Citigroup Inc. offered ¥1.25 trillion ($10.8 bln) to buy its investment-banking partner Nikko Cordial Corp., the company's biggest takeover bid in Asia, after the Japanese brokerage was battered by an accounting scandal.
Citigroup will pay ¥1,350 a share to raise its stake in Nikko from 4.9%, the company said in a press release today. The takeover would be the second biggest by an overseas buyer in Japan and the largest by Charles Prince since he became CEO in 2003. Nikko Cordial's shares surged 14% to ¥1,340 before the announcement. The biggest US bank would gain 109 branches and 12,000 employees in the world's No. 2 economy by acquiring Tokyo-based Nikko Cordial. A takeover also would end concerns about Nikko's future, after six top executives quit and the Tokyo Stock Exchange said it may delist the company's shares because of the accounts fraud. „The business is worth over ¥2,000, for sure, in the long term,” David Herro, Chicago-based chief investment officer of international equities at Harris Associates LP, Nikko's biggest shareholder. He was speaking before the bid. „Granted, they made this accounting error. At most places, that just gets corrected and shoved under the rug. For some reason, there's a big issue in Japan.”
Nikko said last week it sued former CEO Junichi Arimura, former CFO Hajime Yamamoto, and Hirofumi Hirano, former chairman of Nikko Principal Investments Japan Ltd., for a total of ¥3.1 billion, seeking compensation for losses suffered because of the scandal. The company also restated earnings, reducing net income for the year ended March 2006 to ¥88 billion from the ¥96.4 billion previously reported. Nikko on February 13 said it will boost compliance staff by a third, to 150. „A buyer can't offer a very high price without having time to analyze the risks of the target company,” said Taiji Okusu, Credit Suisse Group's head of corporate coverage in Japan. „You can't pay a high premium without thorough due diligence.” Nikko Cordial and New York-based Citigroup operate an investment banking venture, in which the US firm has a 49% stake. „There has been some negative impact on the joint venture because of the publicity surrounding Nikko Cordial,” Citigroup's Prince said during a January 31 presentation to investors.
In the run-up to today's announcement, overseas investors increased their stakes in Nikko Cordial, and now account for more than 60% of the shares, the Nikkei newspaper reported on March 3. Harris Associates last month became the biggest investor in Nikko by raising its stake to 7.2% from 6.2%. Nikko „could become a conduit to sell Citigroup products and ingenuity in the Japanese market, which is starved of good investment products,” said Harris' Herro. „It's a very good combination.” Japanese individual investors are increasingly taking money from bank savings to invest in higher-yielding assets, including overseas stocks and bonds. Overseas stock purchases by Japanese investors rose to ¥17.9 trillion last year from ¥12.8 trillion in 2004, according to data compiled by Bloomberg. „We are highly complementary,” Douglas Peterson, Citigroup's Japan CEO, said at a press briefing in Tokyo. „We offer a full range of brokerage services. The retail market is expected to grow. Citigroup will leverage Nikko's branch network and talent.”
Citigroup today said that the deal is conditional on it getting at least 50% of Nikko Cordial's shares. Tying up with Citigroup may be a bonus for Nikko's domestic corporate clients. Japanese companies turned to overseas banks for advice on a record $80 billion of overseas bids last year, Bloomberg data shows. Goldman Sachs Group Inc., UBS AG, Citigroup Inc. and Merrill Lynch & Co. for the first time took the top four slots for takeover advisory in Japan last year. Nomura Holdings Inc., the perennial market leader, slumped to sixth. Buying Nikko Cordial may help restore credibility at the company after the top management was implicated in the accounting fraud. In January, an outside panel found Nikko Cordial's former CFO ignored repeated warnings in late 2004 and early 2005 from the company's audit committee about accounting methods.
Yamamoto was „actively” involved in inflating Nikko's profit in 2004, according to a report presented January 30 by the former head of Japan's securities regulator. Yamamoto, who was CFO from October 2001 to February 2006, left the Tokyo-based company this year. Citigroup has endured setbacks of its own in Japan. Three years ago, regulators ordered the company to close its local private bank for failing to police fraud and money laundering. Last month, Citigroup moved to shut about 80% of its consumer-finance outlets in the country after new laws capped the interest rate non-bank lenders may charge. Mizuho Financial Group Inc., which has a 4.8% stake in Nikko Cordial, dropped a plan to acquire Nikko, two company officials said last week, eliminating a potential hurdle for a deal with Citigroup. (Bloomberg)