The Opportunity of a Lifetime In September 2008, Lehman Brothers went bankrupt. Britain’s Barclay Capital bought Lehman’s North America operations for $3.75 billion. Lehman’s assets in Asia and Europe were purchased by Nomura for the bargain-basement price of $200 million. Founded in 1925, Nomura is the oldest and largest securities brokerage and investment banking firm in Japan. Although Nomura had operated in 30 countries prior to the Lehman deal in 2008, it had always been known as a significant but still primarily regional (Asian) player in the big league of the financial services industry. In addition to Lehman, the list of elite investment banking firms in early 2008 would include Goldman Sachs, Morgan Stanley, Bear Stearns, JP Morgan, and Citigroup of the United States, Credit Suisse and UBS of Switzerland, and Deutsche Bank of Germany. No one would include Nomura in this group. Nomura viewed itself primarily as an Asian version of Merrill Lynch.

The tumultuous 2008 left Bear Stearns dead first, Lehman second, and all of the firms in the big league just named in deep financial trouble. To Nomura, this became the opportunity of a lifetime. Within a lightning 24 hours, CEO Kenichi Watanabe decided to acquire Lehman’s remnants in Asia and Europe. Some of the Lehman assets were dirt cheap. For example, its French investment banking operations were sold to Nomura for only one euro (that is, €1!). Overall, by cherry-picking Lehman’s Asia and Europe operations and adding 8,000 employees who tripled Nomura’s size outside Japan, Nomura transformed itself into a global heavyweight overnight. The question was: Does Nomura have what it takes to make this acquisition a success? 

Integration Challenges 

The answer was a decisive “No!” from Nomura’s investors, who drove its shares from a high of 1,900 yen ($17.67) in 2008 to a low of 200 yen ($1.86) in 2012. Since the purchase price seemed reasonable and there was little evidence that Nomura overpaid, the biggest challenge was postacquisition integration, merging a hard-charging New York investment bank with a hierarchical Japanese firm that still largely practiced lifetime employment.
Clearly, Lehman’s most valuable, rare, and hard-to-imitate assets were its talents. To ensure that Nomura retain most of the ex-Lehman talents, Nomura set aside a compensation pool of $1 billion (five times the acquisition price) and guaranteed all ex-Lehman employees who chose to stay with Nomura not only their jobs, but also their 2007 pay level (including bonuses) for three years. About 95% of them accepted Nomura’s offer. Given the ferociousness of the financial meltdown in 2008–2009 (which was triggered by Lehman’s collapse), many employees at other firms that were not bankrupt lost their jobs. The fact that Nomura guaranteed both jobs and pay levels was widely appreciated by ex-Lehman employees who otherwise would have been devastated.
Instead, acquiring Lehman introduced significant stress to Nomura’s long-held traditions. A leading challenge was pay level. Most senior executives at Lehman made on average $1 million in 2007. Nomura employees typically only received half the pay of their Lehman counterparts. It is not surprising that guaranteeing ex-Lehman employees such an astronomical pay level (viewed from a Nomura perspective) created a major problem among Nomura’s Japanese employees. In response, Nomura in 2009 offered its employees in Japan higher pay and bonuses that would start to approach the level ex-Lehman employees were commanding in exchange for less job security—in other words, they could be fired more easily if they underperformed.
So far, about 2,000 Japanese employees accepted the offer, which would link pay to individual and departmental performance rather the firm as a whole. Another challenge was the personnel rotation system.

Like many leading Japanese firms, Nomura periodically rotated managers to different positions. For example, Yoshihiro Fukuta, who served as head of Nomura International Hong Kong Ltd. in 2008, was rotated back to Tokyo as head of the Internal Audit Division in 2009. While these practices produced well-rounded generalist managers, they generated a rigid hierarchy: A manager in a later cohort year, no matter how superb his (always a male) performance was, was unlikely to supervise a manager in an earlier cohort year. These  Nomura practices directly clashed with Western norms:

(1) Work was increasingly done by specialists who developed deep expertise 

(2) superstars were typically on a fast track rocketing ahead. 

Although the personnel rotation system largely did not apply to Nomura’s overseas employees, it resulted in a top echelon that entirely consisted of Japanese executives who went through the rotations. In an effort to globalize, Nomura’s top echelon needed to attract diverse talents, especially those from Lehman. Could the rotation system accommodate the arrival of ex-Lehman employees who had neither experience nor stomach for it?

Post-acquisition Performance 

Four years after the acquisition, the performance was disappointing. In 2009, Nomura moved its investment banking headquarters to London to demonstrate its commitment to break into the top tier. In 2011, in Europe Nomura was number 13 in underwriting equities and number 15 in advising on mergers. In Asia outside of Japan and in the United States, it was a distant number 24 and 22, respectively, in underwriting equity offerings. Its dominance in Japan was indeed strengthened by the Lehman deal. Nomura’s market share in advising Japanese acquirers that made deals overseas shot up from 10% in 2007 to 25% in 2011.
Integration continued to be Nomura’s headache number one. Outside Japan, the deal turned out to be a “reverse” takeover with gaijin (foreigners) running most of the show.
Nomura undertook a campaign to expunge the long shadows of the Lehman hangover. Both symbolically and comically, mentioning the “L” word (such as “This is how we did it at Lehman”) during senior executive meetings in London would cost executives £5 ($6.25) every time—they had to toss the money into a box as a penalty.

In 2012, Jesse Bhattal, who was the former Asia Pacific CEO of Lehman, the deputy president of the Nomura group, and the CEO of Nomura’s investment banking group (the highest ranked non-Japanese executive at Nomura), resigned amid heavy losses. Bhattal failed to see eye to eye with the board and was frustrated by his inability to undertake much needed cost cutting. His departure was regarded as “the culmination of a clash with Nomura’s old guard,” according to Bloomberg.

Over time, Nomura’s shares recovered from its 2012 low of 200 yen ($1.86). By 2017, they hovered at 700 yen ($6.51)—but still less than half of its 2008 high of 1,900 yen ($17.67). Top executives admitted that Nomura underestimated the cost of executing the integration of Lehman and now emphasized cost cutting. For example, in 2017 it completely exited European cash equities and completely laid off its staff of 500.

Case Discussion Questions 

1. What is the strategic fit between Nomura and Lehman?

2. Is there any organizational fit? How to bridge the gaps between the cultures of these two firms?

3. What are the key lessons from Nomura’s integration efforts?