Nomura Seeks A Comeback
Under CEO Nobuyuki Koga, Japan’s biggest investment bank is striving to match the global rankings it achieved in the 1980s.
Nobuyuki Koga, chief executive officer of Nomura Holdings Inc., Japan’s biggest in- vestment bank, chuckles as he recalls his teenage dream to become an Olympic gold medalist in judo. His motivation: the unexpected defeat of local hero Akio Kaminaga by an underdog Dutchman, Antonius Geesink, at the 1964 Tokyo games. “I was shocked when I watched that match,” says Koga, who as a 14-year-old witnessed Kaminaga’s demise on television in his hometown of Fukuoka, 900 kilometers (560 miles) west of the capital. “Immediately, I started practicing judo. Maybe I was young, but I wanted to do something for Japan.”
Koga never fulfilled his judo ambitions, managing to achieve only a beginner’s white belt. Instead, at 54, he’s set on regaining Nomura’s place on the winner’s podium as a world-class financial institution. “I want to make Nomura a globally competitive investment bank,” he says.
To achieve that goal, Koga will need more staying power than he displayed in his schoolboy judo practice. While Tokyo-based Nomura is today the most profitable investment bank in the world’s second-largest economy, it’s still an also- ran in international rankings. As of Aug. 31, its global ranking was 10th in share sales, 15th in bond underwriting and 23rd in mergers and acquisitions, according to data compiled by Bloomberg. (See charts, page 106.) And Koga, who has spent his entire career in Japan and jokes about his 40-year strug- gle to master English, will have to convince investors he’s as international in outlook as his predecessor, bilingual Junichi Ujiie, who turns 59 on Oct. 12. Ujiie spent 10 years overseas and received a Ph.D. from the University of Chicago.
Koga will also need to fend off comparisons between Nomura’s present ambitions and its earlier attempt to achieve global prominence. In the late 1980s, Nomura was fleetingly the world’s biggest financial institution—with a market value of $76 billion on April 17, 1987, 18 times that of Merrill Lynch & Co.—before embarking on a scandal-plagued, decade-long decline. Nomura’s share price fell 86 percent to a low of 827 yen on Oct. 15, 1998, from a peak of ¥5,910 April 1987. Over the same period, the benchmark Nikkei 225 Stock Average fell 45 percent to 12,995 from 23,938. Nomura’s share price has since partially recovered, trading at ¥1,519 on Sept. 14.
Koga’s global ambitions will be hard to fulfill, says Timo- thy Dattels, 46, who was Goldman Sachs Group Inc.’s head of investment banking in Asia excluding Japan from 1996 to 2000. “Nomura is a big, important, powerful institution, and it can use its balance sheet to buy a certain amount of business and also hire talent,” says Dattels, who left Goldman in 2002 and is now a San Francisco–based adviser for U.S. buy- out firm Newbridge Capital Inc. “But monetary incentives can be short-lived. It takes years to build a successful team and form deep relationships with clients.”
Under Koga, who took over as CEO and president from Ujiie in April 2003, Nomura’s profit rose to $1.57 billion on revenue of $10 billion in the fiscal year ended in March from a profit of $1.1 billion a year earlier. That’s more than the combined profit of its two biggest Japanese domestic rivals, Daiwa Securities Group Inc. and Nikko Cordial Corp., which is 15 percent owned by Citigroup Inc. It was still only about half of the earnings of the world’s three-most-profitable investment banks—Merrill Lynch ($3.8 billion), Morgan Stanley ($3.7 billion) and Goldman Sachs Group Inc. ($3 billion)—in the same period.
As of Sept. 14, Nomura was Japan’s No. 1 arranger of share and bond sales and was number-one in advising on M&A. Among Japanese investment banks, it was also the country’s biggest custodian of assets under management ($138 billion), according to Bloomberg data. It ranked No. 2, be- hind Goldman Sachs, in M&A advisement in Japan. The $288 million it received in fees for global share sales was one-fourth that of market leader Goldman Sachs ($1.1 billion), and its $103 million in fees from global debt under- writing was about one-seventh that of first-place Citigroup ($724 million).
Koga says he’s mapped out a strategy to close those gaps. First, he wants to widen Nomura’s lead over its competitors in Japan. Second, he hopes to win the business of the growing number of Japanese companies that are making acquisitions overseas. Finally, he wants Nomura to be able to compete against Wall Street and European banks for non-Japanese- related business in the West and, especially, China. As of Sept. 14, Chinese and Hong Kong companies had sold shares valued at $16 billion, all of them lead managed by Western and Chinese securities houses, according to Bloomberg data. Another $25 billion of Chinese initial public offerings are in the pipeline. “We are aggressively pursuing the China market,” says Kenji Kimura, 43, Nomura’s Stanford University–educated global head of mergers and acquisitions.
Koga says part of his plan involves hiring 100 top bankers around the world to add to his 14,000-member team in 28 countries. So far, in London, where Nomura employs about 1,000, he has scooped up a 13-member derivatives team from Merrill Lynch and a 12-member international convertible bond team from ING Financial Markets. In the U.S., where the head count has risen to about 950 from 900 a year ago, he has hired two senior bond traders from Morgan Stanley. In Hong Kong, where there are about 300 employees, Nomura has recruited 10 equity and capital markets specialists.
Koga has also hired Lord Colin Marshall, 70, as chair- man of Nomura’s European subsidiary, Nomura In- ternational Plc. Marshall retired as chairman of British Airways Plc and a director of HSBC Holdings Plc, Eu- rope’s biggest bank by market value, this year. Marshall, who was also CEO of British Airways from 1983 to ’95, says he’ll be using his contacts in Europe and the Middle East—“my backyard”—to help drum up more business for Nomura. “The goal they are pursuing is to rival the likes of Goldman Sachs,” says Richard Werner, Tokyo-based adviser to ProfitFundCom AG, a Vaduz, Liechtenstein–based money manager.
Minoru Shinohara, 43, Nomura’s Hong Kong–based head of Asian investment banking, says Nomura has a unique competitive advantage over the Western securities houses: unrivaled access to the Japanese retail brokerage market, where potential investors in global stocks and bonds maintain $3.85 trillion in cash accounts that yield almost no interest. Now, Koga has given him extra bankers. “I feel I have the gun and the bullets,” Shinohara says.
Nomura may be taking that advantage for granted, says Paul Heaton, who helps manage $500 million of Japanese stocks at London-based Royal London Asset Management Ltd. Nomura earns a big slice of its pretax profits—37 per- cent last year—from its domestic retail brokerage unit run by subsidiary Nomura Securities Co., which operates 130 nationwide branches selling stocks, bonds and mutual funds to 3.4 million clients. Until two years ago, Nomura and its two domestic brokerage rivals, Daiwa and Nikko, had that mar- ket to themselves. Then, online brokerages began to make in- roads. Also, in 2005, Japan will change its banking regulations to enable commercial banks, which had been restricted to selling mutual funds, to trade individual securi- ties from their thousands of branches across Japan as agents of brokerages.
This new competition has contributed to a 17 percent fall in Nomura’s stock price this year compared with a 6 percent rise in the Nikkei 225. “Nomura’s problem is that they have not kept up with the growing retail investment market and have lost share to the online companies,” Heaton says. “I would submit this has come under the stewardship of both Dr. Ujiie and Mr. Koga.” Alexandre Tavazzi, who helps manage $1.1 billion of Japanese stocks at Geneva-based Pictet & Cie, says Nomura may have its priorities wrong. “Perhaps instead of looking globally, they should be paying more attention to the domestic situation,” he says.
Koga says he’s confident he can increase Nomura’s domes- tic market share. The reason: Japanese individuals keep 55 percent of their $7 trillion of financial assets in bank accounts and only 12.3 percent in stocks, bonds and investment trusts, according to the Bank of Japan, Japan’s central bank. By comparison, Americans invest 52 percent of their assets in securities and keep only 12 percent in cash and bank deposits, according to the U.S. Federal Reserve. Koga says Nomura’s profit has increased because it is selling more stocks and bonds to Japanese investors, and he says Nomura is already negotiat- ing with most of the country’s 113 regional banks to forge alliances that can fend off the challenge of the big banks. “We have to take advantage of deregulation to expand our market share to the maximum,” Koga says.
Traditional brokers such as Nomura will be on the defensive, says Robert McKillop, who manages $2 billion of Japanese stocks at Edinburgh-based Standard Life Investments Ltd. “There’s going to be a terrific battle ahead,” he says.
Rating firms don’t seem concerned. In July, when Nomura reported that its profit in the first quarter of the 2005 financial year had risen 4.6 percent to $365 million from $347 million a year earlier, Standard & Poor’s raised the company’s credit rating one level to BBB+, the eighth-highest level. It also raised the rating for Nomura Securities to A–, the seventh-highest level. Two weeks earlier, Moody’s Investors Service had raised Nomura Securities one level to A3, the seventh-highest level. “Nomura won’t be like an animal caught in the headlights,” says Profit- FundCom’s Werner, who until April was adviser to TelWel, a $5 billion Japanese pension fund. “It is used to reacting to new challenges.”
It should be. The history of the House of Nomura mirrors Japan’s political and financial upheavals from the last days of the feudal shogun era. The bank traces its roots to Tokushichi Nomura (1850-1908), son of a samurai warrior who became a money changer and then, in 1878, a founding member of the Osaka Stock Exchange, according to The House of Nomura (Arcade Publishing, 1990), a family-authorized history by former Tokyo-based banker Albert Alletzhauser.
Nomura’s son, known as Tokushichi 2nd, founded the company now known as Nomura Holdings in 1925, opened a branch in New York in 1927 and in 1930 built Nomura’s distinctive, seven-story, wedge-shaped headquarters at No. 1 Nihonbashi, the point in central Tokyo from which all distances from the capital are measured.
Nomura and its headquarters survived World War II; family control didn’t. After Japan’s 1945 surrender, the U.S. military commander, General Douglas MacArthur, ordered that the Nomura clan’s majority shareholding be dispersed among institutions and individuals, Alletzhauser writes. Today, Fumihide Nomura, 70, grandson of the founder, is a nonexecutive director and owns only 0.01 percent of the company, according to Bloomberg data. Foreign investors own 40 percent.
Koga, the man who now runs Nomura, was born in Fukuoka, 120 kilometers from Nagasaki, five years after the second atomic bomb dropped on Japan ended World War II. The son of a merchant, he won at age 15 a place at Lasalle College, Kagoshima, one of the country’s most-elite high schools. He then entered the University of Tokyo—a Japanese Ivy League equivalent—where he graduated with a law degree. He joined Nomura in 1974.
Koga’s outgoing personality made him an unlikely candidate for a top corporate job in Japan, says Motoshige Itoh, a former classmate who is now an economics professor at the University of Tokyo. Most Japanese business leaders tend to be stern and distant from their subordinates, Itoh says. “Koga is friendly and easy to approach,” he says. “His body language makes people relax.”
Apart from a four-year spell in the underwriting department, where he worked on Japanese public offerings, Koga spent most of his career rising through the human resources and planning departments. He was a witness to some of Nomura’s brightest and darkest days, Itoh says.
The good times came in the mid to late 1980s, when easy credit and a strong yen created an asset bubble that saw Japanese stock and real estate prices soar. In four years, the Nikkei 225 almost tripled to 38,915 on Dec. 31, 1989, from 13,083 on Dec. 31, 1985. When Nomura’s shares peaked in April 1987, the company’s market value was $76 billion compared with Merrill Lynch’s $4.3 billion. In the fiscal year ended in September 1987, Nomura made a profit of $2.5 billion compared with Merrill’s $335 million in the calender year 1987.
To compensate for poor returns in Japan, Nomura developed profitable niche businesses in the U.S. and Europe.
Then, at the end of 1989, the Japanese bubble burst. In the first nine months of 1990, the Nikkei lost 46 percent of its value. Nomura’s stock did worse—falling 55 percent to ¥1,520 from ¥3,440. In June of the following year, Japan’s Finance Ministry accused Nomura of compensating a select group of favored clients $120 million for their stock trading after the bubble burst. Nomura CEO Yoshihisa Tabuchi resigned to take responsibility, without admitting guilt. Japan’s Fair Trade Commission made Nomura and other brokerages promise not to compensate clients for their losses in the future.
As the Japanese market stagnated, Nomura developed profitable niche businesses in the U.S. and Europe, Nomura spokesman Tsukasa Noda says. In the U.S., in 1992, Nomura hired Max Chapman, former CEO of Kidder Peabody & Co., who moved the bank into risky commercial-mortgage-backed bonds. Two years later, in England, Guy Hands, a former in- vestment banker at Goldman Sachs, approached Nomura with a plan to set up a buyout unit in Europe. He established Nomura’s Principal Finance Group and arranged $20 billion of takeovers, acquiring, among other assets, 5,500 of Britain’s 60,000 pubs.
At home, in 1997, the company was engulfed in another scandal when it admitted paying $3.3 million in bribes to yakuza-style corporate extortionists, known as sokaiya, who had threatened to disrupt the company’s 1995 annual meeting. President Hideo Sakamaki resigned, and Nomura was banned by Japan’s Finance Ministry from stock trading and participating in public bond auctions for the rest of the year.
Ujiie, who was promoted above 10 more-senior executives to the dual roles of CEO and president, was soon grappling with another crisis. In August 1998, Russia defaulted on $40 billion of government debt, drying up demand for most types of bonds. Two months later, Nomura reported a $1.87 billion loss in the first half of 1998—$1.16 billion of it in the U.S., $564 million in Europe and $145 million in Asia.
So far had the venerable house of Nomura fallen that some Japanese doubted that it had a future. “People would joke at the time that, when college students said they wanted to work at Nomura, their parents would ask, ‘Why?’” says global mergers and acquisitions head Kimura.
Koga, who was head of planning and personnel, was called in by Ujiie to help clean up the mess, Noda says. Koga says one of his first decisions was to close the U.S. com- mercial-mortgage-backed-securities division, which ac- counted for most of Nomura’s U.S. revenue. He then brought the U.S. and European divisions under Tokyo’s direct control. “I was managing the crisis,” he says. “We posted ¥600 billion [$500 million] of special losses in the year ended March 31, 1999. I dared to close the CMBS bond business in the U.S. A company can make a dramatic change when it is in a critical situation.”
Ujiie and Koga also sought to woo foreign investors by adopting U.S. accounting principles, giving more power to independent directors and listing its shares on the New York Stock Exchange in 2001.
Nomura then moved to pare back Guy Hands’s venture capital investments because they were taking up too much of its European capital. Hands, 44, set up his own company, Terra Firma Capital Partners Ltd., to run two funds. The first consists of Nomura’s original position. Nomura also has a 10 percent stake in the second fund. Hands says the split was by mutual agreement. “We had a hugely successful partnership,” he says.
Under Ujiie, Koga rose through a succession of executive positions: senior managing director in 1999, deputy presi- dent in 2000 and chief operating officer in 2001. Then, last year, at age 57, Ujiie decided to take the chairman’s job and install Koga as CEO. “Although his career has kept him in Japan, Koga has been a prime mover in important decision making in our overseas operations,” Ujiie says. “For an executive in a Japanese company, he is still young, and I thought he would be able to provide the necessary vigor to lead Nomura group.”
Japan’s economy may help the bank. This year, gross domestic product will grow by 4.5 percent—faster than in the U.S.—according to the International Monetary Fund. As of Sept. 14, the Nikkei 225 was up almost 50 percent to 11,295 from its 20-year low of 7607 on April 28, 2003. That’s more than double the 20 percent rise in the S&P 500 Index in the U.S. during that period. Last year, there were 1,719 M&A deals in Japan—five times the figure for 1995, according to Nomura data.
China is a major testing ground for Nomura’s ambition to underwrite deals all over the globe.
Nomura co-managed, with Citigroup and Morgan Stanley, the eighth-largest share sale so far this year: the $2 billion IPO by Tokyo-based Shinsei Bank Ltd. In August, Nomura was chosen, along with UBS AG, to lead manage Ja- pan’s biggest share sale in six years, the $3.4 billion IPO of Electric Power Development Co.
Japanese companies are also expanding overseas, Koga says. In January, Nomura helped Asahi Breweries Ltd., Japan’s biggest beermaker, and Itochu Corp., the third-largest Japanese trading company, pay $384 million to Tingyi (Cayman Islands) Holding Corp. for half of Tingyi’s soft drink business. Then, in April, the bank advised Nissin Food Products Co., the company that says it invented instant noodles, when it paid $190 million to acquire one-third of China’s second-biggest noodle maker, Hebei Hualong Food Group Co.
Koga says Nomura’s ultimate ambition in its globalization strategy is to regularly underwrite non-Japan-linked deals. China is a testing ground where Deutsche Bank AG, Citi- group, Goldman Sachs, Merrill Lynch and UBS vie with the biggest local investment house, China International Capital Corp., for the world’s most-sought-after share sales.
Nomura is seeking to win a share of Chinese IPOs through a system called POWL, short for public offer- ing without listing, under which Japanese investment banks offer to sell a portion of Chinese international share sales through their retail brokerage networks. Nomura first bet on winning POWL business in Europe in 2000 when it sold 10 percent—or about $560 million—worth of shares in the $5.6 billion IPO of Deutsche Post AG. The total sale at- tracted eight times more offers than there were shares for sale, according to the German post office’s spokeswoman, Silje Skogstad. Since then, Nomura has sold almost $1 billion of Chinese stocks by the same method, Shinohara says.
In 2002, Bank of China, the country’s second-biggest bank, awarded Nomura 12 percent—or $300 million—of the $2.7 billion sale of shares in its Hong Kong unit, BOC Hong Kong (Holdings) Ltd. Bank Warburg LLC and Goldman Sachs underwrote the rest of the sale.
With 10 times more buyers from Japan than there were shares available, Nomura could have sold the entire IPO in Japan, Shinohara says. “It was very successful,” says Bank of China assistant to the president Zhu Min. “It greatly helped our listing.” Zhu says he was so pleased that he invited Nomura representatives to attend a sunset champagne party on the Great Wall of China outside Beijing along with representatives of the lead underwriters.
Now, after a 22-year presence in China, Nomura can com- pete to underwrite entire Chinese IPOs in Hong Kong, says Noriyasu Yoshizawa, Nomura’s Hong Kong–based head of the Asia/Oceania region. “In the past, the Japanese stock market was so sluggish that the Chinese had no reason to talk to Nomura about financial issues,” Yoshizawa says. “But what we did for Bank of China Hong Kong opened people’s eyes to Japan.”
On Sept. 12, Beijing Capital Group announced it had hired Nomura to help manage a $1 billion overseas share sale next year. Other Chinese clients aren’t committing them- selves. Zhu declined to say whether Nomura would participate in the $5 billion listing of Bank of China’s mainland business in the second half of 2005.
Koga points to Nomura’s bond trading as another exam- ple of its global potential. Nomura is the biggest buyer of government bonds in Japan—itself the world’s biggest government bond market, with $5.7 trillion in marketable securities compared with $3.6 trillion in the U.S. Nomura is also one of 23 primary U.S. government dealers that trade with the Federal Reserve Bank of New York.
In the past two years, Nomura has jointly underwritten with Wall Street and European investment banks two 5-billion-euro ($6.1 billion) bond issues for the Austrian government, a $3 billion issue for the European Investment bank and two $1 billion issues for International Finance Corp., the private lending arm of the World Bank. “Nomura performed well in all markets,” says John Borthwick, deputy treasurer and head of funding in the IFC’s treasury operations department.
China will be a particularly tough market for Nomura, says Jim Walker, 54, a managing director for joint ventures at Hong Kong–based CLSA Ltd., a unit of Crédit Agricole SA, who was Nomura’s managing director of Asian equities outside Japan from 1998 to 2000. “They are a relatively late entrant to the scene, and they are going to be competing with Goldman, Morgan Stanley and even CLSA, and it’s not going to be easy for them, because these people do it very well,” he says.
Most important to Nomura, Koga says, is Japan’s econom- ic health. He says taking Nomura global doesn’t mean it has to be a carbon copy of Goldman Sachs. Just as Goldman and Morgan Stanley need a strong U.S. home market, he says, so Nomura’s fortunes depend on the strength of the local econ- omy. “An investment bank is supposed to develop its business with the clients it is closest to,” Koga says. “The U.S. firms are global, but their base is still the U.S. We want to be a global investment bank so we can meet our Japanese clients’ needs.” With Japan’s long-term prospects still blurred, Koga may need to wait a while before he knows whether his vision for Nomura proves more enduring than his childhood dreams of Olympic gold.