The Japanese investment bank needs cash after acquiring most of Lehman Brothers' operations in Asia-Pacific and Europe after the Wall Street firm went bankrupt. The acquisitions weren't that costly in themselves, but eager to keep the best talent, the Japanese bank offered the top 500 staff at Lehman in Asia a flat bonus versus 2007 for two years to stay on. It also committed to a flat bonus pool for 2008 for all other Lehman employees who stay until September 2009 û a costly endeavour in a year when capital markets volumes in Asia ex-Japan have fallen sharply and most of its competitors are paying token bonuses at best.
As reported earlier, about 2,600 former Lehman staff have chosen to stay with Nomura out of the 3,000 that worked for the firm in Asia at the time of the takeover.
ôThe funds raisedàwill allow Nomura to strengthen its financial position and continue the expansion of the international franchise,ö the bank said in a press release announcing the bond sales.
Meanwhile, after weeks of rumours about what roles former Lehman bankers will play within Nomura's new management structure, it appears as if they will be nowhere near as prominent as once thought.
Jasjit Bhattal, former CEO of Lehman Brothers Asia, has been made senior managing director and chairman of Asia. He has also been nominated to the global wholesale committee, along with another two foreign bankers, Sadeq Sayeed and David Benson, both long-term Nomura men. Bhattal is the only former Lehman employee on the 14-man committee, which is subordinate to the executive management board. The executive management board answers to the board of directors. In addition, Nomura has appointed Tarun Jotwani, also from Lehman, as global head of fixed income and senior managing director. Jotwani is not on any board.
The global wholesale committee oversees all parts of the securities company that are not part of the Japanese retail operation. The committee is chaired by Takumi Shibata, deputy president and chief operating officer of Nomura Holdings. The other members are all senior heads of business lines, such as the global markets CEO, the global investment banking CEO, the chief risk officer, the chief information officer, and so on.
The global wholesale committee answers to the executive management board which is the æsupreme decision-making bodyÆ, according to one Nomura banker. It is chaired by Kenichi Watanabe, president and CEO of Nomura. Senior managing directors (SMDs), like Bhattal, are junior to executive managing directors (EMDs). ItÆs the latter who comprise the top executive management board. EMDs have company-wide functions and include the CEO, the COO, the heads of the five business divisions, the head of Europe, the CIO, the CFO and the head of corporate. There are no ex-Lehman employees on the top board at all.
The regional executive management committees are an innovation, and are designed to cope with a much more international business. The Japan executive management committee will be chaired by Shibata (who also chairs the global wholesale committee). The regional committees report to the global wholesale committee.
Under the changes, Bhattal is simply a member of the regional executive management committee for Asia, and not a chairman. Bhattal has also lost his former CEO function. His new role will be to develop client relationships, especially outside Japan, and to carry out management functions.
The structure appears to scotch any idea of a æreverse takeoverÆ of Nomura by Lehman. This was a theory that had been doing the rounds in Tokyo in past weeks. With no ex-Lehman banker on the top committee, and just one on the second committee, it could be difficult for a æLehman factionÆ to develop.
While it prevents a power struggle, this development is also somewhat contradictory, given that the takeover of Lehman Brothers was limited, essentially, to staff contracts. Ironically, these bankers now do not appear to be in a position to exert their expertise on the operations. Brian OÆConnor, a close collaborator of BhattalÆs and formerly chief administrative officer of Lehman Brothers Japan, is not on any committee, despite having been persuaded to stay on with Nomura. Nor are many others. The question now is whether such a Nomura-dominated structure will encourage more ex-Lehman bankers to look elsewhere.
And if they do leave, might Nomura be relieved? Rumours are circulating that the guaranteed 2007 bonus is up for 'renegotiation'. Perhaps the takeover of Lehman, which must have seemed a thrilling opportunity when it first came around a few months ago, is losing its appeal as Japan heads into the worst recession for many years.
As crucial for the integration as the management restructuring is the financing. A recent Credit Suisse report suggested that Nomura might be looking at a loss of up to $5 billion for the full financial year to March 2009. Although positive about the takeover of Lehman in the long term, Credit Suisse has also estimated the ôsuccession costs" at Lehman Brothers to be around $2 billion, which will make it "very difficult to turn Lehman into the blackö.
However, the author of the report, Azuma Ohno, told FinanceAsia he was impressed by the planned capital raising.
ôThe Ñ410 billion planned capital raising is more than the Ñ200 billion-Ñ300 billion that I had expected,ö he says.
However, Ohno does not expect the funds to be used to compensate for the full-year losses. ôA few months ago, Nomura raised $6 billion dollars, and even after their losses, they still have $1 billion-$2 billion to draw on. So the new funds can be used to integrate the Lehman operations and expand internationally,ö he says.
Nomura lost Ñ149.5 billion in the first half of fiscal 2009.
According to a press release yesterday, Nomura is preparing to issue the first series of unsecured subordinated bonds and the first series of unsecured subordinate convertible bonds with warrants. The CB will amount to Ñ110 billion ($1.15 billion), while the size of the straight bonds has yet to be determined.
Nomura cited the subordinate nature of the bonds, the ability to shift the CB to equity, and the flexibility of a 120% call option as reasons for why it chose these particular arrangements. The subordinated bonds enhance the firmÆs financial position without causing dilution. The money will be used as operating funds throughout the global operations.
The unsecured bonds, maturing in 2016, but with a call option in 2011, carry a tentative coupon of 3.6% and will be priced on December 11, prior to a public offering to be held between December 12 and 25. The bonds are rated A+ by the Japan Credit Rating Agency.
The CB, which will be offered on December 16, matures in 2014 and features a call option subject to a 120% hurdle that may cap the upside for investors. It too has an annual coupon of 3.6% but will be redeemed at par, meaning the bonds offer no additional yield on top of the coupon payments.
The bonds are convertible at an initial conversion price of Ñ745 per share, which translates into a modest 9.9% premium over yesterday's closing price of Ñ678. The bonds can be converted at any time after January 5, 2009. The CBs will be allocated to third parties, one of which was named in the local media as Dai Ichi Mutual Life Insurance.
In related news, Zenji Nakamura has been appointed co-head of global fixed income and senior managing director with responsibility for Europe and the Americas; Yoshinori Go will move to Singapore to manage the firmÆs wealth management business; and Hiroyuki Suzuki will return to Tokyo to work in Nomura Securities as senior managing director.
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