Greenhill & Co.’s 75th-place ranking for global mergers advice this year didn’t deter Mizuho Financial Group Inc. from paying more than double the market price for the US boutique bank.
Facing rock-bottom interest rates and lackluster returns at home in recent years, Mizuho and some of Japan’s biggest banks are seeking to make inroads into the world’s largest fee pool, even if they have to pay up for the assets.
Sumitomo Mitsui Financial Group Inc. last month agreed to triple its stake in Jefferies Financial Group Inc., while Mitsubishi UFJ Financial Group Inc., Japan’s biggest bank, has a more than decade-old alliance with Morgan Stanley.
The Japanese lenders have so far made slow progress cracking the US market. While they’ve carved out businesses in bond offerings and corporate loans, Mizuho and bigger rivals MUFG and SMFG generally don’t rank among the top 10 for global M&A and are outside the top 20 for US equity offerings this year, according to data compiled by Bloomberg. Mizuho ranks 10th for mergers in 2023 if its own $550 million deal for Greenhill is included.
By Mizuho’s own admission, the bank lacks scale to compete on deals with larger US rivals, and hiring bankers away from these Wall Street giants can be challenging. With the acquisition of Greenhill, Mizuho adds more than 80 M&A managing directors, according to Jerry Rizzieri, head of the US securities unit.
“It’s impossible to attract and afford talent, which will be drawn to established franchises, especially in a challenging market environment,” said Stefan Selig, managing partner at BridgePark Advisors, whose clients include executives, boards and wealthy investors.
Japan’s financial institutions have looked abroad to drive growth as far back as Nomura Holdings Inc.’s tieup with Wasserstein Perella in 1988, which was followed by their acquisition of Lehman Brothers Holdings Inc. assets in the 2008 financial crisis.
Lately, their Wall Street ambitions have taken on added urgency as pressure grows to boost returns on capital and shift to more profitable fee-based businesses that tie up less of their balance sheets. At the same time, Japan’s biggest banks are flush with cash and are forecasting their highest profits in years, giving them fresh ammunition for acquisitions.
“We are aiming for a position next to bulge brackets in a medium- to long-term,” SMFG Chief Executive Officer Jun Ohta said at an investor meeting this month. The expanded alliance with Jefferies was necessary to catch up, he said.
“They already dominate the local market,” said Bloomberg Intelligence analyst Pri De Silva, referring to Japan’s megabanks. “Balance sheet lending is challenging, particularly in the US. So capital markets might be one of the few viable avenues left.”
There are inherent risks with the push, most notably the volatility of capital markets. Deal-making globally has slumped about 44% this year to $973 billion amid economic uncertainty and tougher financing markets, according to data compiled by Bloomberg.
That slowdown has led to a slew of sales by boutique banks like Greenhill, whose stock had plunged 93% from its 2009 peak before the Mizuho deal. Deutsche Bank AG agreed last month to buy Numis Corp., one of the best-known UK boutiques. In March, Toronto-Dominion Bank completed the $1.3 billion acquisition of US brokerage Cowen Inc.
Potential pitfalls for the Japanese banks include fierce price competition and a sluggish M&A market that could weigh on profitability due to high fixed costs, said Kaori Nishizawa, a director at Fitch Ratings. Bloomberg Intelligence’s De Silva said the retention of key talent is also among the challenges.
At more than double Greenhill’s market value, Mizuho’s purchase isn’t cheap, according to Pramod Shenoi, co-head of Asia-Pacific research at CreditSights. It’s the bank’s first major acquisition after it bought much of the Royal Bank of Scotland franchise in North America for $3 billion in 2015. The analyst deemed that a success, and the most recent deal can be too, he said.
“Although Mizuho is undoubtedly paying up, we see the acquisition as sensible,” said Shenoi.
--With assistance from Liana Baker.