This Hybrid Is Looking Plenty Tough

Nikko Salomon Smith Barney has Citi's clout, Japan Inc.'s trust

It's only a year old. And from the start, the betting was that a hybrid investment bank--part American, part Japanese--would have a tough time in Japan Inc. But take another look. Nikko Salomon Smith Barney has nabbed some of the biggest underwriting and merger business of the past 12 months. Now the fledgling is taking on the likes of Morgan Stanley Dean Witter, Goldman Sachs, and J.P. Morgan--the big foreign houses that dominate the Tokyo market for merger and underwriting advice. Says Toshiharu Kojima, Nikko Salomon's chief executive: "We're now a global bank offering one-stop shopping."

When ailing Nikko Securities bolted from Bank of Tokyo-Mitsubishi Ltd., its longtime keiretsu ally, a lot of Tokyo bankers wondered whether BTM would try to shut out its new rival. Although relations are strained, that didn't happen. Instead, Nikko Salomon has come into its own with surprising speed. After a big push last fall, it beat out Daiwa Securities Group Inc. as one of three global coordinators, together with Goldman and Warburg Dillon Read LLC, for a $15 billion share offering by telecom colossus Nippon Telegraph & Telephone.

That deal, plus a stream of big initial public offerings, enabled the bank to dislodge giant Nomura Securities Co. as Japan's top equity underwriter last year. "This firm has infinite resources," boasts David Hatt, Nikko Salomon's managing director of equity capital markets. Indeed, the clincher in these deals is a distribution base that spans the U.S. and much of Europe. "We have people in Madrid selling Japanese equities," Hatt says.

GOOD TIMING. Nikko Salomon has also done some trophy merger work, including the $5.8 billion tie-up between Nissan and Renault. Toru Mio, managing director for M&A, sees richer opportunities as mobile-phone and Net startups, now enjoying huge runups in market capitalization, seek alliances and acquisitions.

Of course, Nikko Salomon was launched just as Corporate Japan began to reshape itself. Last year, some $85 billion worth of mergers took place and $65 billion was raised in equity and convertible bonds. Also, a record number of startups went public, and there's no letup in sight. After taking Oracle Corp. Japan public last year, Nikko Salomon was chosen on Mar. 22 to underwrite a $9 billion secondary offering of the company's stock.

Kojima figures that a hybrid bank is perfectly suited to the times. As part of Citigroup, it has Salomon Smith Barney's global reach and Citi's expertise in such products as debt securities. Nikko's domestic presence gives it an edge with Japanese companies uncomfortable with an exclusively foreign-run investment bank.

SHUFFLED DECK. Nonetheless, the new bank has been a managerial challenge. Although Nikko is a 51% partner, the U.S. side is in charge. Citigroup owns 9.5% of Nikko Securities' equity plus convertible bonds that could hike that stake to 25%, giving it veto power. Citigroup's Deryck C. Maughan, an ex-Salomon Japan CEO, sits on Nikko's board. To even up things, every major business is managed by people from both sides. And at the top, Jun Okano, an ex-Nikko man, holds the title of co-CEO, though he is under Kojima.

Skeptics wonder whether the team approach works. Stuart D. Pearce, CEO of HSBC Securities Japan Ltd., admires the venture but thinks "the management of cultural issues" will be crucial to the bank's long-term success. At this point, Kojima worries more about burnout than turf battles. But smooth cross-cultural relations are crucial, given the defections and talent raids bedeviling every major investment bank in Tokyo.

Kojima, who started out as a bond trader with Salomon in the 1980s, clearly wants Nikko Salomon to swim in the global pond. But right now, at least, this East-West partnership is busy enough at home.

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