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Nomura's Comeback


Back in 1997, a five-alarm fire was raging inside the House of Nomura. For the second time in a decade, scandal had shaken the big investment bank. Senior managers were charged with approving payoffs to corporate extortionists. Several resigned: Even Chief Executive Hideo Sakamaki confessed to condoning a payoff and got a suspended prison sentence. Coming on top of the 1991 affair in which the firm covered the investment losses of influential clients, the new allegations were such a stain on Nomura's reputation that some wondered if it would survive.

In a near-desperate move to save the bank, Chairman Masashi Suzuki bypassed more senior managers and named Junichi Ujiie as president and CEO. Ujiie didn't look much like chief executive material: At 51, he was young for a Japanese CEO and he had spent many years outside Japan, running Nomura's risk-management offices in Zurich and New York. A fluent English speaker who earned a doctorate under monetarist Milton Friedman at the University of Chicago, Ujiie didn't readily fit Nomura's hard-driving make-the-sale-at-any-cost culture. But the fact that he was not tainted by scandal overrode every reservation, and Suzuki forced through his appointment. Ujiie was boss.

Now, six years later, in a country crying out for comeback stories, Ujiie appears to have pulled one off. Under Ujiie, Nomura has proved there's money to be made even in a market where the Nikkei is flirting with 20-year lows, and where the commercial banking crisis never seems to end. Nomura is expected to earn $1.36 billion for the fiscal year ending Mar. 31, on revenues of $11.2 billion. Good profits in financial services? These days that would be miraculous in the U.S., let alone Japan. Ujiie has also helped Nomura shed its image as ethically challenged. Indeed, he has been maniacal about compliance, knowing another scandal would do irreparable harm. "I think we have regained the public's trust," says Ujiie.

Perhaps most gratifying of all for its staff, Nomura has succeeded in grabbing back billions of dollars in Japanese merger-and-acquisition and other business hijacked by foreign interlopers during the 1990s. To many of the bank's more hard-nosed dealmakers, losing out to foreign competitors was a worse disgrace than the payoffs. In 2002, Nomura led the rankings for Japanese M&A deals, arranging $16 billion in acquisitions. It also topped the list in equity offerings and initial public offerings, leaving firms like Goldman, Sachs & Co. and Nikko Salomon Smith Barney Ltd. in the dust. "When people are really beating us, we fight back," Ujiie says. "Any competitive global company has to have dominant share in its home market."

Ironically, these days it's not Nomura grappling with image problems but key rivals such as Citigroup, Merrill Lynch & Co., and Credit Suisse First Boston, which are being hounded by regulators over the objectivity of their research in the U.S. The American and European powerhouses are also scaling back operations in Japan. Merrill had an especially ambitious agenda, buying up the branch network of failed brokerage Yamaichi Securities Co. in 1998 in a bid to challenge Nomura. It closed up shop in Japan last year.

In contrast, Nomura is expanding its turf. To be sure, Nomura is still a shadow of its former self. It isn't the late-1980s juggernaut that threatened Wall Street on its home court, or even the late-1990s niche player that delivered handsome profits in the U.S. commercial mortgage and asset-backed securities market. But it has a market-leading 33.9% share of Japan's investment banking services. And Nomura now manages $125 billion in assets, including 40% of Japan's bond mutual funds and 20% of its stock funds.

Ujiie turned Nomura around with a combination of block-and-tackle restructuring and a rethinking of its approach to its various businesses. When he took over in 1997, Nomura's fortunes were already declining along with those of its mother country. Domestic earnings were getting hit by a free-falling stock market. In 1998, Nomura got creamed by the Russian bond default. So Ujiie took quick action to lop off money-losing operations and cut out-of-control costs. He slashed head count, mainly overseas: The U.S. workforce has been cut some 20% since 2000. He sold off a finance unit, acquired Nomura's formerly independent asset-management arm, and reorganized Nomura into a holding company focused on retail, asset management, and investment banking. To improve transparency and benchmark Nomura better against Western rivals, he listed on the New York Stock Exchange and adopted U.S. accounting principles. He also brought outside directors onto the Nomura board.

Readjusting the mind-set was key. Ujiie took a wrecking ball to the notion that Nomura's retail sales force, especially its big money earners, are princes of the realm. For decades, the guys who hauled in the biggest commissions shot up the management ranks. But since Ujiie never went through the typical career track of starting out at a small retail branch and clawing his way up, he had the freedom to try a new approach. As a result, within the new holding company retail brokering, investment banking, and asset management are on an equal footing. Capital and talent are mobilized to take advantage of the best opportunities to make money. That's wise because right now the biggest opportunity for Nomura isn't selling stocks but overhauling companies and balance sheets.

Gone, too, is the "only invented here" syndrome that limited Nomura to financial products designed in house, consumer be damned. Now if investors want a hot foreign bond fund or a global equity product, they get it. Ujiie shocked insiders and rivals alike by insisting that Nomura's asset-management division distribute mutual funds by the likes of Fidelity Investments, Merrill Lynch, and Goldman Sachs. Says Ujiie: "We will sell it, if the product is good. Who makes it? We don't care."

In the new Nomura, ethics and compliance matter. In fact, Ujiie insists every employee carry a wallet-size mission statement that stresses the positive role the financial professions play in society. On a day-to-day basis, branch managers are under orders to close any of Nomura's 5 million retail accounts immediately if there is a scent of corruption. Ujiie admits that retail branch managers have been threatened by thugs for carrying out this policy.

On the financial front, Nomura refocused its attention on its home market at just the right time -- as restructuring and consolidation slowly become Japan's new business religion. And the firm's decades-old ties with large domestic companies are paying off quite nicely. It is the main adviser to Konica Corp. on its planned multibillion-dollar takeover of Minolta Co. and on several deals in the bloated construction industry. It also advised the retail chain, Seiyu Ltd., when it sold 37% of its shares to Wal-Mart Stores Inc. (WMT) And last month, Nomura won the competition to advise the New Tokyo International Airport Authority on its planned initial public offering set for later this year. That deal was made by Hiroshi Toda, Nomura's head of M&A, whose team of rainmakers is the most respected in Tokyo finance.

Nailing such deals is vital because the profit margins can be lucrative and strategic advice often leads to future business. Also, Nomura has ambitious plans to become a turnaround artist. In the past two years, it has injected capital into troubled midsize companies such as Fuji Car Manufacturing Co. and Misawa Resort Co. in the hope of fixing them up and exiting with big returns. Nomura, says merchant banking planning chief Takeo Sumino, aims to invest hundreds of millions of dollars in fresh workouts over the next few years. "This year, many Japanese companies are really trying to find a solution for survival," says Ujiie. "I tell Nomura people revival is a key word through which we can contribute to the Japanese economy...and, oh, by the way, we are going to make money."

Surprisingly, Nomura has even managed to generate profits from Japanese retail clients, despite the Tokyo stock market's sickening slide. Income-hungry investors are flocking to Nomura's array of U.S. and Australian bond products, for instance, which offer a 5% or so return, vs. nearly zero for Japanese bond funds. Instead of the old churn-and-burn ethos, Nomura's manager of retail strategy, Kimifusa Fujii, says there is a greater emphasis on "increasing the amount of assets over time for our clients." Nomura just reported its best quarter on the retail side in two years.

Having repaired its operations in Japan, the big strategic question facing Nomura is how to grow. Should it, for instance, buy its way back onto the international stage with a major acquisition? Senior Nomura bankers in Europe are urging Ujiie to revitalize his overseas operations by buying an investment bank; both CSFB and Dresdner Kleinwort Wasserstein, they point out, could be had cheap. "If they don't have an international alliance, they never will be a global player," says one rival investment banker.

For now, Ujiie doesn't think this makes sense. He would rather focus on commanding a bigger share of cross-border equity and merger deals involving Japanese companies, then go big-game hunting for U.S. and European corporate clients. He is also keeping his hand in the dealmaking culture in Europe. Nomura has profited by maintaining a relationship with Guy Hands, the private equity prince from Britain who split from Nomura last year to form his own company.

Having won plaudits for restoring the House of Nomura to some of its former glory, Ujiie is now ready to step back and play a more strategic role. He is expected to be named chairman on Apr. 1 and to hand over the job of president and CEO to Nobuyuki Koga, now the firm's chief operating officer. Koga can hardly take it easy, though. Domestic rivals such as Mizuho Holdings Inc. share Nomura's keenness to capitalize on the restructuring of Japan Inc. And Ujiie is sure that his big Western competitors will return to Japan one day. But at least Nomura will be around to meet the challenge.

Corrections and Clarifications

"Nomura's comeback" (Finance, Apr. 7) -- about the return to prominence in Japan of Nomura Holdings -- stated that Merrill Lynch & Co. "closed up shop in Japan last year," a reference to the retail branch network that Merrill had purchased from Yamaichi Securities Co. in 1998 in a bid to challenge Nomura.

Merrill notes that it retains a significant presence throughout Japan in investment banking, investment management, and wealth-management operations. Merrill Lynch services for private clients, the firm says, include 120 financial advisers in three offices and are solidly profitable.

By Brian Bremner in Tokyo


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