the fall of lehman brothers
TRANSCRIPT
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Chapter - 1
1.1 The History of Lehman Brothers
Like its most aggressive rival Goldman Sachs, Lehmans history traces back to a
German immigrant. Henry Lehman of Rimpar, northern Bavaria, settled in
Montgomery, Alabama in 1844 and opened a small general store. Only in 1850,
Henry Lehman and his brothers, Emanuel and Mayer, founded Lehman Brothers,
which at this time was a cotton trading company. Until the late 19th century
Lehman Brothers remained focused on the cotton market. The Lehman brothers
moved the firm to New York after the civil war and were involved in the
foundation of the New York Cotton Exchange in 1870. Only in 1883 Lehman went
on to enter the coffee market, becoming a member of the Coffee Exchange.
Four years later, in 1887, Lehman became a member of the New York Stock
Exchange.
Lehman expanded into the profitable equity underwriting business which was
strongly linked to the rapid industrialization of the United States. In 1899, it
underwrote its first public offering, the preferred and common stock of the
International Steam Pump Company and subsequently developed to one of the
most active equity underwriters. While the firm prospered over the following
decades as the US economy grew into an international powerhouse, Lehman
had to contend with plenty of challenges over the years. Lehman survived them
all:
The railroad bankruptcies of the 1800s
The Great Depression of the 1930
Two world wars
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A capital shortage when it was spun off by American Express in 1994 and
losses had depleted shareholder equity to less than 2% of assets
The Long Term Capital Management collapse
The Russian debt default of 1998
And the 2001 attack on the World Trade Center where Lehman had 3 floors
of office space.
In 1975 the firm merged with Kuhn, Loeb and Company to form at the time the
4th largest investment bank. The merger didnt go quite as planned and strife
arose in the firm. The firm was sold to American Express. AMEX started to break
away from banking and brokerage operations and sold off operations to
Primerica which in 1994 was broken off as an IPO for the current Lehman
Brothers ticker. The firm did exceptionally well purchasing fixed income such asLincoln Capital Management and Neuberger Berman which still are profitable
today. Since the IPO in 1994 Lehman had steadily increased revenues and grew
in employees from 8,500 to approximately 28,000.
However, despite its ability to survive past disasters, the collapse of the US
housing market ultimately brought Lehman Brothers to its knees, as its headlong
rush into the subprime mortgage market proved to be a disastrous step. However,
even at the time of the bankruptcy most units of Lehman were profitable andLehmans last CEO, Richard Fuld, had spent most of his tenure with diversifying the
company, making sure it would have other businesses to depend on if one
collapsed.
1.2 Lehmans Big Man: Dick Fuld
The last CEO of Lehman Brothers was Richard S. Fuld, Jr. who joined the
company at the age of 23 and spent his entire 39-year career at Lehman, the
last 15 in the top job. Fuld was considered as a trader by nature and nurture and
was described as highly competitive and keeping a straight face.
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In 1993, he became CEO of what was then the Lehman Brothers unit of
American Express. When American Express spun off Lehman as a public
company in1994, Fuld became its first chief executive. That was widely
perceived as a signal of the rising power of traders on Wall Street.
1.3 Lehman and the Subprime Mortgage Market
In 2003 and 2004, with the US housing market soaring, Lehman acquired five
mortgage lenders, including:
Irvine, California-based subprime lender BNC Mortgage, which lent to
homeowners with poor credit or heavy debt loads.
Aurora Loan Services, which specialized in Alt-A loans (a notch above
subprime, to more-creditworthy borrowers who do not provide full
documentation for their assets).
Benefits of the Acquisitions
In the first quarter of 2006, BNC was lending more than $1 billion a month,
while Aurora was originating more than $3 billion a month of such loans in
the first half of 2007.
Lehmans acquisitions at first seemed prescient; record revenues from
Lehmans real estate businesses enabled revenues in the capital marketsunit to surge 56% from 2004 to 2006, a faster rate of growth than other
businesses in investment banking or asset management.
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The firm securitized $146 billion of mortgages in 2006, a 10% increase from
2005. Lehman reported record profits every year from 2005 to 2007. In 2007,
the firm reported net income of a record $4.2 billion on revenue of $19.3
billion.
At the time Lehman was the biggest underwriter of US bonds backed by
mortgages, accumulating an $85 billion portfolio, 44% more than Morgan
Stanley and almost four times the $22.5 billion of shareholder equity
Lehman had as a buffer against losses.
In February 2007, Lehmans stock reached a record $86.18, giving Lehman
a market capitalization of close to $60 billion.
Lehman's Colossal Miscalculation
However, by the first quarter of 2007, cracks in the US housing market were
already becoming apparent as defaults on subprime mortgages rose to a seven-
year high. On March 14, 2007, a day after the stock had its biggest one-day dropin five years on concerns that rising defaults would affect Lehmans profitability; the
firm reported record revenues and profit for its fiscal first quarter. In the post-
earnings conference call, Lehmans CFO saidthat the risks posed by rising home
delinquencies were well contained and would have little impact on the firms
earnings. He also said that he did not foresee problems in the subprime market
spreading to the rest of the housing market or hurting the US economy. Prices of
securities backed by their mortgages sank, ultimately forcing Bear Stearns,
Lehmans main competitor in subprime underwriting, to tell investors in two of its
hedge funds, which bet heavily on home loans, that their investments had beenwiped out.
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1.4 Causes of the financial turmoil
The US housing market
1. Creation of a housing bubble
US house prices rose dramatically from 1998 until late 2005, more than doubling
overthis period , and far faster than average wages. Further support for the
existence of a bubble came from the ratio of house prices to rentingcosts which rocketed upwards around 1999. Furthermore, Yale economist
Robert Schiller found that inflation-adjusted house prices had remained
relatively constant over the period 1899-1995. Pointing to the escalation in
house prices and marked regional disparities, Shiller correctly predicted the
imminent collapse of what he believed was a housing bubble
The rise in house prices reflected large increases in demand for housing and
happened despite a rise in the supply of housing. The significant increasein the demand for housing is attributed to a number of factors.
a. Low interest rates
Sustained low interest rates from 1999 until 2004 made adjustable-rate
mortgages (ARMs) appear very attractive to potential buyers. At least in part,
low interest rates were driven by the large current account deficit run by the
USA, mirrored by capital inflows from countries like China which avidlypurchased US Treasury bonds, but also the decision (justified by a new
economic paradigm) on the part of the Fed to keep interest rates lower than in
similar previous scenarios.The Fed - and many of the worlds otherleading
central banks - continued to pump liquidity into credit markets to ensure credit
would continue to flow at low rates of interest
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b. Speculation
The upward rise in house prices was accentuated by property speculation.In some markets, 10% to 15% of buyers were speculators, estimates Bruce
Karatz of KB Home. Harvard economist Robert Shiller adds: Home buyers
typically expect price appreciation of 10% [a year) Speculative activity was
exacerbated by the USs comparatively generous foreclosure rules: unlike in
the UK, where foreclosure is likely to result in personal bankruptcy, homeowners
in the US can generally just walk away from their home and mortgage.
Together, these factors created a huge housing bubble. By 2005-06, the
value of subprime mortgages relative to total new mortgages was estimated at
20% - as opposed to less than 7% in 2001.44 Subprime mortgage lending rose
from $180bn in 2001 to $625bn in 2005.45 New Alt-A mortgages, the risk level
between subprime and prime,46 had risen from 2% in 2001 to 14% by 2006.Dean
Baker, co-director of the Center for Economic and Policy Research, valued the
housing bubble at $8 trillion.
2. The collapse of the bubble
By 2006 a number of factors had conspired to burst the bubble.
First, average hourly wages in the US had remained stagnant or declined
since 2002 until 2009 in real terms this represented a decline. Consequently,prices could not continue to rise as housing became increasingly
unaffordable.
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Second, growth in housing supply tracked price rises.While prices were able to
withstand this downward pressure until 2005, once demand had subsided
excess supply exacerbated the sharp fall in prices.
Third, as interest rates rose to a peak of 5.25%, ARMs became less attractive
and effectively removed many non-prime prospective buyers from the market
- in the first half of 2006, the Mortgage Bankers Association found the value, and
total number, of subprime mortgages to be down 30% on the second half
of 2005.
Fourth, as personal saving from disposable income fell below zero, fewer
households had the requisite finance to support increases in debt.
The collapse in house prices affected the ability, and the willingness, of
mortgage-owners to meet their payments. In some cases, house-owners with
ARMs simply could not face the rise in their payments resulting from the steep
rise in the Fed funds rate. As house prices fell, the options of either selling the
property or re-financing the mortgage also diminished.This unfortunate position
was exacerbated by the decline in the net savings rate, which meant
homeowners had fewer financial reserves to help themselves. In other
cases, there existed an incentive to voluntarily foreclose where the value of the
house (and future gains associated with a stronger credit rating) was smaller
than the value of the outstanding mortgage because of generous
foreclosure legislation.
Consequently, 2007 and 2008 saw significant rises in delinquency and
foreclosures.Serious mortgage delinquency rates rose in both the prime and
subprime markets, although the latters rise from just over 6% in 2006 to 18% in
2008 was particularly salient. The number of properties subject to foreclosurefilings rose by 79% in 2006 to reach 1.3m in 2007, and increased by a further 81%
to 2.3m in 2008 (a 225% increase on 2006).
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1.5 The Beginning of the End
Toward the end of 2006, people familiar with Lehmans risk managementoperations say, executives at the firm started seeing trouble in the mortgage
market.
The securitization division raised rates on its bonds to reflect higher risk, which
meant higher interest on the loans Lehmans mortgage units made to home
owners. When that did not slow borrowing, lending standards were tightened, a
decision that was met with resistance by BNC and Aurora executives, whose fees
depended on volume, the people say. By the end of 2006, Lehman started
hedging against its mortgage exposure. Some traders were allowed to bet
against the prices of home loans by shorting indexes tied to mortgage securities.
Still, Lehman President Gregory did not move fast enough to reduce risk, the
people say.
As the credit crisis erupted in August 2007 with the failure of two Bear Stearns
hedge funds, Lehmans stock fell sharply.
Lehman Brothers became the first firm on Wall Street to close its subprime-
lending unit and lay off 2500 employees of the BNC and other mortgage related
units. Against the statements of the CFO from March 2007, shuttering BNC
Mortgage LLC would cut third-quarter earnings by $52 million Lehman calculated
at the time.
BNC made about $2 billion of loans in the first quarter of 2007, already down
40% from a year earlier, according to industry newsletter National Mortgage
News. BNC had 23 offices in eight states of which all were closed. In addition, it
also closed offices of Alt-A lender Aurora in three states. Even as the correction
in the US housing market gained momentum, Lehman continued to be a major
player in the mortgage market.
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In the fourth quarter of 2007, Lehmans stock rebounded, as global equity markets
reached new highs and prices for fixed-income assets staged a temporary
rebound.
However, the firm did not take the opportunity to trim its massive mortgage
portfolio, which in retrospect, would turn out to be its last chance.
Some of Lehmans losses in that period were from leveraged loans, which are used
by private equity firms and others for buyouts. The firm was stuck with the loans,
which they had aimed to package and sell, when the leveraged buyout market
froze in the second half of 2007.Fuld used the temporary recovery of credit
markets in the first quarter of 2008 to offload one-fifth of the firms leveraged-
loan portfolio. Yet he also tried to gain market share by borrowing against the
firms capital to trade other fixed-income products for Lehmans clients, people
say. That increased Lehmans risk in the event of a renewed downturn, as did its
growing inventory of Alt-A loans. Fuld had bet the wrong way: In March, markets
tumbled as defaults by homeowners surged, housing prices fell further and the US
headed toward a recession.
Reversing course, he ordered his associates to hunker down, people say. Traders
were told to sell troubled assets or buy credit protection for further potential
losses, which meant that if prices were to recover, Lehman couldnt benefit. In other
words, things werent going to turn around anytime soon.
Before the bankruptcy, Lehman Brothers risk management department had
identified five specific risks inherent in their business.
Market risk represents the potential unfavorable change in the value of aportfolio of financial instruments due to changes in market rates, prices
and volatilities
Credit risk represents the possibility that a counterparty or obligor will be
unable or unwilling to honor its contractual obligations to Lehman
Brothers.
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Liquidity risk is the risk that Lehman brothers are unable to meet their
payment obligations, borrow funds in the market at a good price on a
regular basis, to fund actual or proposed commitments or to l iquidate
assets.
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems, or from external events.
Reputational risk concerns the risk of losing confidence from the
customers, public and the government due to unfortunate decisions
about client selection and the conduct of their business.
In summary, the market, credit, liquidity, operational and reputational risks
constituted the total risk in Lehman Brothers business (Lehman Brothers Annual
Report, 2007). In order for successful and sustainable investment banking theymust be carefully managed and balanced. On the other hand, if treated with
disrespect they could have disastrous consequences and destroying whole
companies.
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It is hard to believe that only one year ago, this once behemoth of Wall Street
had a $47 billion market cap and now is filing for bankruptcy. As the troubles
mounted in late August rumors started piling on that a bailout from the Korea
Development Bank was in the works. This never materialized. On September 10
Lehman announced another stunning loss of $3.9 billion and made it clear thatthey were also in the works of selling off the prized jewel in Neuberger Berman to
raise capital. The rest we already know and weekend talks broke down and
Lehman was forced with no other option but to file for bankruptcy.
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Chapter -2
The Bankruptcy of Lehman Brothers
My goodness, Ive been in the business 35 years, and these are theMost extraordinary events Ive ever seen
Peter G. Peterson, co-founder of Blackstone Group, and former head of Lehman
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The difficulties the financial services industry was facing during the year 2008,
which were mainly caused by the subprime crisis, hit Lehman particularly hard:
Pulling out BNC Mortgage of business and thus eliminating 2500 jobs in August
2007 was just part of Lehmans decline, which should reach its nadir at the
weekend of September 14, 2008. Lehmans high degree of leverage - the ratio of
total assets to shareholders equity was 31 in 2007, and its huge portfolio of
mortgage securities made it increasingly vulnerable to deteriorating market
conditions. On March 17, 2008, following the near-collapse of Bear Stearns - the
second-largest underwriter of mortgage-backed securities Lehman shares fell as
much as 48% on concern it would be the next Wall Street firm to fail.
Confidence in the company returned to some extent in April, after it raised $4
billion through an issue of preferred stock that was convertible into Lehman
shares at a 32% premium to its price at the time. However, the stock resumed its
decline as hedge fund managers began questioning the valuation of Lehmans
mortgage portfolio.
Throughout the year 2008 Lehman had to suffer bigger and bigger losses caused
by lower-rated mortgage-backed securities, culminating in $2.8 billion losses and
a decline of its stock value of 73% at the end of the second fiscal year,
announced on June 9.
Lehmans second-quarter losses, four times more than the worst analyst estimate
and its first loss since being spun off by American Express. It also arranged a $6 billion
share sale.
As painful as this quarterly loss has been, now is the time to look forward,
Fuld wrote to employees.In past down cycles, the firm has always emerged
stronger. We have done it before, and we will do it again. The firm also said
that it had boosted its liquidity pool to an estimated $45 billion, decreased gross
assets by $147 billion, reduced its exposure to residential and commercialmortgages by 20%, and cut down leverage from a factor of 32 to about 25.
However, selling $147 billion of assets in a jittery market meant taking significant
losses. On top of that, people familiar with the transactions say, some of the
hedges did not work. For example, Lehman bet against the CMBX index, a
gauge of bonds backed by commercial mortgage bonds, to hedge its residential
mortgage portfolio. In the second quarter, the index improved - the cost of
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protecting against losses on commercial mortgage bonds narrowed to 100 basis
points from 150 while the prices of residential mortgages continued to drop,
resulting in losses on both sides of the trade.
However, the above described measures were perceived as being too little and
too late. Over the summer of 2008, Lehmans management made unsuccessful
overtures to a number of potential partners.
a) The stock plunged 77% in the first week of September 2008, amid
plummeting equity markets worldwide, as investors questioned CEO
Richard Fulds plan to keep the firm independent by selling part of its asset
management unit and spinning off commercial real estate assets.
b) In August 2008, shortly before the third-quarter announcements in mid-
September, Lehman made public to lay off 1500 jobs, being 6% of its
workforce. Having already laid off more than 6000 workers since June
2007, this round of Lehmans head-count reductions should not only affect
its mortgage origination and securitization businesses. Now, as business was
stumbling from one somber quarter to the next, jobs in investment banking
and trading were also in jeopardy.
In August 22, 2008 investors confidence in Lehman reached a small peak after the
state-run South Korean firm Korea Development Bank announced it was
considering buying Lehman. On that day Lehmans stock value appreciated by
5% and 16% over the week. After this short moment of euphoria Lehmans shares
finally fell sharply by 45% to mediocre $7.79 on September 9, when the Korean
bank had to report to hold the negotiations due todifficulties pleasing
regulators and attracting partners for the deal On that day the fresh concerns
over Lehmans stability and investors worries that Lehman could have major
difficulties in finding new sources of capital pulled down the Dow Jones by 300
points and the S&P by 3.4%.
This decline more than wiped out the markets revival on the day before, after
the Bush administration rescued the mortgage giants Fannie Mae and Freddie
Mac.
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The outlook and fear that the government might not come to rescue Lehman and
that it may have to solve its problems on its own finally lead to the market decline
on that day.
The news was a deathblow to Lehman, leading to a 45% plunge in the
stock and a 66% spike in credit-default swaps on the companys debt.
The companys hedge fund clients began pulling out, while its short-term
creditors cut credit lines.
On September 10, Lehmans share further dropped by 41% to $4.22, as it
had to announce a loss of $3.9 billion and indicated its intention to sell its
prized investment managing division, including Neuberger Berman.
Among the potential buyers were Barclays of Britain, the Bank of America
and private equity firms. As the potential buyers were seeking assistance
from the Federal Reserve in form of assurances guaranteeing a part of
Lehmans troubled assets, it was still unclear whether the Fed would help.
The same day, Moodys Investor Service announced that it was reviewing
Lehmans credit ratings, and also said that Lehman would have to sell a
majority stake to a strategic partner in order to avoid a rating downgrade.
These developments led to a 42% plunge in the stock on September11.
On Friday September 12, the New York Federal Reserves president Timothy F.Geithner summoned the heads of major Wall Street firms, so they could review
their financial exposures to Lehman and work out plans over the possibility that
the government had to co-ordinate an orderly liquidation of Lehmans assets
the next Monday. The meeting was very reminiscent to the meeting held ten years
ago before the collapse of Long Term Capital Management (LTCM), a hedge
fund firm that dealt with esoteric securities, when Bear Stearns, the hedge funds
clearing broker, refused to contribute in an investment saving the fund.
The Wall Street banks involved in this meeting argued that Lehman overreached
and brought its troubles on itself. If a buyer of Lehman could not be found, they
could collect their collateral and liquidate Lehmans assets. Finally, after nervous
around-the-clock negotiations over the weekend, on Sunday September 14,
Merrill Lynch agreed to sell itself to Bank of America. Lehman announced
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Barclays has ended the bid to buy all or part of Lehman and a deal to
rescue the bank could not be settled. Bank of America, also rumored to be
involved in bidding for Lehman, had to reject its interests, too, as the regulators
declined a governmental involvement in Lehmans sale. It was finally on that
day when Lehman announced to file for bankruptcy protection on MondaySeptember 15.
2.1 THE THREE LS THAT KILLED LEHMAN
Leverage
During the good times, the best way to enhance your returns is to 'gear up' by
borrowing money to invest in assets which are rising in value. This enables you to
'leverage' (magnify) your returns, which is particularly useful when interest rates
are low. However, leverage cuts both ways, as it also magnifies your losses when
asset prices fall. (Witness the recent return of negative equity to the UK property
market.)
A sensibly run retail bank would have leverage of, say, 12 times. In other words, for
every 1 of cash and other readily available capital, it would lend 12. In 2004,
Lehman's leverage was running at 20. Later, it rose past the twenties and thirties
before peaking at an incredible 44 in 2007.
Thus, Lehman was leveraged 44 to 1 when asset prices began heading south.
Think of it this way: it's a bit like someone on a wage of 10,000 buying a house
using a 440,000 mortgage. If property prices started to slide, or interest ratesmoved up, then this borrower would be doomed. Thanks to its sky-high leverage,
Lehman was in a similar pickle.
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Liquidity
Most businesses fail not because of lack of profits but because of cash-flowproblems. Like all banks, Lehman was an upturned pyramid balanced on a small
sliver of cash. Although it had a massive asset base (and equally impressive
liabilities), Lehman didn't have enough in the way of liquidity. In other words, it
lacked ready cash and other easily sold assets.
As markets fell, other banks started to worry about Lehman's shaky finances, so
they moved to protect their own interests by pulling Lehman's lines of credit. This
meant that Lehman was losing liquidity fast, which is a dangerous state for anybank. Only six months earlier, in March 2008, Lehman rival Bear Stearns faced a
similar loss of liquidity before JPMorgan Chase rode to its rescue.
Believing that Lehman did not have enough liquidity at hand, other banks refused
to trade with it. Once a bank loses market confidence, it loses everything. Being
unable to trade meant that Lehman and its business ceased to exist in other
banks' eyes.
Losses
After the terrorist attacks of 11 September 2001, US interest rates plummeted,
causing a five-year boom in domestic and commercial property prices. This
boom ended in 2006 and US housing prices have since fallen for three years in a
row.
Lehman was heavily exposed to the US real-estate market, having been the
largest underwriter of property loans in 2007. By the end of that year, Lehman had
over $60 billion invested in commercial real estate (CRE) and was very big in
subprime mortgages (loans to risky homebuyers).
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Also, it had huge exposure to innovative yet arcane investments such as
collateralized debt obligations (CDO) and credit default swaps (CDS).
As property prices crashed and repossessions and arrears sky-rocketed, Lehman
was caught in a perfect storm. In its third-quarter results, Lehman announced a
$2.5 billion write-down due to its exposure to commercial real estate. Lehman's
total announced losses in 2008 came to $6.5 billion, but there was far more 'toxic
waste' waiting to be unearthed.
2.2 The Bankruptcy Law in the United States
Bankruptcy in the United States of America is permitted by the US Constitution
and codified in Title 11 of the United States Code, commonly known as The
Bankruptcy Code. The Code has been amended several times, especially in
2005 through the Bankruptcy Abuse Prevention and Consumer Protection Act,
BAPCPA, which has particular significance for the financial industry.
Bankruptcy cases are filed in US Bankruptcy Courts and governed under federal
law, but state laws play usually a major role in bankruptcy cases, because these
are often applied in property rights issues.
Chapters of the Bankruptcy Code:
Chapter 7: Liquidation
Liquidation under this chapter involves the selling of non-exempt property of the
debtor and the distribution of the proceedings to his creditors. Most Chapter 7
cases are no-asset cases, i.e. the debtor keeps all his essential property.
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Chapter 9: Reorganization for municipalities
This chapter is only available to municipalities and is a form of reorganization,
e.g. Orange County in 1994.
Chapter 11: Reorganization
Chapter 11 of the Bankruptcy Code allows reorganization of any business, with
the basic rationale behind, that a reorganized business is more valuable as a
going-concern than the value of its parts in case of liquidation. In most cases the
debtor remains in control of its business operations as a debtor in possession and
is subject to the oversight of a jurisdiction of the court. The rights and interests of
the owners of companies filing under Chapter 11 with debts exceeding its assetsare ended and the creditors are left with ownership of the newly reorganized
company.
Chapter 11 features tools and mechanisms to facilitate the debtor to restructure
its business.
The debtor in possession may acquire financing and loans on a favorable basis,
providing the lender first priority on the earnings obtained by his advances. Thepriority scheme in Chapter 11 is the same as in the other chapters of Title 11, i.e.
giving secured creditors (with security interest or collateral in the debtors
property) higher priority than unsecured creditors, e.g. giving then employees
higher priority than others.
Each priority level has to be paid off in full before the next lower one can be
served. The debtor can also obtain the permit to cancel or reject executory
contracts, such as labour union contracts, supply/operating contracts or real
estate leases, in case it would be favorable to the company and its creditors. The
Chapter 11 plan for reorganization, with the goal to emerge debtors from the
bankruptcy within months or years, is voted upon by the interested creditors. A
confirmed plan becomes binding and identifies the treatment of debts and
business operations. Debtors have the exclusive right to propose a plan for a
specific duration (in most cases 120 days), after which creditors may also propose
a plan.
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In case the involved parties cannot confirm a plan, the bankruptcy case may be
converted into Chapter 7 liquidation or dismissed to return to the status quo
before the bankruptcy filing, allowing the creditors to claim their rights by use of
non-bankruptcy law.
If a publicly listed company files under Chapter 11, its stocks are immediately
de-listed from the stock exchange, but remain very often listed as over-the-
counter (OTC) stock, or in many cases the confirmed Chapter 11 plans render the
shares of the company valueless.
Chapter 12: Reorganization for family farmers/fishermen
This chapter is very similar to Chapter 13, but only available in certain situations.
Chapter 13: Reorganization for consumers
Bankruptcy under Chapters 11-13 is a complex form of reorganization and allows
the debtor to keep part or all of his property and use future earnings to pay off
his creditors.
Chapter 15: Cross-border insolvency
BAPCPA added this chapter to deal with foreign companies with US debts.
Bankruptcy cases are either voluntary, where debtors petition the court, or
involuntary, where creditors file the petition, e.g. To force a company into
bankruptcy to enforce their rights. Voluntary cases are by far the majority of all
bankruptcy cases.
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All bankruptcy cases commence with the establishment of the debtors estate,
which consists of all property interests at the time of the case commencement,
subject to certain exclusions. The bankruptcy estate of a company, partnership
and other collective entities is for federal income tax purposes not a separate
taxable entity from the debtor, contrary to individuals filing under Chapters 7 or 11,where the estate is separate. In particular, the estate is the net worth of an
individual or company, being the sum of the assets (legal rights, interests and
entitlements to property of any kind available for distribution to the creditors) less
all liabilities, and is administered by a trustee in bankruptcy. The moment the
petition for bankruptcy is filed, an automatic stay is imposed. An automatic stay
is an injunction, which prohibits the commencement, enforcement and appeal
of actions and judgments by creditors against the debtor for the collection of a
claim. Actions and proceedings towards the estate itself are prohibited, too.
Violations of the automatic stay are treated as void ab initio or voidable,depending on the circuit.
2.3 Lehmans Bankruptcy Filing
Lehman filed on Monday September 15, 2008 for bankruptcy protection under
Chapter 11 of Title 11 of the United States Code. The case is in re Lehman
Brothers Holdings Inc. (LBHI), US Bankruptcy Court, Southern District of New York
(Manhattan), being by far the largest corporate bankruptcy in history, listing a
total of $639 billion in assets, $613 billion in bank debt and $155 billion in bond
debt. As only the holding filed, Lehman further announced that its subsidiaries
would continue to operate business as usual.
The way that Lehman filed for Chapter 11 shows that its executives hired
the bankruptcy attorney as late as possible to avoid hints to its employees and to
the markets, that bankruptcy was in consideration. Hence, there was no well-planned contingency plan to allow a seamless transition to the Chapter 11 state
and to avoid a financial meltdown during the first days after the bankruptcy
filing.
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But possibly a better plan wouldnt have changed much since the BAPCPA
added provisions that affected Lehman in a per se unfortunate manner.
Actually, Lehman filed only three, non-substantial motions to open the
bankruptcy case:
First motion asks the court to enforce the automatic stay provisions.
Second motion asks the court to extend the time to file required lists and
schedules.
Third motion asks the court to waive the requirement that a filing include the
list of creditors.
Major Asset Dispositions
On September 20, 2008, a revised proposal to sell the brokerage part of Lehman
was approved by the bankruptcy court. Barclays was to acquire the Manhattan
core business of Lehman for $1.35 billion, with the responsibility of around 9000
employees. With the deal, Barclays absorbed assumed $47.4 billion in securities
and $45.5 billion in trading liabilities.
The fact that only the real estate, which was acquired with the deal, was worth
$1.29 billion (including the Manhattan headquarters skyscraper) shows the
exceptional nature of the deal.
Finally, on September 22 and 23, Nomuras agreement to buy Lehmans
franchise in Japan, Hong Kong and Australia and its intentions to buy Lehmans
investment banking and equities businesses in Europe and Middle East were
announced, and the deal became legally effective on October 13.
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2.4 Conclusion
Lehmans collapse roiled global financial markets for weeks, given the size of the
company and its status as a major player in the US and internationally.
Many questioned the US governments decision to let Lehman fail, as compared
to its tacit support for Bear Stearns (which was acquired by JPMorgan Chase) in
March 2008. Lehmans bankruptcy led to more than $46 billion of its market value
being wiped out. Its collapse also served as the catalyst for the purchase of
Merrill Lynch by Bank of America.
Less than a week later, on September 21, the Wall Street that had shaped the
financial world for two decades ended, when Goldman Sachs Group Inc. andMorgan Stanley became bank .Holding companies concluding that there was no
future in remaining investment banks as investors had determined the model is
broken.
When analyzing Lehman Brothers risk management one can conclude that
Lehmans Management countless times exceeded their own risk limits, ultimately
exceeding their risk polices by margins of 70% as to commercial real estate and
by 100% as to leverage loans. One explanation of this rather dangerousbehavior is the compensation system. In order to attract and keep the sharpest
minds in the industry, investment banks normally rewarded their most revenue
generating employees with big monetary bonuses.
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2.5 The significance of Lehman Brothers bankruptcy
Key issues arising from Lehman Brothers bankruptcy continue to challengeindustry participants. Firms on both the buy- and sell-sides of the market are
beginning to identify and implement risk mitigation measures to reduce the
likelihood of future credit and liquidity-based losses.
1. Market participants, in particular large and complex financial institutions,
continue to address the challenges of accurately quantifying,
aggregating, monitoring, and reporting market, credit, and liquidity risks.
2. Clients have placed increased scrutiny on selecting and monitoring
derivative and other counterparties, including their prime brokerage
relationships.
3. This focus includes evaluating risks inherent in contractual agreements
and the legal rights and remedies afforded by such arrangements.
4. Investors and counterparties are requiring added assurance that their
assets and trade obligations are adequately safeguarded, moving
business and assets away from arrangements and institutions perceived as
less secure, or seeking to modify existing contractual arrangements.
Lehman Brothers global footprint meant that thousands of financial market
participants were directly impacted by its collapse. In addition, numerous
aftershocks were felt throughout the world resulting from numerous cross-border
and cross-entity interdependencies. Lehmans insolvency has resulted in more
than 75 separate and distinct bankruptcy proceedings.
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2.6 Lehman Specific Events
2007
13th Mar Announced investments to 20% of D. E. Shaw group.
22th Aug Announced closure of BNC Mortgage, Subprime-loanoriginator.
2008
17th Jan Announced reduction of retail mortgage and suspend wholesalemortgage lending business in U.S
9th Jun Announced to raise USD 6 bl. in common and preferred stock.
16th Jun Posts USD 2.8 bl. in losses for 2Q results.
22nd Aug Report says S. Korea's KDB having interest in acquiring Lehman
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9th Sep Report says KDB's negotiation failed, strong plunge in stock prices.
10th Sep Announces USD 6.9 bl. for 3Q results, further plunge in stock prices amid
reform strategies
15th Sep Lehman files Chapter 11
17th Sep Barclays Plc announces acquisition of Lehman's North American
business.
22nd Sep Nomura Holdings announces agreement on acquisition of Lehman's
Asia Pacific franchise.
23rd Sep Nomura Holdings announces agreement on acquisition of
Lehman's European equities and Investment Banking businesses.
29th Sep Bain Capital and Hellman & Friedman agrees in acquisition of asset
management business (Neuberger Berman)
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Chapter 3
The Nomura Group has been founded in 1919 in Osaka by Tokushichi Nomura II,
a wealthy Japanese stock broking tycoon. Everything begun much earlier with
Tokushichi IIs father, Tokushich Nomura. His father created a money changer
business in Osaka in 1872, the Nomura Shoten. His son first helped him in his
business and then went on to start in a new business in Japan at that time, stock
brokering. This led Tokushichi Nomura II to found the nowadays called Nomura
Group based on the idea that a long and sound customer relationship is the key to
a successful business.
3.1 The History of Nomura
The Nomura Group is the financial institution of a wider conglomerate named
Nomura Holding. This conglomerate is based on the Japanese business model
Keiretsu. Companies in a Keiretsu have strong and interwoven relationships but
stay independent in their management. Those business groups are usually
organized around a bank which lent to Keiretsu companies, hold equities in them
and bail Keiretsu members out if needed. Nomura Holding is a horizontal Keiretsu
with companies present in many industries from oil and gas to construction,
chemicals and foodstuff. The bank in this case is Nomura Group with a
noteworthy group member named Nomura Securities (NSC).
NSC is Japans most internationally famous stock brokerage firm. It has been
established in 1925 in Osaka, when it spun off from Nomura Group.
It was first a bond trading firm and became famous for inventing the conduit
commercial mortgage.
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NSC has managed throughout the 20th century to take advantage of political
and economical difficult situations like the end of the Second World War, the
1965 Japanese recession or the oil shocks. This was made possible by the visionary
company beliefs, always one step ahead of the industry competitors.
An Economist once wroteWhat Nomura does this morning, the rest of the
Japanese securities industry will do after lunch. For example in 1965, guided by
the belief that economics and technology would be closely intertwined in the
future, NSC founded an independent research institute to serve Nomuras needs
but those of Japan as well. Today Nomura Research Institute is one of the leading
research organizations in Japan and the companys belief at that time has
been proved to be correct. During the 1980s, a cutting edge computer system
was one of the competitive advantages Nomura had on the market.
NSC was the first Japanese company to be listed on an American stock
exchange (Boston) in 1969 and the first Japanese company to be listed on the
New York Stock Exchange in 1981. However they never really succeeded in
taking a significant part on the American securities market. They founded the
very successful European branch in the 1970s with its headquarters in Frankfurt.
At the beginning of the 1990s during the Japanese economy crash, things
started to get nasty. NSC faced many scandals and market troubles. However,they managed to stay financially sound and took the crisis as an opportunity to
restructure their business and management model to become competitive again.
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3.2 Nomuras Acquisition of Lehman Brothers
Nomura started to move to acquire Lehman Brothers after the company
filing for bankruptcy. After one week of decision, on September 22, Nomura
declared the acquisition of Lehman Brothers franchise in the Asia Pacific region,
including Japan and Australia. On September 23, Nomura acquired Lehmans
European and Middle Eastern equities and investment banking divisions.
On October 7, Nomura moved further to hire former Lehman Brothers fixed
income staff. Then on October 14, Nomura completely integrated the acquisition
of three companies in Lehmans eleven services platform in India which are LB
Services India, LB Financial Services (India), and LB Structured Financial Services.
The acquisition of Lehman will help Nomura to increase the number ofinternational investors. While Nomura holds a top share of JGB underwriting for
domestic investors, Lehman holds a top rank for international investors.
Furthermore, the Lehman investment banking branches in Asia and Europe will
complement the client base, since Lehman is a top player in this market. Nomura
can still maintain a top share in Japan and emerging markets such as India and
Eastern Europe.
The person who broke the status quo and boldly led the acquisition of Lehman
was Kenichi Watanabe, who was appointed CEO in April 2008. Nomuras
previous top management was also aware of the need forglobalization, but
conservative attitudes failed to deliver meaningful results. Watanabe is known
for putting particular emphasis on speed in management, and his appointment as
CEO reflected Nomuras strong desire for change. Joining Watanabe on as
chief operating officer on Nomuras top management was Takumi Shibata,
who would later go on to lead the actual negotiations in the Lehman
deal.Along with Watanabe and Shibata, Sadeq Sayeed, the long time head of
Nomuras overseas operations, was recognized as being a key contributor in the
Lehman deal. Sayeed is said to have extolled his colleagues to dare to be
bold in pushing ahead with the Lehman deal, and is considered by some as
the architect of the plan to acquire Lehmans Europe and Middle East
operations. From the summer of 2008, Watanabe and Shibata began to keep a
close eye on market movements related to Lehman and developed
acquisition plans.
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When it became evident, on September 16, that Lehmans US operations would
go to Barclays Plc., Watanabe and Shibata quickly shifted their focus to Lehmans
Asia-Pacific, Europe, and Middle East operations.
Nomura succeeded in winning the deal for Lehmans Asia-Pacific business,
outbidding its competitors with a price of $225 million. On October 6, Nomura
additionally announced the acquisition of Lehmans India offices and IT services
units.
Lehmans India operations would provide a support platform for Nomuras global
business, as well as upgrade its IT capabilities, such as adding a high frequency
trading engine.
Given the low overlap of their existing business portfolios, there was high
potential for creating synergy between Nomura and Lehman. In 2008, only 20% or
so of Nomuras revenues came from overseas, while for Lehman its Europe, Middle
East, and Africa (EMEA, 35%) and Asia-Pacific (17%) units accounted for 52% of
revenues. In terms of core customers, Nomuras primary base was domestic
mutual funds and institutional investors, while Lehman had a global client list,
especially among hedge funds. Also, while Nomuras equity capital markets
business overseas only occupied a niche market position, Lehman was one of the
leading players globally.
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Nomura to acquire Lehman Brothers' Asia Pacific franchise
Tokyo, September 22, 2008Nomura Holdings, Inc. today announced it has
agreed to acquire Lehman Brothers' franchise in the Asia Pacific region
including Japan and Australia. The transaction is subject to a number of
conditions.
The deal includes all of Lehman Brothers' franchises and approximately 3,000
employees in multiple locations in the Asia-Pacific region. Lehman has been a
strong player in the investment banking field, particularly M&A, executionservices, non-cash business including derivatives, electronic trading and prime
brokerage. By combining two strong client franchises, the partnership will enable
Nomura to strengthen its wholesale business and to further realize its strategy of
delivering Asia to the world.
Under the terms of the transaction all employees in Asia Pacific will be offered
employment with Nomura. The deal does not include any trading assets or
trading liabilities.
Kenichi Watanabe, Nomura's President and CEO, said: "This is a transformational
deal that allows us to bring together the strengths of Nomura and Lehman
Brothers to further deliver value to our clients. It will significantly extend our reach
in Asia. We see immediate strategic benefits, delivering the scale and scope to
realize our vision to be a world-class investment bank.
"The businesses we are acquiring are hugely successful with excellent
management and staff. This is a once in a generation opportunity and we are
delighted to be able to partner with Lehman Brothers' talented people to create
one of the biggest independent global financial institutions that provides world-
class investment banking services to clients across the globe. Our ability to
capitalize on this opportunity in spite of such volatile markets reflects ourfinancial strength and demonstrates how well we have managed the credit
crisis. This deal is validation for our strategy," said Mr. Watanabe.
Jesse Bhattal, CEO of Lehman Brothers Asia, added: "To partner with such a
reputable firm as Nomura is truly a remarkable opportunity for both firms, as it
creates a completely complementary platform across an expanded range
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3.3 Lehmanization of Nomura
Since its acquisition of Lehmans Asia, Europe, and India operations, Nomura has
undergone changes in its human resources, business, and governance structure,
in what can be described as the Lehmanization of Nomura. While many of
these may have been planned from the outset, some key changes were
responses to unexpected turn of events. The case of Nomuras acquisition and
post merger integration of Lehman provides important lessons for cross-border
M&As, including the importance of early involvement by top management,
flexibility in response to unexpected events, and management of divergent
corporate cultures
3.3.1 The New Workforce Resources
The new world-class human capital came from the former Lehman employees,
which were around 8,000 people. Approximately 2,650 employees worked in
equities, investment banking and fixed income in Europe. Approximately 1,100
people worked in the former Japan franchise. Approximately 1,500 people
worked in Asia Pacific (ex-Japan), and around 2,900 worked in the subsidiary in
India.
The acquisition gave access to a broad range of clients and be complimentary
in the business areas. Through the India acquisition, Nomura gained the strength
of Lehmans IT platform, being a crucial element for global business operations,
i.e. one of Lehmans strengths was the high-velocity trading engine, which
allowed Lehman to trade the stocks and bonds significantly fast. This is highly
beneficial to the customers such as hedge funds.
3.3.2 Nomuras Key Strategy
The key strategy behind the acquisition was to quickly overhaul the wholesale
business by enhancing the product and service delivery as well as significantly
expanding the international franchise and client base. Nomura also aimed to
create substantial value to the customers by investing in the infrastructure system.
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Another strategy was to reduce the cost of operation due to the acquisition and
powerful infrastructure model. The last key strategy is to promote the world-class
management structure in terms of organization, management bodies, and
corporate systems.
3.3.3 Transition: The Road to Revenue
There were four phases which Nomura aimed to follow to integrate Lehman.
The first phase was to acquire Lehman and offer the former Lehman employees
to join Nomura.
The second phase is to start the joint operations, integrate infrastructure and run
up the business.
The third phase is to promote the efficiency in the combined operation and
infrastructure.
The last phase Nomura can expect revenues generated from the synergies in
the next fiscal year.
In addition, in the management structure, Nomura allowed increase in the
diverse pool of management. This enhanced the performance of managementto support the sophisticated nature of financial business. Furthermore, Nomura
tries to promote the right persons for each job and not only Japanese bankers.
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In the medium to long term, Nomura wants to become a world class player in
investment banking. The benefit from the acquisition will dramatically help
Nomura in many ways such as having world-class human resources, world-class
services and solutions, and a world-class client base. In addition, a well structured
synergy and the integration of infrastructure will provide Nomura to become aworld-class investment bank in the near future.
3.4 Post Merger Integration Process
While differences between Nomura and Lehman in terms of business portfoliobode well for creating synergies, the differences in culture worked in the
opposite direction. Nomura set up a transition team immediately after the
acquisition and dispatched them to all the overseas offices to aid the
integration process. There was a formidable set of challenges, and Nomura
ran into trouble from the onset. Episodes of culture shock were quickly
reported by the media: Teams of Nomura traders singing company songs
each morning to kick off the day; the unilateral decision by the Nomura HRdepartment to change former Lehman female employees e-mail
addresses to their married names without asking which they used
professionally; the new employees training session where the women were
taught how to wear their hair and serve tea, just to name a few. While
these problems may simply be chalked up to differences in customs
between the East and West, the more fundamental issues stemmed from
the differences in corporate culture.
Lehmans corporate culture was in large part an embodiment of the
personality of its former CEO, Richard Fuld. He was a trader by nature, and
during his tenure as CEO, he instilled an aggressive and bold attitude
among his employees. Lehman bankers were used to a culture of high
risk tolerance, frequent use of leverage, and swift decision making.
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Nomuras corporate personality, on the other hand, was more hierarchical,
conservative, and favored more stable revenues based on moderate levels
or risk taking.
The difference in corporate culture between the two firms also was
evident in their approach to client prioritization. Lehman used to place
more emphasis on fee generation as a determinant of which client to
serve, while Nomura tended to place more weight on factors such as
length of relationship and loyalty in regards to client relations.
Consequently, conflicts arose between former Lehman and Nomura
bankers regarding which client deals to take on. The former complained
that Nomuras overly conservative attitudes were costing themopportunities to make money, while the latter looked down upon the
formers all too willingness to abandon long term clients for the sake of a
quick buck.
Watanabes plan to remedy the gap between Nomura and Lehman was to
establish a new hybrid corporate culture.
1. He envisioned a situation where the Lehman system of pay-for-
performance and low job security and the Nomura system of moderate pay
with high job guarantees co-existed in the same organization. The results,
however, looked closer to a Lehmanization of Nomura with some even
describing it as a case of a reverse takeover of Nomura by Lehman.
Lehmans influence became evident on many fronts. As the interaction
between Nomura and former Lehman bankers increased in frequency,
the main language of communication within Nomura, even in its Tokyo
headquarters, quickly became English. According to one Nomura
executive, more than half of conversations and 70% of e-mails are in
English.
2. Nomuras HR system also changed.
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Nomura employees were also offered a choice between the existing
compensation scheme and a Lehman style performance based system with
lower employment guarantees, and 45% chose the Lehman style package. In
addition, the method of career development changed from Nomuras old
generalist system, where employees rotated across different departments, to aLehman style specialist system, where employees remained in one department to
build up expertise. Also, many Lehman bankers were given key posts as heads of
overseas business units. This may not have been a hard decision, given that
those Lehman bankers had a track record of solid performance, while Nomuras
past overseas achievements were mediocre at best. The heads of EMEA and
Asia-Pacific equity markets, fixed income and investment banking all were
occupied by former Lehman banker.
Nomura, however, did not accede to full control of the overseas business to the
former Lehman bankers, opting to maintain the positions of global business unit
chiefs with senior Nomura personnel. Instead, to help the globalization process,
the business unit chiefs, who traditionally resided in Japan, were sent to the local
foreign offices. Hiromi Yamaji, the global head of investment banking moved to
London, and Naoki Matsuba, global head of equity capital markets relocated to
New York. Despite the high titles and responsibilities given, the former Lehman
bankers were not awarded commensurate levels of independence and
decision making authority that they were accustomed to. In major deals, theyoften had to get approval from the Nomura global unit chiefs and frustrations
began to mount regarding the slow and conservative pace of decision making.
Despite the high titles and responsibilities given, the former Lehman bankers were
not awarded commensurate levels of independence and decision making
authority that they were accustomed to. In major deals, they often had to get
approval from the Nomura global unit chiefs and frustrations began to mount
regarding the slow and conservative pace of decision making. Another majorpoint of contention among ex-Lehman bankers was the lack of representation at
the highest level of Nomuras management. One who felt such frustrations was
Bhattal who, in July 2009, announced that he would be resigning within a years
time. With Bhattals announcement the tension between the Nomura and former
Lehman bankers reached a new level.
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Things came to a head on March 2010, when the last of the guaranteed
bonuses was paid out. Within a span of a month, 12 high level former Lehman
bankers resigned. Nomuras top brass had anticipated a certain amount of
defections with the end of guaranteed pay, but they were caught by surprise at
the level and speed with which ex-Lehman talent began to leave. Soon they
began to fear that, with the looming departure of Bhattal as well, the trickle
would turn into a flood, resulting in a mass exodus of ex-Lehman personnel
In order to subdue a potential crisis, Nomuras top management made a major
announcement on April 2010. Jasjit Bhattal was appointed a seat on Nomuras
executive management board, responsible for setting the groups strategy and
budget, the first foreigner to take such a position in Nomuras history. In addition,
Nomura also announced that Bhattal would be in charge, as president and
COO, of the newly created wholesale division that encompassed all of the
overseas operations
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Chapter -4
Re-entry into the US Market
Recently, Nomura has been making a strong push into re-establishing its US
operations. Having lost out to Barclays Plc. in its bid for Lehmans US units, Nomura
has been organically building up its US business since 2008.
It is scheduled to invest up to $2.5 billion towards this effort, and in 2009, it
increased its
US workforce by more than 1,200 persons. A solid US presence is necessary, in
Nomura's
view, to maximize the synergies from the talent and product capabilities gained
through the Lehman acquisition, as well as to attract and maintain top class
talent.
In 2010 raised $3 billion, through a US bond offering, to fund its endeavors. Also, it
has increased its US workforce from 650 in 2008 to 1,900 in 2010. Nomura has beensuccessful in recruiting from its rivals, such as Bank of America and Deutsche Bank.
In particular, many of those joining Nomura in the US are former Lehman bankers,
who are reuniting with their colleagues in Europe and Asia. The chief risk officer,
chief economist, fixed income head, and many traders and sales personnel of
Nomuras US operations are former Lehman bankers.
Nomura considers the expansion of its US operations as a key piece of the puzzle of
its overall global strategy for several reasons.
First, the US is attractive, in and of itself, as the worlds largest financial market.
Second, a US presence is needed to attract and maintain top level talent.
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Third, the US component is required in order to be able to provide customers
global solutions and maximize the synergies with the Europe and Asia parts of the
business acquired through the Lehman deal.
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Chapter - 5
Financial Performance
Nomuras financial performance, since its acquisition of Lehman, has been
turbulent.
In FY2008, Nomura recorded a net loss of 708.2 billion yen, the worst notonly in its own but in the history of all public Japanese companies, for
which Watanabe had to apologize to shareholders.
While the financial crisis and disposal of distressed assets were the main
contributors to the loss, the cost associated with absorbing the Lehman
workforce also played a significant part. According to Nomuras 2009
Annual Report, of the net loss in FY2008, around 120 billion yen (16.9%) was
attributable to the cost of integrating Lehmans operations.
Recovery began from the second quarter of 2009, and for FY2009 Nomura
recorded
a net profit of 67.8 billion yen. In addition to the rise in the Japanese stock
market, gains
from Nomuras European units contributed to the turnaround.
Recently, Nomura has posted seven consecutive quarters in the black, up
to the fourth quarter of 2010.
In addition to returning to profitability, Nomuras standing in the global financial
markets is also rising. For example, Nomura was the leading equities trader on
the London Stock Exchange for six months running in the second half of 2009, a
position previously held by Lehman before its collapse.
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It is also participating in deals that were previously out of reach, such as being the
sole M&A adviser in KKRs $1.5 billion bid for UKs Pets at Home. Also, helped by the
acquisition of Lehman, Nomura has succeeded in regional revenue
diversification, with its overseas revenue share rising to 43% in the first quarter of
2010. Overseas revenue even surpassed domestic revenue at one time, with theforeign share of revenue reaching 53% in the second quarter of 2009.
However, not all is positive.
Nomuras pace of recovery lags behind those of its global investmentbank competitors. In the first quarter of 2010, when Nomura posted a net
gain of $207 million, Goldman Sachs recorded $3.46 billion, Morgan Stanley
$1.78 billion, and Citigroup $4.43 billion in profits during the same period.
Nomuras ROE (Return on Equity) also falls short of its competitors.
For the third quarter of fiscal year 2009, Nomuras ROE was3.6%, a low level
when compared to past performances as well as against Goldman Sachs32% and Barclays Capitals 24%. Also, in terms of revenue per employee,
Nomura garnered $137,000 per head, while Goldman Sachs employees
made $434,000, and Morgan Stanley employees brought in $168,000 each.
These figures are an indication that Nomura has yet to fully realize the
synergy potential from its Lehman acquisition, while, despite efforts at
reducing redundancies in head count in 2009, the cost of compensation andbenefits remains a financial burden.
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Chapter6
Conclusion
Following the acquisition of Lehmans operations, Watanabe said he plans to
complete the integration of Lehmans employees within three years. To this end,
Nomura has made significant inroads, along various dimensions, and Shibata
assesses the post merger integration process to be 50% complete at this point.
The merger of Nomura and Lehman is still a work in progress and it is too early to
impart a final verdict on its success or failure. However, the case of Nomurasacquisition of Lehman provides meaningful lessons relevant to successful M&As,
as much in the process as in the final outcome.
Lessons relevant to successful Mergers & Acquisitions
The Nomura case highlights the importance of early interest and involvement by
the top management in the M&A process. The acquisition of Lehmans operations
was planned and executed in a top down manner, with Watanabe himself
taking the lead. As such, the deal was a high priority agenda from the get go
and Nomura was able to act swiftly when the opportunity presented itself. Also,
there was a clear top management division of labor allowing for efficient
decision making: Watanabe at home communicating with regulatory authorities
and board members, and Shibata on the ground negotiating the deal.
Nomuras case shows the importance of flexibility and room to move in the
event of unexpected occurrences. Employee defections was a scenario
anticipated by Nomura, however, they were caught off guard at the level and
speed with which it occurred following the payment of the last bonuses.
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In cross-border M&As, a typical dilemma is the issue of how much authority and
independence to give foreign operations, as well as how much trust to have in
the personnel of the target firm, whom there is a natural tendency to view as
foreigners. Acquiring firms should consider honestly what forms and to what
extent they are willing to empower the target firms employees as part of an
M&A process
Nomuras post merger integration process reaffirms the importance of culture
as a key component of successful M&As. As expected, the biggest issue in the
integration of Lehman was the conflict arising from the divergent corporate
cultures of the two firms. To remedy the situation, Nomura has tried to mesh the
two cultures, but the result, so far, has looked closer to a Lehmanization of
Nomura.
A key factorcommon to all successful M&As is the level of open mindedness of
the acquiring firm, and when the merger is between two firms of different
nationalities, it becomes even more important. Thus, for those Korean firms that
are seriously contemplating cross-border M&As as a means to overseas
expansion, an open mindset towards foreign cultures is a prerequisite. And such
a mindset is best developed beforehand, rather than waiting until after the
acquisition.
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Bibliography
1. Britannica Online Encyclopedia.
2. Wikipedia.
3. Funding Universe, Nomura Securities Company, Limited.
4. Laura Kulikowski, Lehman Brothers Amputates Mortgage Arm,TheStreet.com (August 22, 2007).
5. Wall Street Journal, Nomura Stumbles In New Global Push, 2009 (July 29).
6. Wall Street Journal, Nomura Turns to a Foreigner from Lehman, 2010
(March 17).
7. Bankruptcy Litigation Blog
8. Forbes.com, Nomura Profit Vindicates Lehman Gambit, 2009 (July 29)
9. Financial Times, Fresh push at Nomura to realize ambitions, 2010 (March
18).
10.Financial Times, Nomura offers Lehman-style contracts, 2009 (April 5).
11.Foley, C.F., Meyer, L.N., 2009, Nomuras Global Growth: Picking up Pieces
of Lehman, Harvard Business Review.