Cash-Rich Japanese See Opportunities in U.S. Market
Yasuda Mutual Life Insurance Co.'s agreement to buy up to 25% of Paine Webber Group Inc. is the latest in what will continue to be a major push by Japanese financial services firms into U.S. securities markets, analysts said Monday.
The Japanese--who have emerged virtually out of nowhere in recent years to become major dealers in U.S. government bonds and stocks--are likely to see even greater opportunities for expanding here in the wake of the October stock market crash and falling dollar, analysts said.
Japanese brokerage firms, which generally did not suffer the large crash-related losses as U.S. firms did, are bulging with cash and are in even stronger financial shape to challenge their American counterparts. Some U.S. securities firms, hurt by those losses and shrinking profit margins, may be more amenable to marry well-heeled foreign partners to obtain new capital and enhance their competitiveness in global markets. And the falling dollar makes stock in U.S. securities firms, already depressed before the market crash, even cheaper to foreigners.
However, the Japanese will increasingly expand in the United States by adding American staff and branch offices, rather than by buying stakes in U.S. firms, some Wall Street experts said. That is because many major U.S. brokerages--such as Goldman Sachs, Kidder Peabody, First Boston and Shearson Lehman--already have foreign partners or are units of much larger U.S. companies.
“It seems that most major firms already have a relationship in one way or another,” said one investment banker at a major Wall Street firm.
“It’s a good time for any value-conscious investor to be looking at the market” for U.S. securities firms, said David H. Resler, chief economist for Nomura Securities International, the New York arm of Tokyo-based Nomura Securities, the world’s largest brokerage firm. But many Japanese firms may still find it cheaper--and less complicated--to add American personnel rather than buy American companies, he noted.
In many ways, the growing Japanese presence on Wall Street is a natural result of the explosion of Japanese investing in U.S. stocks and bonds, and the growing internationalization of securities markets.
Only a handful of giant multinational firms will dominate the securities markets of the future, many experts say, meaning that a major Wall Street presence will be a necessity for the Japanese. Many smaller U.S. firms may find that they will have to link up with Japanese or other international firms to gain the financial wherewithal to successfully compete globally.
“Wall Street sees (the Japanese) as a capital source and an interesting way to make contacts,” said Michael W. Blumstein, securities industry analyst at First Boston.
With their considerable capital and determination to succeed in the giant U.S. market, Japanese brokerages, insurance companies and commercial banks are already seen as a major competitive threat to Wall Street firms.
The “Big Four” Japanese firms--Nomura, Daiwa, Nikko and Yamaichi--have had U.S. branch offices for years, but only in the past three years or so have they greatly expanded by hiring hundreds of American investment bankers, traders and brokers.
By emphasizing volume sales at lower costs--the same tactic used by Japanese auto firms to gain a foothold in the American car market--the Big Four have gained market share rapidly.
Although accurate estimates are not available, some guess that the Big Four now account for as much as one-fifth of long-term U.S. government bond trading. During periods of heavy Japanese buying, they also may account for as much as one-tenth of trading on the New York Stock Exchange.
Last December, Nomura and Daiwa scored perhaps their greatest coup in the United States: being named by the Federal Reserve as primary dealers in U.S. government securities, a long-sought privilege that allows them to trade directly with the Fed.
The Big Four’s next big push is likely to be in investment banking and corporate finance, rather than retail brokerage, said Perrin Long, brokerage analyst at Lipper Analytical Services.
Also, Long said, they are more likely to expand internally rather than through acquisitions, as shown by their lack of interest so far in acquiring E. F. Hutton, which is soliciting offers. Nikko Securities, for example, said recently it was studying a possible offer for E. F. Hutton, but an official added that the Japanese firm was more interested in institutional brokerage rather than retail brokerage, which is Hutton’s strength.
The Japanese also may be leery of Hutton’s high-cost distribution network, as evidenced by high-cost leases on its branch system, investment bankers say.
On the other hand, Japanese banks and insurance companies are more likely to acquire stakes in U.S. firms, a pattern demonstrated by Yasuda and Paine Webber and several other deals within the past year.
Industrial Bank of Japan, for example, bought Aubrey G. Lanston & Co., a primary government securities dealer, in October, 1986, for $234 million. In November, 1986, Japan’s Sumitomo Bank Ltd. acquired a 12.5% stake in Goldman, Sachs & Co. for about $500 million. Shearson Lehman Bros. sold a 13% stake to Nippon Life Insurance Co. of Japan for $538 million in March of this year.
Such linkups also include joint ventures. Paine Webber and Yasuda, for example, plan to establish a London-based joint venture company that will engage in asset management and financial advisory activities. Shearson Lehman has already set up a joint investment-management venture in London with Nippon Life.
In these cases, “it appears the Japanese want to wait before they jump right in” and buy whole firms, First Boston analyst Blumstein said. He noted that acquiring whole firms could result in clashes between the vastly different cultures of Japanese and American firms. Pay at Japanese firms, for example, typically is far less than that at U.S. firms.
However, the list of U.S. firms appearing available and willing to entertain Japanese partnerships is rapidly shrinking. First Boston, for example, could be available, but it is 40% owned by Financiere Credit Suisse-First Boston, a London-based holding company. Morgan Stanley, Salomon Inc. and Merrill Lynch are large enough to go it alone and don’t appear willing to give up their independence.
Salomon, trying to avoid a bid by corporate raider Ronald O. Perelman, agreed in September to sell 12% of its stock to Warren Buffett, the Omaha billionaire investor.
One possibility might be Bear Stearns Cos., which had agreed in September to sell a 20% stake to Hong Kong’s Jardine Matheson Holdings Ltd. However, Jardine terminated the offer following the market collapse.
Another possibility may be L. F. Rothschild Holdings Inc., which has suffered massive losses and is believed to be facing a sale or breakup of the firm.
JAPAN’S GROWING STAKE IN WALL STREET October, 1986 An affiliate of Industrial Bank of Japan buys a primary dealer in U.S. government securities, Aubrey G. Lanston & Co., for $234 million. November, 1986 Sumitomo Bank Ltd. acquires a 12.5% stake in investment banking firm Goldman, Sachs & Co. for $500 million. December, 1986 Nomura Securities and Daiwa Securities are designated as primary dealers in U.S. government securities. March, 1987 Nippon Life Insurance Co. of Japan buys a 13% stake in Shearson Lehman Bros. for $538 million. November, 1987 Yasuda Mutual Life Insurance Co. acquires an 18% stake--which may be raised to 25%--in Paine Webber Group Inc. for $300 million. Los Angeles Times