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Nomura's Global Ambition Starts to Pay Off

When Nomura (8604.T), Japan's biggest securities house, bought Lehman Brothers' European, Middle Eastern, and Asian business last fall, it was hard to tell if the move was inspired or reckless.

Sure, it enabled Nomura to take on about 8,000 employees in regions where it is keen to expand at a time when most rivals were wounded—fatally so, in the case of Lehman. It also made Nomura perhaps the only truly independent major investment bank left on the planet after Goldman Sachs (GS) and Morgan Stanley (MS) became bank holding companies and Bear Stearns and Merrill Lynch were taken over by commercial banks.

Yet it was hard to escape the sense of skepticism. Certainly, investors didn't react favorably. In the months after Nomura made its move, its stock plunged to around $4.40, losing 70% by early March. Nomura's annual results, meanwhile, offered little encouragement. For the fiscal year that ended in March 2009, it lost $7.5 billion. "This represents a record loss for Nomura and is something we are not proud of," Kenichi Watanabe, the firm's contrite CEO, told investors. "I would like to take this opportunity to express my sincerest apologies to our shareholders."

Lately, though, there are signs that Nomura's quick thinking—Watanabe and colleagues took the decision to acquire the remnants of Lehman in Asia and Europe within 24 hours—is starting to pay off. For sure, with the global economy showing signs of stabilizing, Nomura's finances look to have stabilized. When the Tokyo-based firm announces its results for the April-June quarter on July 29, industry-watchers are hopeful of a return to profit. JPMorgan (JPM) analyst Natsumu Tsujino, for instance, reckons Nomura will post a small pretax profit of $85 million for the quarter. "We're happy with where we are and the progress we are making," Takumi Shibata, Nomura's chief operating officer, said at an investment conference in Tokyo earlier this month.

He pointed out that, as part of plans to clean up its finances as quickly as possible, Nomura "took the maximum loss allowed under the financial rules" for the last financial year and raised $13 billion to shore up its capital base.

Boost from Lehman Recruits Just as encouraging, there are signs the new recruits from Lehman are bolstering Nomura's global investment banking business, despite the difficult economic environment. The firm's merger advisory business is one example. In Europe, for instance, mining company Anglo American (AAUK), which in June rejected a hostile merger bid from Switzerland's Xstrata (XTA.L), has hired Nomura alongside Goldman Sachs and UBS (UBS) for advice on resisting future bids. Considering Nomura ranked 51st in European M&A advisory before taking over the Lehman business, it's unlikely it would have won such business a year ago.

In Asia, Lehman recruits are also helping Nomura win business with cash-rich Japanese corporations hunting deals in the region. Nomura advised Kirin (2503.T), a large Japanese drinks maker, on its $1.2 billion deal to buy San Miguel's domestic brewery business in the Philippines. Nomura's improving prospects are reflected in its share price, which has risen 94% from the March low. Goldman Sachs analyst Takehito Yamanaka thinks the rebound could continue as business opportunities grow. On July 2, Goldman, while maintaining a neutral rating, raised its 12-month share price target for the firm. "Revisions to our estimates are based on revenue growth prospects, not cost savings," Yamanaka wrote in a research note to clients.

Tokyo watchers say the new Nomura can prosper further into the future. One advantage this time around is that it has a better chance of keeping many of the new hires. Perhaps benefiting from the challenging economic environment, Nomura says 95% of Lehman workers accepted job offers. "They're hiring great people who know the employment alternatives right now are not very good, so they'll stick around and give it a chance," says C.J. Wilson, founder of Global Alliance, a boutique investment firm with close ties to Tokyo. "This is a golden opportunity for Nomura."

Uniting Two Corporate Cultures Still, whether Nomura can emerge as a true rival to the likes of Goldman, UBS, and Morgan Stanley in the longer term is harder to say. "It's quite clear Nomura is taking an aggressive approach to expanding internationally but the question is whether they can succeed," says Neil Katkov, group manager for Asia research at Celent in Tokyo. "It would be unprecedented for a Japanese financial institution to enter the ranks of the top global players." One key to success, he says, will be ensuring that the very best international hires, rather than top managers from Japan, fill senior positions outside Japan.

Then there is the question of bringing together the two corporate cultures. So far, the integration appears to have gone reasonably smoothly, despite a few moans from former employees on both sides. In Tokyo, for instance, former Lehman traders who had been based in Lehman's swanky offices in Roppongi Hills are now getting used to older, more cramped Nomura offices across town in Otemachi. They must also get used to the Japanese firm's way of doing things, and answering to Nomura executives. Meanwhile, reports earlier in the year suggested some Nomura veterans were unimpressed at the guaranteeing of bonuses to incoming Lehman employees. Then there's the fear of job cuts as Nomura executives aim to reduce costs by 10%. Insiders, though, insist it is far easier for Nomura to bring together its people with those from Lehman than if it was a larger, more diversified institution. "The difference in culture between an investment bank and a commercial bank can be greater than two investment banks," Shibata said at the recent investment conference.

There are also hopes that by hiring thousands of former Lehman employees, Nomura will breathe new life into some of the stuffier aspects of its Japanese operation. One example is remuneration. Earlier this year, Nomura began offering employees in Japan the prospect of higher pay and bonuses in return for accepting that they could be fired more easily if they underperform. So far, about 850 have accepted the offer, which links pay to personal and departmental performance rather than the firm as a whole.
Rowley is a correspondent in BusinessWeek's Tokyo bureau.

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