A year ago, Barclays and Nomura were preparing to dismember the carcass of recently-deceased Lehman Brothers. Twelve months seems a good time to ask: who got the tastier meal?
There is little question Barclays got a bargain. It paid 1 billion pounds for Lehman's U.S. broker-dealer business, and almost immediately booked a 2.26 billion pound gain on the assets. Helped by a strong following wind in the financial markets, Lehman's fixed income trading operations helped its new parent book large profits in the first half of the year.
Barclays will not say how much Lehman contributed, but U.S. revenues at its Barclays Capital investment banking arm were 3.3 times higher in the first quarter of 2009 than in the previous year. When compared to Bank of America's disastrous takeover of Merrill Lynch, struck at exactly the same time, Barclays' execution looks impeccable.
Nomura's initial outlay was even smaller: it paid just $2 for Lehman's operations in Europe. But it had to extract assets from bankruptcy and then recruit the employees it was interested in retaining, which meant it took longer to get up and running. Even so, in areas such as trading equities on the London Stock Exchange, Nomura has quickly regained the position Lehman enjoyed before its collapse.
Barclays had three advantages. First, it bought Lehman's core Wall Street franchise, which was better-established and more profitable than the bank's international operations. Second, Barclays had already assembled large parts of a global investment bank: Lehman gave it a position on Wall Street that would have taken years to establish organically. Barclays Capital's North American management team were also well-placed to avoid a damaging clash of cultures.
For Nomura, the deal was a bigger leap. A year ago, it was predominantly a Japanese brokerage and asset management firm. Lehman doubled its workforce outside Japan to 10,000. This has presented it with the twin challenges of becoming a global, full-service investment bank while absorbing a large cadre of highly-paid workers. The adjustment has only just begun.
Yet Barclays faces challenges too. It has scored early gains in trading government bonds, currencies and related derivatives, but profit margins in these areas are likely to be squeezed as markets return to normal. The Lehman purchase has also taken Barclays into areas it had previously avoided, such as trading equities and advising on mergers and acquisitions. It is now attempting to build up these businesses outside the United States through aggressive hiring. The track record for such efforts is distinctly mixed.
The biggest question facing both Barclays and Nomura, however, is working out where the future profits in investment banking are likely to be earned. The U.S. is currently by far the biggest source of revenues, which gives Barclays a head start. Indeed, Nomura has embarked on a recruitment drive on Wall Street, and has poached some former Lehman workers from Barclays. In the longer term, however, power is likely to shift to the east, which should play to Nomura's strengths.
Lehman's collapse benefited both banks, allowing them to pick up businesses they would have struggled to build themselves for bargain prices. In the short term, Barclays has been the bigger winner. Yet it is far from certain that its advantage will be sustained in the long run.