services
company's healthy assets -- namely, its personnel."

Well that's good, because there are 5,500 of them, 1,300
of whom are in Tokyo. Nomura wants them badly enough that
it has issued assurances that everyone will have a job
after the handover, and in particular has guaranteed the
various Lehman Managing Directors that their compensation
packages will stay as they are. Unfortunately for Nomura,
it appears that the assurances are not being given much
credibility, and already a number of high-profile managers
in the most desirable segment, Equities, have jumped ship.

According to the Nikkei, and this is only hearsay at this
point, about a quarter of the 170-person Tokyo equities
team have either left already or are in the process of
leaving, and apparently there are a number of others in
Investment Banking and Fixed Income who have declined to
sign on with Nomura. Since these teams are supposedly THE
major reason Nomura is buying the Lehman business, we
wonder if the Japanese firm isn't taking too long to staunch
the bleeding?

The current goings on have also made us wonder how will the
Lehman acquisition go long-term for Nomura. Will the
Japanese firm emerge as a resurgent world force in
investment banking, thanks to its canny purchase and
Lehman's unfortunate accident, or will the Japanese-ness of
Nomura serve to disincentivize the Lehman staff and lead to
their gradual and steady hemeorraging to other firms?

[Continued below...]

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[...Article continues]

Although we are not an insider at either firm, by listening
to the recruiting markets and media, our understanding of
the general atmosphere and incentive schemes of both
companies leads us to make the following general
characterizations of each:

1. Lehman Brothers in Japan and around the world has been a
high-flying, highly innovative company, attracting
top-level performers to execute deals and create businesses
that reward those performers outstandingly and the rest of
the operations team on a more moderate level.

Some would say that this kind of environment epitomizes the
creed of greed that is being bashed by politicians in the
USA at present, but no one could deny that Lehman's
innovations and risk taking have led to some major coups
here in Japan. Uppermost in our minds was their funding of
JPY80bn of debt for Horie-mon of LiveDoor back in his
heyday. The structuring of this debt was such that Lehman
wound up with huge profits at the expense of the markets.
OK, so they lost it all again with the Marubeni scandal in
March of this year, but a pending law suit may still see them
get it back.

It is our understanding, too, that Lehman pays "above
market" in Japan for almost all categories of employees. In
some cases, as much as 30% above market. And remember that
the "market" we're talking about is the employment universe
for foreign securities firms, which of course pay at least
30% more and sometimes up to double what their less-flashy
Japanese counterparts do. As a result, Lehman has a good
slice of talented bilinguals and a particularly high number
of bilingual, risk-taking foreigners, who have led some of
the best deals for the company.

Contrast this type of environment, then, with Nomura, a
company which just 10 years ago was regarded with the same
disdain as politicians in the LDP. By far the largest
player in the Japanese investment banking field, it was
generally regarded as the repository for home-team deals
and corporate egoism. Although it wasn't a place anyone
really wanted to work, it was a fantastic place to make
connections that would pay off in the next job. So many
senior finance industry players have had a stint at Nomura
somewhere early on in their careers, especially players in
Private Equity, REITs, and general banking.

To Nomura's credit, things appear to have changed for the
better over the last ten years, and the company has
cleaned up its act significantly -- particularly after
several scandals in the late 1990's. Its operations in
Europe in particular have helped create a new international
image, while steady profits here in Japan have reinforced
its market leadership position. Further, its February 2007,
US$1.2bn acquisition of market data supplier Instinet
seems to be going well, which means that the company has
figured out how to buy and maintain an international
operations business. Nonetheless, it appears difficult for
Nomura to completely evolve into a full-blown securities
firm with all the risks and leveraging that that kind of
business entails. The corporate culture just doesn't seem
to support that kind of activity.

Instead, Nomura has come to be viewed as more of a
Steady-Eddy type of firm. Its worker-bee atmosphere has
meant that it is relatively conservative and doesn't seem
to mind sacrificing potentially huge profits and bonuses in
return for stability and predictability. Of course, in
retrospect this may not be a bad thing and is perhaps the
future of investment banking itself for the next 3-5 years...

So will Nomura be able to successfully merge the Lehman
staff into its business or not?

Our sense is that Nomura is going to wind up paying more
than it thinks for less human assets than it can use. We
think that the dilution process will occur in two phases.
Firstly, the Wunderkind of Lehman are highly mobile and
from Day One have viewed Nomura as an environment that
would restrict their activities and ambitions. As they
have started to leave, the ability for the remaining
front office team members to pull down big and innovative
deals will start to disappear -- leaving Nomura with some
sharp but very expensive back-office and middle-office
teams and not enough people to provide the front-end

Thus the second phase will start, and this will be slower
and more drawn out. We imagine that as income drops, Nomura
will inevitably have to use its own sales and deal teams to
create revenue and thus the inherent lower performance of
those home-grown teams will accentuate the expense of
keeping the remaining Lehman staff.

It would only be rational under such circumstances for
Nomura to start pressuring the remaining higher-paid staff
to either take on more responsibility or to accept a cut
in wages. The image of "working like a dog" comes to mind.
This scenario is particularly likely as the global economy
contracts, as it surely will once the U.S. money markets
start to realize that government's US$700bn is only the
down payment on unwinding the financial mire ahead of it.
Indeed, some commentators are estimating the U.S. clean-up
to be in excess of US$6trn, and that's not counting the
tsunami of debt that a global depression would cause.

So would Lehman Brothers staff be better off jumping ship
now? It's hard to say. In the investment banking world,
usually it's a case of last-in, first-off, and for those
people jumping to companies which might still not have
come clean on their full subprime or CDO liabilities, the
ex-Lehman staff could wind up facing redundancy sooner than
they think. On the other hand, those people who stay in
Lehman will be able to parry Nomura's cost-cutting efforts
for some time, possibly several years, giving them time to
look for a better and more stable position and for the
current fear-based employment environment to become more
rational again.

Either way, we don't see the deal being so good for Nomura.
President Watanabe says that he expects a hit to the
Nomura P&L for the coming year as the acquisition is
absorbed. However, we think he is being optimistic.
Instead, he may be required to take personal responsibility
for draining the company's treasury to buy into a dream
whose time has already passed.


If you like great music, then you should head over to the
Pink Cow in Shibuya on the evening of October 13th. The
reason is that the Resentments of Austin, Texas, are going
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Who? You may ask...

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+++ NEWS

- Kikkoman buys U.S. supplement company
- New radio-control toys climb walls
- AIG to sell off Japan businesses
- FXOnline sold for hundreds of millions
- Japanese boy rescued from being a beggar in Manila

-> Kikkoman buys U.S. supplement company

In an indication of what comes next after Soy Sauce, the
Kikkoman company has just acquired U.S. supplement firm
Allergy Research Group, for around JPY2bn (US$19m).
Allergy Research has sales of around JPY1.8bn, which makes
the purchase price sound high, but in addition has the key
element of a unique distribution channel. The company sells
mainly through doctors and has a high level of credibility
within the health profession. Kikkoman appears to be
intending to team Allergy Research with their 2005 health
supplements acquisition -- Country Life. (Source: TT
commentary from, Sep 30, 2008)

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Tomy looks like it might have a new hit product on its
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***Ed We want one of these!** They'll be priced at JPY4,725
each and will be available early next year. (Source: TT
commentary from, Oct 1, 2008)

-> AIG to sell off Japan businesses

The September financial meltdown in the USA is starting to
impact the local market, but not always for the worse. The
AIG insurance company has said that it will sell its three
local life insurance businesses: Alico Japan, AIG Edison
Life Insurance, and AIG Star Life Insurance in the next few
weeks. The company will apparently hang on to its non-life
operations. This represents a very attractive buying
opportunity for Japanese and other foreign life insurance
firms, because AIG has been in the market for such a long
time and has become a trusted name in Japanese insurance.
The buying price is expected to be around JPY1trn
(US$9.5bn) or more. Before the meltdown, AIG was the
world's largest insurance firm. (Source: TT commentary from, Oct 3, 2008)

-> FXOnline sold for hundreds of millions

In what is probably the largest earn-out ever made by a
foreigner starting a business in Japan on his own,
FXOnline's James Gow has just managed to sell 87.5% of his
online Foreign Exchange trading business, FXOnline, for a
massive 112.2m pounds (US$207.7m) to the UK's IG Group.
FXOnline was founded in 2002, and has been able to take
advantage of the major shift by Japanese housewives into
foreign exchange trading. The company earned a huge JPY3bn
in post-tax profits last financial year, and appears to
still be growing at a fast clip -- fast enough for IG Group
to pay an 8.7 times earnings premium for the business.
***Ed: All we can say is well done James and team! This is
the kind of deal that inspires other immigrants to Japan to
give it a go.** (Source: TT commentary from,
Oct 2, 2008)

-> Japanese boy rescued from being a beggar in Manila

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with a Filippina mother was found begging on the streets of
Manila after the mother left his father and took the child
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mother was left destitute, causing her to push the boy to
beg for food. The Japanese father, a cattle farmer from
Hokkaido went to pick the boy up and return him to the
family home to be reunited with his two sisters, whom he
hasn't seen for 5 years. ***Ed: And you think your life is
tough... This sort of story puts things into perspective**
(Source: TT commentary from, Oct 3, 2008)

NOTE: Broken links
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In this section we run comments and corrections submitted
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*** Our bad:
In TT487, regarding U.S. House testimony by two leading
health scientists that cell phones may cause brain cancer,
we stated that David Carpenter was the director of the
Institute of Health and Environment at the University of
Albany. However, as a reader points out...

*** Our Reader:
There is no 'University of Albany'.... never has been. It
is the State University of New York (SUNY) Albany.... SUNY
is the system that that includes a rather large collection
of campuses including SUNY Buffalo, SUNY Binghamton, SUNY
Purchase, etc. There is also a CUNY (City University of
New York) which includes places like City College of New
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aforementioned are public institutions.... New York
University, however, is a private university.

*** Our Comment:
We love getting feedback. Further, comments like this just
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Lehman bust has helped adjust the salary levels of the bankers which is out of control. Nomura must be crazy to buy such gaijin firm, as Nomura is known in the market to be anti-gaijin to begin with.

Is addition, they didn't buy the NY office, as all sites rely on the NY office for their global conectivity, ie trading systems. Nomura will need to dump another US$100M in the infrastructure to by-pass the dependance on the NY office.

Sorry to say, but this will be a fire sale soon. Like the saying goes, you can't pollish a turd.

Lehmans is a powerhouse firm in America where they have a long history but quite frankly are far behind the competition in every other market that they are based in. Lehman have to pay 30% above market in order to secure decent personnel because otherwise talented people won't come there. But what does that mean? It means you've got semi-talented people coming to work with you for the money and a bit of freedom (Lehman clearly didn't have much corporate governance happening there). If I was working there and saw Nomura come and buy the firm, I'd start doubting both of those positive attributes. And as far as Nomura is concerned, they are overpaying for a mediocre brand who will see its most talented people leave as their contracts are paid out over the next few years. Sounds like a lose-lose situation to me.

Nomura has grossly under-rated the Japanese employment market and should have acted swiftly to provide incentives to all staff, not as I suspect, the senior front office staff.

Unlike Europe and the USA, the Asian employment market is strong with firms snapping up Lehman's staff at even higher salaries than before. It is no surprise to me to see on Bloomberg that 100 of 170 Equities front-office staff have already vacated. I am guessing too that Nomura already has a large Fixed income floor, so I would discount them from the deal.

I agree with this article, at best they may get a chance to overhaul their back / middle office.