Bloomberg News

Nomura Reeling From Lehman Hangover as Shibata Vows No Retreat

February 28, 2012

Feb. 28 (Bloomberg) -- At 8 a.m. on Jan. 10, Takumi Shibata, chief operating officer of Nomura Holdings Inc., walked into the firm’s London boardroom overlooking the River Thames to try to salvage its 2008 acquisition of parts of bankrupt Lehman Brothers Holdings Inc.

Shibata had flown in from Tokyo to assemble executives at Nomura’s wholesale business, which includes investment banking and sales and trading. The unit’s head, Jesse Bhattal, was on videoconference from Singapore with news: He was leaving. Before the meeting, Shibata had terminated Bhattal’s lieutenant, Tarun Jotwani, a former Lehman trader running global markets, according to people familiar with the situation who asked not to be identified.

The departure of the top two former Lehman executives was the culmination of a clash over competing visions for the future of Japan’s largest brokerage. Bhattal argued for an aggressive approach to businesses that weren’t generating high returns. The old guard wanted to stay the course to build an international investment-banking franchise.

For the 86-year-old firm making its fourth attempt to go global, things hadn’t gone well: The dispute emerged as the wholesale division suffered $1.1 billion in pretax losses in the six months ended Sept. 30. Shares hit a 37-year low on Nov. 24. Once the world’s biggest securities firm with a market value of $76 billion in 1987, Nomura has a market value of $18.2 billion, one-third that of Goldman Sachs Group Inc.

Bhattal, 55, wanted big cuts in equities, investment banking and the firm’s U.S. business -- as much as $1.6 billion, the people say. At the same time, he saw opportunities to buy assets being unloaded by European banks to meet tougher capital rules. Executives in Tokyo balked.

“Nomura remains committed to being a global, Asia-based investment bank,” Shibata says he told the London group, speaking in an interview at Zurich Airport in January.

While Europe’s prospects look bleak for the next two to three years, Nomura isn’t retreating, Shibata says. The firm will keep its equities and investment-banking businesses, including the U.S. unit Nomura built from scratch, while paring elsewhere including in commodities trading. It will build on strengths, Shibata says, such as helping financial firms raise capital and advising natural resource companies.

“We need to make sure we survive the storm, but we have no intention of going into hibernation,” he says. “We cut out the fat without much of a strategic change.”

On Nov. 1, Nomura said it would triple cost cuts announced in July to $1.2 billion.

“We are still going for dominance in Japan, no question,” says Shibata, 59, an opera-loving Nomura lifer with a degree from Harvard Business School. “Outside of Japan, we will focus on a narrower range of activities, but where we are active, we want to be very deep.”

Jotwani and Bhattal declined to comment for this story.

Nomura has had big ambitions for decades. It expanded abroad in the 1980s, only to pull back as Japan’s economy faltered. Attempts in the mid-1990s and mid-2000s foundered as well.

“The firm’s ambition has been to be the Japanese Morgan Stanley or Goldman Sachs -- a major global player,” says William Overholt, chief regional strategist at Nomura in Hong Kong until 2001 and now with Harvard University’s Kennedy School of Government. “It has suffered from an inability to implement its strategy.”

When Lehman’s international units became available, Nomura Group Chief Executive Officer Kenichi Watanabe called it a “once-in-a-generation opportunity.” Nomura bought the Europe operations for just $2 and Asia’s for $225 million in what was supposed to be a game-changing bid to take on Wall Street banks weakened by the financial crisis.

The Lehman deal amounted to a reverse takeover, with “gaijin,” or foreigners, running most of the businesses. To integrate, Nomura embarked on a deprogramming campaign. When executives uttered the “L” word during meetings, they had to put 5 pounds into a box.

Shibata was banking on an opening in the market. With Bear Stearns Cos. acquired by JPMorgan Chase & Co. and other banks hobbled by government bailouts, he figured Nomura could make headway.

“I was wrong,” Shibata says. “I thought in 2008 we were going to a world where European banks would go back to being commercial banks. If they were to receive taxpayers’ money, taxpayers would demand the money be used for transactions in that country.”

Even with the bargain price tag, the cost of the Lehman acquisition was high. Nomura took on 8,000 employees and guaranteed multimillion-dollar bonuses for top bankers for two years, locking in pre-crisis compensation. At least a dozen Lehman rainmakers left afterward, including Christian Meissner, who now runs investment banking at Bank of America Corp.

Globally, Nomura has struggled to break into the top tier. Last year in Europe, it ranked 13th in underwriting equities and 15th in advising on mergers, according to data compiled by Bloomberg. It was 24th in underwriting equity offerings in Asia outside of Japan.

Still, its grip on Japan remains strong. Nomura ranked No. 1 there in underwriting equities and advising on mergers and acquisitions last year.

The Lehman acquisition was transformative. Nomura’s trading volumes swelled 10-fold within three months. The deal helped Nomura strengthen its hold on financial markets, doubling its share of stocks traded on the Tokyo exchange to 14 percent of volume, the largest in Japan. The Lehman purchase also enabled Nomura to win fees from Japanese companies doing deals overseas, Shibata says. Its market share in advising Japanese acquisitions abroad increased to 25 percent in 2011 from 10 percent in 2007, Bloomberg data show.

Shibata isn’t the only one trying to steer through the newly slimmed-down financial world. Rising capital requirements, lower trading volumes, European sovereign-debt woes, and regulatory capital constraints make it harder to generate returns.

After raising $9 billion in two share offerings in 2009, Nomura is ahead of rivals in meeting new capital rules taking effect in 2015. It has Tier 1 capital of 12.9 percent of risk- weighted assets, more than required under Basel III rules.

“We don’t feel now is the right time to reduce that cushion,” says David Benson, Nomura’s London-based vice chairman. “Instinctively, as a trader I’d like to be on the other side of the banks in their deleveraging, but we need to be smart with our capital.”

In March 2010, Shibata named Bhattal to lead a new wholesale division joining investment banking with fixed income and equities, and gave him the title CEO a year later. An Indian-born Rhodes Scholar with a taste for Savile Row suits, Bhattal was a 15-year Lehman veteran who had headed the U.S. firm’s Asian business.

In his first year as president, Bhattal brought order to the fragmented house of Nomura, creating a weekly executive review committee and agreeing with Shibata on a hiring freeze.

As losses continued, one banker close to Bhattal says he didn’t see eye to eye with the board and became frustrated that he couldn’t set strategy. With differences growing, Shibata and Bhattal met in Tokyo in mid-December and agreed to part ways.

“Bhattal was one of the most highly regarded guys at Lehman,” says Lawrence McDonald, a former Lehman trader and author of “A Colossal Failure of Common Sense” about the firm’s collapse. “Some executives were lightweight. He was heavyweight.”

Nomura’s cost cutting may be too little, too late, says Ichiro Takamatsu, a fund manager for Tokyo-based Bayview Asset Management Co.

“Either Watanabe or Shibata should resign to take responsibility for the failure,” says Takamatsu, who formerly held Nomura shares.

--Editors: Sheridan Prasso, Robert Friedman

-0- Feb/28/2012 15:50 GMT

To contact the reporters on this story: Stephanie Baker in London at; Takahiko Hyuga in Tokyo at

To contact the editors responsible for this story: Michael Serrill at; Chitra Somayaji at

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