Citi Returns to Japan with $10.8 Billion Nikko Bid

Three years ago, Citigroup was effectively forced out of Japan’s private banking sector and its top man personally apologized to regulators, staff and customers. The cause was lax controls resulting in huge potential for fraud. How delicious that it returns with a $10.8 billion bid for Nikko Cordial, Japan’s third largest broker and a company that has admitted “systemic” accounting manipulation to the Tokyo Stock Exchanges authorities.

What is difficult to understand is why Citi beat Mizuho, a Japanese bank, to the punch. Both own around 5% of Nikko Cordial. One theory is Mizuho has more to lose than Citi if the delisting does, in fact, go ahead. Another suggests that the Japanese government wants Citi back in Japan to keep American fair-traders from getting too hot and bothered about Japan’s trade advantages.

In any case, Nikko is in trouble. It is suing three of its former staff for cooking the books to make the profits of the company look bigger, by about $1.74 billion for the fiscal years to March 2005 and March 2006. The company’s seeking ¥3.1 billion (around $26 million) in damages from Junichi Arimura, its former president; Hajime Yamamoto, ex-CFO; and Hirofumi Hirano, former chairman of Nikko Principal, its private equity unit.

Without the Citi takeover, Nikko faced delisting from the Tokyo Stock Exchange. For a financial institution like Nikko, that’s not quite a death sentence, but it may as well be. Officially, the bid changes nothing. TSE president Tazio Nishimuro told the press, “I highly respect Nikko Cordial’s pledge to make a clean break with the past. However, I also do not think [responsibility for] what’s done in the past can be mitigated.” Unofficially, the Citi bid gets everybody (except the three ex-staffers) off the hook.

A joint statement from the two companies said, “Citigroup and Nikko Cordial are forming the alliance in order to create one of Japan’s leading financial services groups and to enable the combined franchise to pursue important new growth opportunities, giving due respect to Japanese culture and business practices.” That’s code for, Citi is back in the Japanese market, and for politically expedient reasons, it will have a Japanese front. After all, after the offer, Citi will have 100% of Nikko Cordial. Calling it an alliance doesn’t change that.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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