To the victors, the spoils: a post-Lehman scorecard

For Barclays and Nomura, the collapse of Lehman Brothers was the opportunity of the lifetime—a chance to grab a seat at banking’s top table as Wall Street’s giants fell.

A year after their high-speed takeovers, Britain’s Barclays is confident it is on course to fulfil long-held ambitions now it has a foothold in United States equity and mergers and acquisitions markets, and Lehman has already boosted its bottom line.

But Japan’s Nomura, a conservative brokerage which went for Lehman in its own bid to become an international investment bank, is still hobbled by a lack of scale in the United States and insiders say lingering cultural differences are a burden.

“We knew we were crossing a line and we would never be able to go back,” Barclays Capital President Jerry del Missier told Reuters, speaking of frenzied negotiations as departing staff carried boxes of belongings across news broadcasts.

Speed was critical for both banks, not least to retain the talent and customer connections in the businesses they bought.

Having failed to buy all of Lehman, Barclays days later acquired its core US broker-dealer out of Chapter 11 bankruptcy protection. Nomura bought European and Asian assets the following week.

A week after Barclays’ acquisition, in the throes of the worst market turbulence in decades, it had named its top team. Nomura integrated the new structure in 70 days—much faster than the 100 it had targeted.

“We wanted to send a powerful message to the marketplace that we were going to get the Lehman businesses up and running,” Del Missier said in an interview.
“We had clients to worry about, our own risk positions we needed to manage—and the environment was incredibly volatile.”

Nomura declined to comment for this article.

Lucrative opportunity
The core of Lehman Brothers has allowed Barclays to go from a respected debt shop to a comprehensive investment bank, adding stock underwriting and M&A advisory to the business in a swoop.

Lehman’s US equities business was key to that deal—US distribution channels are the largest and critical for anyone selling and underwriting stocks.

It has proved a lucrative opportunity, helping to double pre-tax profit from Barclays investment banking business in the first six months.

“With Lehman you had a ship that had been sailing along very well and one particular thing torpedoed it,” said analyst Mike Trippitt at Oriel Securities. “The rest of the business in the US was still buzzing—what Barclays got was a business in which 80% was pretty vibrant.”

Challenges for Barclays include the huge technological weight of rolling out a single equities platform across the globe, and the task of climbing up the ranks of investment banking league tables as more banks fight over fewer deals.

Since the deal Barclays has taken the number two spot in debt capital markets tables, up one place, but it is still below Lehman’s old positions in both global M&A and equity capital markets, according to Thomson Reuters data.

Culture clash
Success has been more measured for Nomura. While areas such as its Japanese franchise, M&A advisory and convertible bonds have shown strength, the bank suffered early on from costs associated with the Lehman deal.

“Looking back at Nomura’s financial results for the first quarter, they only managed to show ‘some’ fruit out of Lehman acquisition,” Credit Suisse analyst Azuma Ohno said. “To me it seems they showed they were able to get a fairly good numbers in a good financial environment, but it was not extremely good.”

Asia’s stock market soared in the first months of the year, with shares in China alone ahead more than 80% in early August.

The Japanese bank quickly ran into a challenge that had little to do with speed or execution. Taking on a risk-loving American brokerage proved a tall task.

While steps such as Western-style contracts have been taken to improve the cultural differences, issues still pop up.

The US press has relished stories of traders singing company songs or of lessons on serving tea in the Japanese tradition, while rumours of Lehman-only parties have done the rounds in Nomura Asia.

“There are still internal divisions that just won’t go away. It’s an us versus them mentality and it’s a shame,” according to a legacy Nomura banker who did not want to be identified because he was not authorised to speak to the media about the deal.

Sharing client networks is an ongoing problem, he said.

People power
To keep Lehman bankers through the upheaval, Nomura offered many of them one- and two-year guarantees, based on their 2007 compensation. The full payout of last year’s bonus was due on September 1, prompting speculation that another round of Lehman departures is soon to follow.

Nomura has defended the timing of its purchase and has shown it is still willing to hire, even before the markets recovered.

Nomura, which jumped to 4 400 employees in Europe from 1 500 after the acquisition of Lehman’s businesses, has hired 521 people in Europe since January, including eight number one-ranked research teams.

“The fascinating thing is that 18 months ago, no one from Goldman or Merrill wanted to work at Nomura,” an ex-Lehman executive said, referring to the old-school Japanese image. “Now they see the opportunity to build something.”

Still, Lehman bankers have felt under-represented at the top of Nomura’s management structure, a feeling that intensified when Lehman’s former Asia-Pacific chief executive Jesse Bhattal said this summer he would step down from his chairperson role at year end.

Progress is emerging though. Nomura’s first quarter this year—the three months to the end of June—reversed a year-and-a-half of decline, and teams have cooperated.

“The capital markets team and sales division have worked well with convertibles in terms of distribution. That’s actually been an astonishing success,” said the legacy Nomura banker.

“In a number of parts we’re well positioned. We seem to be missing the boat with some of our businesses. I’d say overall, it’s still a work in progress.”

Even if the deal for Barclays was a more rounded success, it too still has work to do—not least to grow in Asia and Europe and realise its ambition of taking a top spot in equities and M&A league tables.

Its role as adviser to Pfizer on its $68-billion takeover of Wyeth has helped, but Barclays is number 11 in the global M&A tables, below Lehman’s old number nine spot.

“We are still not up and running in Europe and Asia, and especially in Europe that will have an impact on global league tables,” Del Missier said. “I am confident you will start to see the results come through pretty quickly.”—Reuters

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