This week has seen Sumitomo Mitsui, Mitsubishi UFJ, and Nomura buy into Goldman, Morgan Stanley, and Lehman. Will different styles get in the way?
Japan's banking giants have wasted little time in going after some of the biggest names on Wall Street. On Sept. 24, Sumitomo Mitsui Financial Group (8316.T), Japan's third-largest bank, was considering a sizable investment in Goldman Sachs (GS), according to the financial daily Nikkei. Just two days earlier, Japan's biggest bank, Mitsubishi UFJ Financial Group (MTU), announced it would buy a 10% to 20% stake in Morgan Stanley (MS). On the same day, Nomura Holdings (NMR), which runs the country's top brokerage, confirmed it was taking over most of Lehman Brothers' non-U.S. operations (BusinessWeek.com, 9/22/08).
The flurry of dealmaking is symbolic for Japan's banks. For years, they were crippled by hundreds of billions of dollars in bad loans left on their balance sheets from the 1990s, after Japan's asset bubble popped. Now they are looking to close the gap with their savvier U.S. rivals, channel their huge deposits into investments outside of slow-growth Japan, and tap American firms' A-list of hedge funds and other well-heeled global investors. At the end of the day's trading in Tokyo, Sumitomo Mitsui was up 1.2%, Mitsubishi UFJ gained 4.2%, and Nomura jumped 5.2%.
But questions remain as to whether the traditionally cautious top-down style of Japan's banks will be a good fit with Lehman, Goldman, and Morgan Stanley. It's not hard to imagine Mitsubishi UFJ (MUFG) executives—among the most conservative at Japan's banks—clashing with their fast-paced, profit-driven counterparts at Morgan Stanley, Credit Suisse (CS) analyst Shinichi Ina wrote in a Sept. 24 report, which was otherwise positive. If that happens, it could lead to inefficiencies instead of the hoped-for synergies. In fact, MUFG's predecessor, the Bank of Tokyo Mitsubishi, experienced problems when it tried to micromanage the merged Bank of California and Union Bank in the late 1990s, former employees say. (A month ago, MUFG paid more than $3.5 billion to buy all of UnionBanCal, the company that owns Union Bank of California.)
Japan Offering Jobs
Executives at Tokyo-based Nomura may have the hardest job. Unlike MUFG and Sumitomo Mitsui Financial, which will likely become vocal shareholders, Nomura plans to absorb much of Lehman's staff based outside the U.S. Nomura has 2,000 employees in Europe and another 1,130 in Asia. It expects to hire 2,500 of Lehman's 6,000 employees in Europe and the Middle East and all 3,000 in Asia. That's a relief for many Lehman bankers who have been in limbo since the brokerage filed for bankruptcy last week. "We're offering jobs at a time when many in the industry aren't hiring," says Nomura spokesman Michiyori Fujiwara. "We will provide sufficient incentives for people to stay."
Nomura's strength lies mainly in equities trading and sales. It's eager to scoop up derivatives traders and staff who cater to hedge funds and other major global investors. Nomura also wants to boost the number of users on its proprietary trading system, called Chi-X, which the company bought for $1.2 billion in 2006 when it acquired internet brokerage Instinet as part of its push overseas.
But Nomura will have to move fast. There hasn't been much good news from Lehman's New York headquarters for months, and insiders say many are already hunting for new jobs. "If they grab the highly trained quick enough, they might be able to retain people," says one Lehman employee. "The general feeling is that people are still looking around."
Nomura has already shown that it's capable of speed when the occasion calls for it. Within days of Lehman's collapse, the Japanese firm had dispatched Chief Operating Officer Takumi Shibata to Hong Kong and London to explore a deal with Lehman's management. Nomura's priority now should be to send key executives to explain to Lehman employees how they will fit in at Nomura and what sort of culture to expect, says Towers Perrin consultant Kenji Sekine, who draws up personnel solutions for M&A deals in Tokyo. Smaller sessions with groups of 30 to 50 employees should come next, within six months to a year, he says.
Of course, it will take more than that to keep Lehman's best and brightest from leaving. Compensation will play a big role. Nomura and industry officials say bankers at American firms might find Nomura salaries lower than they're used to. And employees will read a lot into who among the Lehman execs decides to stay put and how soon the others get shoved out, experts say. But many who had defected from Japanese banks for the higher, performance-based pay, faster decision-making, and more flexible working hours at Lehman may jump ship rather than return to a Japanese firm. "I'm skeptical that the two cultures can be integrated well," says Sekine.