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Nomura rises from the ashes

Early in the new year, we saw that one of the most highly regarded money managers in the US had reshuffled the largest equity holdings in his portfolio. Out went some hallowed names including Microsoft and Dell and in came a more adventurous selection, including Nomura — yes, Nomura! While this didn't exactly stop us dead in our tracks, because we have always had a soft spot for the bank, the popular conception is that Nomura is one of yesterday's stock selections and not an automatic choice for a modern growth portfolio.

Nomura was the Japanese securities giant which should have become the Citigroup (minus the commercial banking side) of the global investment banking industry.

In the 1980s it had mountains of money and a market capitalisation which dwarfed Merrill Lynch and the next largest US securities house. With its highly rated shares and its cash hoard, Nomura was set to become one of the dominant players in the financial world.

What happened? Did Nomura panic about the reaction which might have occurred if it acquired a major US brokerage or decided to compete head-on with the American giants on their own territory? Did the firm feel that it wouldn't be welcome?

Nomura's window of opportunity didn't last long. The Japanese stockmarket crashed in 1990 and Nomura had the rug pulled from under it.

The many Japanese securities houses that had opened offices in London, to take advantage of the new issue boom in Japanese securities, closed shop and scuttled back home.

There was never going to be any doubt that Nomura would survive in London, but the improbable Yamaichi bit the dust when the parent group failed; Nikko took shelter under Salomon Smith Barney's wing; and Daiwa, once a Euromarket leader, retreated into its London shell.

Nomura's continuing problem, both in Europe and North America, was that it sent over weak Japanese managers to occupy the most senior executive positions and never had a coherent policy for its international operations.

Too much control, or too little

The bank has always tended to make one of two errors. Most senior Europeans and Americans shared their titles with a Japanese manager appointed by Tokyo. If any important decision had to be made, it was the role of the resident Japanese manager to contact Tokyo HQ to ask its permission to proceed.

Time and again, requests appeared to end up in a management discussion cul-de-sac and any decisions took so long that the original opportunity often no longer existed.

On the other hand, sometimes individuals in New York and London were allowed to create personal fiefdoms which seemed designed mainly to promote the financial interests of the non-Japanese managers.

Powerful people such as Max Chapman and Ethan Penner in New York and Simon Fry and Guy Hands in London thrived. In their heyday they gained Nomura some international recognition and made the firm a stack of money, but they ran separate, usually uncoordinated businesses instead of building a platform which could compete with Goldman Sachs or Morgan Stanley.

Why, then, would Nomura become a favoured stock for one of the most successful asset managers in the US? The answer is that, although Nomura fell off the boat in the international market, it is a powerhouse in its own Japanese domestic market.

Nomura runs a near monopoly in parts of the Japanese securities industry and its huge customer base has remained wonderfully loyal, despite all those lurid stories about being scalped by unscrupulous Nomura salesmen.

The Japanese stockmarket has risen from the grave and, while the days of the economic miracle are a distant memory, there are investment opportunities and undervalued assets in Japan which are attracting the shrewdest investment banks, private equity houses and hedge funds.

When Tokyo stockmarkets start to rock'n'roll and the Japanese economy shows signs of life after death, one of the first beneficiaries is Nomura.

Indeed, Nomura is similar to Merrill Lynch many years ago when customers were told: "What's good news for the US stockmarket is good news for Merrill Lynch."

Riding a wave

As Nomura's most recent results show, it is riding the crest of a wave. Third quarter profits quadrupled and exceeded the combined earnings of the other three main Japanese brokerages. Stock commissions, bond underwriting and proprietary trading drove the earnings surge.

We couldn't be more delighted to see Nomura back on track, and it is finally making some progress in Asian regional markets.

However, the main international businesses continue to be a drag on profits and, although Nomura tries desperately hard, it still struggles to make an impact in investment banking, outside its domestic home base.

There's no fundamental reason why Nomura's investment bankers shouldn't compete against Lazard in Europe or even make a pitch against Goldman in the US, but how often do you see Nomura involved in significant overseas transactions?

We don't know what the celebrated money manager in the US, who is so gung-ho about Nomura shares, thinks of the firm's businesses overseas, but he will surely have a view.

The attitude of competitors is usually

malicious and almost always biased. The amount of times we have heard, "Wouldn't it be much easier if they simply closed the main international operations down?" are too numerous to mention.

The other equally outrageous observations are that "they only keep the main overseas offices open because they can organise a good time for visiting bigwigs from Tokyo HQ" or "the overseas offices provide a perfect solution for underperforming managers at home, whom the main bosses are reluctant to fire outright."

Such suggestions are as absurd as they sound, but ask yourselves why Nomura's foreign operations do not produce a bigger profit?

Nomura has a totally acceptable name in the market, a solid credit rating and a large chequebook to hire the best. Can you imagine Goldman Sachs allowing its overseas operations to stumble around like a drunken sailor, running up debts?

You could argue that the firm is so orientated towards domestic Japanese securities that the main purpose of the overseas offices has always been to increase sales of homegrown products.

Of course, such an attitude is totally naïve. Could you conceive of Goldman or Merrill Lynch relying solely on distributing US equities and bonds to maintain their upward earnings momentum in Europe or Asia?

The reality is that Nomura was quite good at identifying attractive new market sectors, but then developed cold feet at the first downturn and withdrew with its tail between its legs — look at its record in European and UK equities, which could have been made into a film


If such indecision wasn't bad enough, Nomura compounded its problems by hiring some truly second rate managers. As one headhunter famously commented: "Nomura wasn't exactly a dustbin, but at one time it did appear that the firm was collecting rubbish."

Of course, this should never have been allowed to happen, and why couldn't Nomura hire some chips off the Guy Hands block instead of adding to its misfit collection?

Not too late

It is still not too late for Nomura to turn over a new leaf overseas. Why hasn't Tokyo HQ turned the overseas operation upside down and created a highly visible and solidly profitable Japanese flag carrier?

When you speak to former Nomura executives in London and New York, they may tell you that Tokyo HQ has never been especially interested in its non-domestic Japanese operations and paid only lip-service to their existence.

Perhaps the famous US money manager will be able to convey to Nomura's top executives in Tokyo that it would be to everyone's advantage if the main overseas businesses were not an albatross around the firm's neck.

If they could be turned around — and this requires little more than kicking some existing butt out of the front door and bringing in ruthless new managers — this might even be a further boost for the Nomura share price.

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