Nomura CEO seeks change with Lehman buy

The head of Nomura Holdings Inc., Japan's biggest brokerage, had been itching to shake things up since he began his new job in April.

So when storied Wall Street firm Lehman Brothers Holdings Inc. collapsed just five months later, Kenichi Watanabe pounced.

The company snapped up Lehman's operations in Asia, Europe and the Middle East for $2 billion in what the 55-year-old president and chief executive describes as a "once-in-a-generation" opportunity. It later added three of Lehman's subsidiaries in India.

"I felt Nomura's clients were changing, but we were not," he said Wednesday. "Therefore top management was considering how we could change the company to better serve the growing needs of our clients. And we were looking to further increase our client base."

Watanabe, seeking to turn his company into a world-class investment bank, said the Lehman takeover represented the dawn of a "new Nomura."

His success - or failure - will depend largely on factors outside the company's control, at least in the short term.

Since Lehman's demise, global stock markets have plunged, corporate profits have sunk and consumer spending is at historical lows. The list of major economies in recession now includes Japan, Hong Kong and the 15-nation euro-zone.

Watanabe praised global leaders for cooperating amid the turmoil, but said they must bolster their faltering economies now that the immediate challenge of the liquidity crisis appears to be receding.

"This really depends on the financial situations of each country, and how each respective government uses its funds wisely," he told reporters at the Foreign Correspondents' Club of Japan.

Nomura has been hit hard by the global financial crisis, putting the Tokyo-based company's overseas offensive under even sharper scrutiny.

The company stayed deep in the red for the third straight quarter as deteriorating market conditions, trading losses and real estate write-downs drained its bottom line. Its net loss of 72.9 billion yen ($754.5 million) for the July-September period widely undershot the consensus forecast.

Following the earnings release last month, Standard & Poor's downgraded its credit rating outlook on Nomura Holdings and unit Nomura Securities Co. to its lowest "negative" level.

But Nomura, along with the rest of Japan Inc., faces a shrinking home market and a bleak future without expanding abroad. Big players in the financial sector, which have suffered far smaller subprime losses than their U.S. and European counterparts, have moved aggressively to take advantage of Wall Street's meltdown.

Top Japanese bank Mitsubishi UFJ Financial Group Inc. invested $9 billion for a 21 percent stake in Morgan Stanley and recently completed the purchase of UnionBanCal Corp., now a wholly owned subsidiary.

Watanabe declined to predict when Nomura would turn a profit. But he was upbeat about the long-term rewards of the Lehman buy, which serve to "perfectly" complement its existing businesses and client base.

"Given what is happening in financial markets, our overall performance is closely linked with these markets," he said. "With market conditions changing, we are trying to adapt as much as possible to return to the black."

While Nomura's main equities clients are pension and mutual funds, he said, Lehman's customers were mainly hedge funds. The Lehman takeover also diversified the Japanese company's overseas fixed income business and added considerable heft to its European M&A operations.

Analysts, however, are finding it difficult to quantify the Lehman acquisition's contribution to profitability.

"The key issue in this regard will be how to maintain and improve the motivation level of Lehman employees," said Credit Suisse analyst Azuma Ohno in a recent note to clients. "It would be in Nomura's best interests to fully integrate former Lehman employees in key positions within the Nomura hierarchy."

Indeed, the integration and retention of 8,000 ex-Lehman workers poses the second biggest challenge to Watanabe's mantra of change. Rivals including JP Morgan, Credit Suisse, Barclays Capital and UBS have landed some high-profile departures, raising questions about Nomura's ability to keep top talent.

The company is quick to point out that more than 95 percent of ex-Lehman employees have accepted employment with Nomura, and Watanabe downplayed suggestions of any friction.

Unlike its Western counterparts, Nomura has no plans for companywide layoffs, he said.

Instead, he repeatedly insisted that the new blood would only help the 83-year-old company evolve.

"It's not about trying to keep the old Nomura or the Lehman culture," he said. "We want to transform ourselves to become the new Nomura."