The rumoured list of financial advisers that will sit around the table for Japan’s blockbuster merger between Nippon Steel and Sumitomo Metal Industries has raised a few eyebrows in Tokyo. Not just because there are so many banks involved, but also because there is one that isn’t: Nomura.
Japan’s pre-eminent investment bank is best known for its dominance of the country's equity capital markets, but it is also no slouch in M&A. In 2010 it topped the announced-M&A league tables in Japan with ease. According to Dealogic, it won 109 mandates announced last year, compared to just 20 for the second-placed firm, J.P. Morgan. In dollar terms, Nomura’s total announced deals were worth twice as much as J.P. Morgan’s.
In other words, Nomura would certainly have expected to land a role on such a large and high-profile deal – the merger will create the world’s second-largest steel company after ArcelorMittal and is reckoned to be worth roughly $25 billion.
The banks that did win a seat at the table, according to a Nikkei report that is widely considered accurate, are: Mitsubishi UFJ Morgan Stanley, Mizuho, Bank of America Merrill Lynch and J.P. Morgan for Nippon Steel, which is a member of the top 30 blue-chip stocks on the Tokyo Stock Exchange; and Daiwa, Nikko Cordial, Deutsche Bank and Goldman Sachs for Sumitomo Metal.
Groups such as Mitsubishi UFG, Mizuho and SMFG (Nikko’s parent) clearly bring their balance sheets to the deal, but even without a lending business Nomura’s reputation and stature in the market usually assures it a seat at the top table on Japan’s biggest transactions.
But strange things happen in Japan. The complex, historical web of relationships between companies often means that mandates are used to save face as much as to enhance value. And for groups as big as Sumitomo there can be many faces to save – its ties run deep through the heart of Tokyo’s financial community.
Banks with close links to the group include its investment banking arm Nikko Cordial, as well as Citi, which it bought Nikko from, plus Barclays Capital, which it owns a stake in, and Goldman Sachs, which used to own a stake in its banking arm SMBC, as well as Daiwa, which was in a joint venture with SMBC until the acquisition of Nikko.
With so many relations to keep happy, it is hardly surprising that the two companies chose to sign a memorandum of agreement without any financial advisers at all.
In light of these myriad relationships, Deutsche Bank seems to have bucked expectations to get a place on the deal ahead of Citi or Barclays. Some bankers are even wondering if Deutsche won the mandate by virtue of its experience as an adviser to Germany’s steel industry. “It seems strange, but they might have picked Deutsche because they have some relevant expertise,” said a rival banker, only half joking.
On the other side of the deal, Nippon Steel is a leading client of Bank of Tokyo-Mitsubishi UFJ, whose investment banking arm is Mitsubishi UFJ Morgan Stanley, which in turn was created after the Japanese lender bailed out Morgan Stanley during the financial crisis in 2008.
Despite all the weirdness, the banks on the deal are mostly solid choices. With the exception of Mizuho, the advisers are all top 10 M&A houses, but that only highlights the glaring omission of Nomura.
The next challenge will be to get the deal done. Last year’s proposed tie-up between Suntory and Kirin, two of Japan’s biggest beverages companies, showed that even compelling deals can fall apart.
The steel merger will probably not suffer that fate. “While there are no guarantees that any transaction in Japan will get done, the Nippon-Sumitomo deal has a much higher probability of completion than Kirin-Suntory,” said one M&A banker in Tokyo. “In this case, both companies are publicly listed and have diverse shareholdings, similar business models and have held shares in each other for seven or eight years. They have an existing business relationship.
“And, even though the CEOs are saying that they will merge into each other, Nippon is much larger than Sumitomo and everyone knows who the acquirer is in reality. With Suntory-Kirin, nobody really knew.”
The beverages deal also attempted to bring together two fierce rivals, one a public company (Kirin) and one a family-owned business (Suntory). “They were just very different cultures,” said the source.
Consolidation in Japan’s steel industry is also necessary thanks to falling demand at home and stiff competition from Asian rivals in Korea, China and India. Idiosyncrasies aside, Nippon and Sumitomo should be able to come together to meet that competitive threat head on, albeit without Nomura as an adviser. Probably.
"Nothing is signed in stone, yet," said one banker in Tokyo. "It's true that everyone seems to think the rumoured list of advisers is accurate, but they've already got eight banks on there; how difficult would it be to add another one if Nomura really throws its toys out of the pram?"