Special Report: Japan's Nomura Yen Power Goes Global

By Barbara Rudolph

For several years after World War II, the plain seven-story red-brick building that stands on the north bank of the Kanda River in Tokyo's Nihonbashi district housed a women's unit of General MacArthur's Occupation Army. On the outside, nothing distinguishes the building from other office blocks in the Japanese capital. Inside, employees toil elbow to elbow in open work areas illuminated by fluorescent lights, and the air is heavy with cigarette smoke. Yet the modest facade masks the nerve center of a powerful financial empire: Nomura Securities, the largest, richest and most profitable securities firm on earth.

With Japan riding high as a premier economic power, no company stands a better chance of dominating global finance than Nomura. The company, building on a powerful domestic base, is a behemoth. Its assets ($372 billion) surpass those of Citicorp ($204 billion) and Merrill Lynch ($55 billion) combined. Nomura's 1987 profits ($2 billion) were almost four times those of American Express. And as Japan converts manufacturing muscle into financial might, the securities giant has passed Toyota (1987 earnings: $1.7 billion) to become the country's most profitable company. No wonder Nomura sparks respect in its competitors, inspires hard work and ambition among its 12,000 employees, and commands the loyalty of its 5 million customers.

Today, with 38 offices in 21 countries, Nomura is increasingly showing its muscle on foreign ground. Six years after establishing a full-fledged subsidiary in London, it ranks No. 1 in the Eurobond market, having overtaken the likes of Deutsche Bank and Credit Suisse First Boston. Nomura controls investment or commercial banks in Britain, Australia, Switzerland, Singapore and Bahrain. In the U.S. it is a major dealer in Treasury issues and holds a seat on the New York Stock Exchange. In The Second Wave: Japan's Global Assault on Financial Services, Authors Richard W. Wright and Gunther A. Pauli put it this way: "Nomura stands alone as a giant among giants, a colossus whose stated goal is to be everything to everybody everywhere in the financial services business."

Nomura took a giant step toward realizing that goal last week, stunning Wall Street with a move to become a major player in the U.S. mergers-and- acquisitions game. The company said it was paying $100 million for 20% of the hot, new Manhattan investment firm started six months ago by Bruce Wasserstein and Joseph Perella, the Wall Street wizards who built First Boston's merger department into one of the best in the business and then left to strike out on their own.

Wasserstein, Perella has already managed about $19 billion worth of mergers and acquisitions, including the $6.6 billion purchase of Federated Department Stores by Canadian Developer Robert Campeau. Teaming up with the U.S. firm, Nomura can gain expertise in merger making and help its Japanese clients acquire U.S. companies. For Wasserstein, Perella the deal provides both an infusion of capital and global connections. Says Perella: "No other single alliance could give us the comprehensive reach that the Japanese connection we have with Nomura could."

Like all other securities firms, Nomura has felt the sting of last October's Wall Street crash. For the six months ended last March, the company's profits nosedived to $713 million, a 23% decline from the same period a year earlier. But that was more than 300% higher than the 1985 figure, and Nomura continues to benefit from the unprecedented boom in the Tokyo stock market (see box).

Using its close ties to Japanese investors, Nomura serves as a central conduit for the trillions of yen pouring out of Japan in search of bigger, better returns. Last year, when Japan had a trade surplus of $96 billion, its net purchases of foreign securities amounted to $88 billion, up from $4 billion in 1980. The largest portion of that outflow used to go into U.S. Treasury securities, but increasingly the Japanese are buying foreign stocks and bonds. They are also acquiring overseas companies and real estate. And no matter what type of play a Japanese investor wants to make, Nomura stands ready to help.

Behind the firm's drive to become the world's unrivaled financial heavyweight is Yoshihisa Tabuchi, 56, a forceful and intensely competitive 32- year Nomura veteran, who became its president in 1985. A former salesman and retail-branch manager, Tabuchi believes Nomura's aggressive style of selling and dealmaking can work in any market, no matter what the language or currency. Nomura, after all, has a big advantage over foreign rivals -- and Tabuchi knows it. Says he: "Japan has simply become the world's source of capital."

Nomura would not be so ambitious overseas were it not for its enormous strength at home. It offers a full roster of investment services, including underwriting, money management and research. Nomura handles nearly 17% of all stock trades in Japan; its nearest rival, Daiwa Securities, has a 12% share of the market. Nomura claims an equally commanding slice of the bond market, 19%, vs. 12% for Daiwa. Nomura and Daiwa, along with Nikko Securities and Yamaichi Securities, are known in Japan as the Big Four. Says a Nomura director, with a mix of arrogance and pride: "It's not really the Big Four. It's Nomura and the Little Three."

A staff of 2,700 salesmen operates out of 131 branch offices throughout Japan, handling 4.8 million individual and 200,000 corporate accounts. In addition, the company has a 2,600-strong force of part-time saleswomen, mostly middle-aged, who troop from door to door, hawking stocks and bonds. This corps was established 30 years ago, when the company sought to spur personal investment by distributing savings chests to Japanese households. The local saleswoman held the keys to savers' chests. Each month she came by to empty the chest and place the money in the customer's Nomura account. The company gave out more than 1 million chests before the gimmick was retired in 1962.

This year the firm introduced a contemporary equivalent: a computerized home investment service. Nomura customers who connect their home computer to their telephone can press a few keys and bring to the screen the latest listings of stock and bond prices and other information. With a few more taps, customers can signal their investment choices.

Critics say that at any given time, Nomura pushes a few particular stocks, which invariably rise in value. The problem is that Nomura's decision to boost a stock becomes a self-fulfilling prophecy. For that reason, Nomura is sometimes accused of manipulating the market.

Other reasons for success are sophisticated research and state-of-the-art technology. Last January the Nomura Research Institute merged with Nomura Computer Systems Co., which develops financial software, to form NRI & NCC, which offers technical support for the company's brokers. NRI & NCC provides a wide range of studies, from detailed profiles of Japanese companies to analyses of worldwide interest-rate moves. The information is stored in $270 million worth of mainframe computers that feed data into 45,000 terminals in Nomura branch offices around the world.

The emphasis on technology is part of Tabuchi's plan to make Nomura a major force in Western countries, a goal first mapped out more than 60 years ago. In 1927 Nomura opened offices in New York City's Equitable Building, becoming the first Japanese securities firm with an overseas branch. That inspired proud lines in a 1929 company song: "The Japanese flag is hoisted in the morning breeze on Wall Street/ And the Statue of Liberty smiles upon/ Our truly global power." After World War II, Nomura was the first Japanese securities company to return to New York with an independent office, which opened at 61 Broadway in 1953. Nomura was also the first Japanese firm to open a securities branch in China (1982) and to obtain a seat on the London Stock Exchange (1986). Between 1980 and 1987, Nomura more than doubled its work force abroad, to 2,000.

Nomura tries to enter foreign markets quietly, a strategy called dochakuka, or "blending into the landscape." Explains Hitoshi Tonomura, co-chairman of Nomura's London-based European subsidiary: "We don't want to become an ) outpost of our Tokyo head office. We are here to become European." The most important tenet of this philosophy is that Nomura hires locally: only 300 of its 2,000 overseas employees are Japanese.

In the City, London's financial center, blending in has meant hiring graduates of Oxford and Cambridge. Last year Nomura signed on more Oxbridge graduates than the Foreign Office. London has been the base for Nomura's enormously successful foray into the Eurobond business. In 1987 Nomura snared the leading share of the market: 13.2%, vs. 7.7% for Credit Suisse First Boston. Nomura won that battle with the same strategy that Japanese manufacturers employed to conquer world markets: innovative products and aggressive pricing. Among Nomura's most popular offerings are Eurobonds sold with so-called equity warrants, which give the purchaser the right to buy shares in the company that issued the bonds for a period of time at a fixed price. Such bonds allow investors to make money in Tokyo's hot stock market. Nomura first gained a foothold in Eurobonds by charging fees that undercut those of its rivals.

Western Europe has also given Nomura the opportunity to move into commercial banking. In the U.S. and Japan legal barriers separate investment from commercial banking, but in London there is freewheeling competition between financial institutions. Says Andreas Prindl, a 20-year veteran of Morgan Guaranty Trust who joined Nomura two years ago to set up its Bank International in London: "To be competitive, we have to offer a wide range of banking activities." Those include foreign-currency trading, asset management and commercial-project financing. Since the bank's opening, its assets have grown from $70 million to $2.5 billion.

Wall Street is another matter: Nomura has yet to hit its stride there. Says Professor Samuel Hayes of the Harvard Business School: "The U.S. investment banks are world-class leaders. For Nomura to come in and compete head to head with them on their home turf is daunting. The only way they can succeed is by acquiring the same skills." Undaunted, Nomura has sharply expanded its U.S. operation, based at 180 Maiden Lane, near Wall Street. (Nomura also has branch offices in Chicago, San Francisco, Los Angeles and Honolulu.) Even before the Wasserstein, Perella deal, the company had invested $230 million in its U.S. subsidiary over the past three years, increasing its staff there from 200 employees in 1984 to 635 in 1987. Last February, though, Nomura laid off about 35 New York workers in response to the stock-market crash. The cost of expansion has made for lean profits in the U.S. In 1987 the American operation barely broke even, and in early 1988 it lost $1 million a month before returning to the black in June.

The segment of the U.S. market in which Nomura stands tallest is the Treasury-bond business. Last spring, at an auction of $8.5 billion worth of 30-year Treasury bonds, Nomura bought about $2 billion. A heavy purchaser of U.S. Government bonds since the early 1980s, Nomura in 1986 became one of the first two Japanese securities firms -- Daiwa was the other -- to be granted the status of primary dealer. That permits Nomura, along with 43 other primary dealers, to deal in U.S. Government securities directly with the Federal Reserve. The firm can then sell the issues to investors, mostly Japanese, at the lowest possible prices.

While the October 1987 crash has tempered foreign interest in the U.S. stock market, Nomura still does sizable trading on the New York exchange, largely because of the "dividend-capture" plays favored by Japanese insurance companies. One of these firms, for example, may buy millions of shares of a company scheduled to declare a dividend and then immediately resell the shares after the payout is made. Reason: Japanese law allows the insurance company to distribute dividend earnings to clients but does not allow income from capital gains to be paid out. On some days, such trades enable Nomura to account for 5% to 6% of the volume on the Big Board.

Nomura's most glaring weakness in the U.S. has been merger-and-acquisition work. That is hardly surprising, since takeovers are relatively uncommon in Japan. With Wasserstein, Perella as a partner, Nomura can now enter the business in a big way. As part of the deal, Nomura will send employees to the U.S. firm to learn all about the merger game. Nomura can also greatly expand its client base by making use of Wasserstein, Perella's contacts with corporate America.

Even so, Nomura realizes that progress in the U.S. will be slow. Says a top officer in Tokyo: "The market in New York is very big, and it is going to take us a while before we really get a share. But we can be patient, even take some losses and develop it." Rivals on Wall Street know they cannot afford to be complacent. Says Eugene Atkinson, former head of the Tokyo branch of Manhattan's Goldman, Sachs investment firm: "Despite all our efforts to make long-term plans, we pale in comparison with Nomura's awesome strategic thinking and investment." There is always the reminder of Detroit in the 1960s, when U.S. auto companies thought they were invulnerable to Japanese competition. Says Jayme Garcia dos Santos, general manager of Chase Manhattan Securities in Japan: "It's true that the Japanese have a lot to learn in New York markets. But we all have to be very careful. How often have we underestimated the Japanese ability to learn."

With reporting by Barry Hillenbrand/Tokyo, Christopher Redman/ Paris and Frederick Ungeheuer/New York