Nomura to buy Lehman's Asia-Pacific assets

The acquisition of the Asian operations of Lehman Brothers gives JapanÆs only independent investment bank a huge boost.
On Monday evening, JapanÆs leading independent investment bank, Nomura, confirmed it has agreed to acquire Lehman BrothersÆ operations in Asia-Pacific. The price was not disclosed, but sums ranging from $250 million to $500 million were talked about in the market. A Nomura source says it is not possible to give a final price until the remuneration for Lehman's staff has been worked out. The acquisition will be financed out of the $6 billion of subordinate loans and bonds that Nomura raised in April.

According to a release, the agreed acquisition includes all of Lehman's franchises and its approximately 3,000 employees in multiple locations in the Asia-Pacific region, including Japan and Australia. A Nomura spokesman in Tokyo specifies that the Japanese bank will buy "the human resources and IT platforms of the operation in Australia, China, Hong Kong, India, Singapore and South Korea". Significantly, Nomura is not buying either the trading assets or the trading liabilities.

Lehman's Asia-Pacific employees are spread across fixed income, equity and investment banking operations and under the agreement all of them will be offered a job with Nomura. The position of Lehman's Asia CEO Jesse Bhattal is probably also assured, according to one source.

"We hope to retain the existing staff, and given that we are offering employment at a time when jobs are scarce we do not expect a retention problem," adds the spokesperson. One source says bonuses equal to the 2007 payout level have been guaranteed for Lehman staff for 2008 and 2009, although this couldn't be confirmed last night.

Outside bankers were generally complimentary about the deal.

ôNomura was being looked on as a basket case last week by other banks in Tokyo, after the bad news swirling about Morgan Stanley and Goldman in the US,ö says one Tokyo banker not involved in the deal. ôBut this is a fantastic deal for them which puts them right back on top of the hill. It helps dispel doubts about their ability to survive unaligned with a mega-bank."

The gloom which surrounded Nomura last week was a direct result of the same situation that saw Goldman Sachs and Morgan Stanley abandon their status as independent broker-dealers and become bank holding companies over the weekend. The move addressed concerns that the pair would not be able to secure sufficient funding for their businesses in a market where credit is tight, by ensuring them access to liquidity provided by the Federal Reserve. It will also give them the ability to buy a deposit-taking bank.

However, Nomura may actually be one step ahead of its larger US peers. At the head of a consortium, Nomura bought into a nationalised regional bank named Ashikaga bank in March 2008, for the sum of $3 billion. At the time, there seemed little clear incentive to buy the assets other than the governmentÆs moral suasion. In retrospect it looks like the right thing to have done. Nomura will be able to use part of that capital to bolster its capital base, but may need more. Fortunately, there are more than enough failing regional banks for Nomura to choose from.

LehmanÆs Asian operations are profitable. Net revenue from Asia-Pacific amounted to $1.4 billion in the first half of this year, roughly 20% of the bankÆs overall revenues. However, itÆs almost certain that profits will not touch those levels again for many years, given that investment banking profits depend on rising asset values, heavy deal flow, complexity, and high levels of debt from third-party sources. At the very least, however, it should put Nomura in a good position to benefit from the next upturn.

With failing US banks ripe for the plucking, many were asking whether Japanese banks would be stepping up to the plate. But with a mixed track record of managing foreign assets, they have been relatively quiet so far. Just last week a senior Nomura banker told FinanceAsia that the reason no bid had been made for Lehman before it filed for bankruptcy was the fear of horrible surprises on the bankÆs balance sheet.

Now it seems they are feeling ready. Aside from Nomura's purchase of the Lehman assets, Morgan Stanley last night announced that it will sell a stake of up to 20% to Mitsubishi UFJ Group for a maximum cost of $8.4 billion. The two banks will also form a strategic partnership.

The question remains why Nomura has not made a bid for the European operations, given that Nomura has a sizeable business in London. Two reasons have been advanced: the European assets would be a lot more expensive; and Nomura may prefer managing the cleaner Asian balance sheets. In any case, itÆs possible a bid may still be forthcoming.

A big concern will be post-merger integration. ôNomura has a mixed track record in handling foreign units. Hopefully, their failures in the past will help them do better with Lehman,ö says a banker. Lehman Brothers is considered by some observers to have an exceptionally brash culture. That may be difficult for the more consensus-focused Japanese bank to manage.

Nomura may also let the Asian operations handle themselves. The takeover of Pilkington Glass by a Japanese firm resulted in Stuart Chambers from Pilkington Glass getting the CEO position in the merged entity, and a similar solution is seen possible here.
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