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No. 362, November 1999

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American Companies in Japan


FINANCIAL SERVICES

WIT CAPITAL JAPAN, INC. has raised $30.2 million in a second round of financing. With a total of $40 million at is disposal, the venture is closer to its goal of becoming the country's first Internet investment bank and, in the process, transforming how capital is raised in Japan. Wit Capital Japan was established by New York City's WIT CAPITAL GROUP, INC., MITSUBISHI CORP. and TRANS COSMOS INC. (see Japan-U.S. Business Report No. 359, August 1999, p. 19). Participating in the latest fund-raising were ENCOMPASS GROUP INC., HIKARI TSUSHIN, INC., a HONDA MOTOR CO., LTD. unit, NIKKO SECURITIES CO., LTD., an ORIX CORP. company, four brokerage houses affiliated with SANWA BANK, LTD. as well as Mitsubishi and Trans Cosmos. These Japanese investors now own 70 percent of Wit Capital Japan, but the American parent has the option to increase its stake to 40 percent from 30 percent within the next six months. Once Wit Capital Japan receives a securities license, it will offer a variety of investment banking services to Japanese Internet and Internet-centric companies. It also will develop electronic brokerage services that will give individual investors the chance to invest in public offerings and venture capital funds.

The opportunities available in Japan's underdeveloped investment banking field also have caught the eye of LEHMAN BROTHERS INC. It is in talks with BANK OF TOKYO- MITSUBISHI, LTD. about formally teaming up in this area as soon as the spring of 2000. Such an alliance would enable the New York City broker/investment banker to exploit the ties that Japan's top commercial bank has to corporate Japan while giving BTM access to Lehman's investment banking expertise. One particular initiative reportedly being explored is the establishment of a Lehman-managed private equity fund that would buy struggling or failed companies, turn them around and then sell them. The tentative partners also apparently are discussing the possibility of moving into the mergers and acquisitions business, another area where the demand for knowledgeable advice and guidance is growing.

The idea of setting up private equity funds to invest in underperforming or even bankrupt companies seems to have fairly widespread appeal to American investment banks and more adventuresome Japanese financial services providers. For instance, Manhattan's ROTHSCHILD INC. and DAIWA SECURITIES SB CAPITAL MARKETS CO., LTD. planned to form an investment fund in November that in time could have $471.7 million with which to work. The pending partners already have identified their first candidate -- NIKKO ELECTRIC INDUSTRY CO., LTD. The automotive parts manufacturer is operating under bankruptcy protection. Rothschild and Daiwa SBCM will inject $14.2 million into the Tokyo company. They expect to make money by taking Nikko Electric public once it is healthy or selling their shares.

The hottest investment scene in Japan, however, is the venture capital part of the market, particularly the provision of start-up capital for promising Internet entrepreneurs. For instance, San Francisco's WALDEN INTERNATIONAL INVESTMENT GROUP, which has invested in more than 200 companies in the Asian Pacific region and in the United States since 1987, and NIKKO SECURITIES CO., LTD.'s investment arm are managing the $30 million WIIG Nikko IT Fund. FUJI-TSU, LTD. is committed to putting up one-third of the financing, hoping that the fund managers will find companies that can help it expand its Internet-related business.

For its part, J.H. WHITNEY & CO., the first organized private equity firm in the United States, has invested a total of $28.3 million in four Japanese companies, including Internet content supplier LINK MEDIA INC. The company, which opened a Tokyo office in February, plans to invest an additional $94.3 million over the coming year. J.H. Whitney's areas of industry expertise and focus go beyond the Internet and include communications, health care, "transforming" industries and the consumer market.

No decisions have been finalized, but the NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. and SOFTBANK CORP., its equal partner in bringing the NASDAQ automated quotation system to Japan, could have the Osaka Securities Exchange manage the envisioned over-the-counter market rather than create an independent market structure, the original plan (see Japan-U.S. Business Report No. 358, July 1999, p. 18). The three parties confirm that talks are underway but have said nothing else. Analysts, however, see definite advantages to such a strategy, especially since the NASD-Softbank team reportedly is having trouble enlisting securities firms as market makers. An alliance with the OSE also could accelerate the debut of NASDAQ Japan, initially targeted for the fourth quarter of 2000.

The presumed elephant in Japan's on-line securities market, CHARLES SCHWAB TOKIO MARINE SECURITIES CO., LTD., will start operations December 1. The joint venture between CHARLES SCHWAB & CO., INC., which is the top on-line trading company in the United States as well as the number-one discount broker, and a group of Japanese investors headed by TOKIO MARINE & FIRE INSURANCE CO., LTD. initially will offer trading in U.S. stocks and investment trusts (Japanese-style mutual funds) (see Japan-U.S. Business Report No. 358, July 1999, p. 18). Trading in Japanese shares will start sometime in the spring of 2000. The biggest news, however, is that CSTM will follow the lead of MERRILL LYNCH & CO., INC. and set up a full-service retail brokerage network. At present, the company is talking about opening six to 10 offices over the next three to four years. By the end of that period, the joint venture hopes to have some 500,000 customers through its on-line operations, call center and branches.

CITIGROUP INC. has found another channel through which it can market its banking and investment products to individuals in Japan. The world's biggest financial services provider will acquire a 19 percent stake in on-line broker NIKKO BEANS INC. from founder NIKKO SECURITIES CO., LTD. Operational since October 1, Nikko Beans offers brokerage, investment trust and insurance products to customers through the Internet as well as a call center. CITIBANK N.A.'s financial products and services now are available at its own Web site in addition to its branch network and call center. MITSUI TRUST & BANKING CO., LTD. and NIPPON LIFE INSURANCE CO. also have minority interests in Nikko Beans.

This deal is only the second one between CITIGROUP INC. and NIKKO SECURITIES CO., LTD. on the retail side of the financial services business since the American multinational acquired a 9.5 percent share in the big broker in 1998 and the two tied up in the investment banking field earlier this year (see Japan-U.S. Business Report No. 354, March 1999, p. 19). However, other alliances are under discussion. One possibility, Citigroup and Nikko Securities say, is the establishment as soon as spring 2000 of a joint Web site that would offer an array of financial services broader than either company provides on its own.

FIDELITY INVESTMENTS JAPAN LTD. managed an estimated $967 million worth of investment trust assets as of September 30, 1999. FIDELITY BROKERAGE SERVICES (JAPAN) LLC expects a boost in that total when it begins sales over the Internet of the 11 Fidelity Investments funds now available. That could happen before yearend. In another bid to attract customers in the increasingly competitive Japanese investment marketplace, Fidelity Brokerage became the first financial services company to launch an automated telephone system. In operation since November 1, Fidelity Voice Access allows customers to get up-to-date information on their account balances, price quotes and other information 24 hours a day.

The Ministry of Finance has given YASUDA KASAI-CIGNA SECURITIES CO., LTD. the go-ahead to market to businesses and individuals an after-tax, payroll-deduction retirement savings program. The joint venture, formed last spring to provide pension and investment fund products and services (see Japan-U.S. Business Report No. 357, June 1999, p. 19), is the first company to offer such a program. Customers will be able to invest in existing investment trusts managed by the Tokyo subsidiary of CIGNA CORP.'s international investment management unit or by YASUDA FIRE & MARINE INSURANCE CO., LTD.'s asset management arm; funds offered by independent asset managers will be available in the future. At the same time, Yasuda Kasai-CIGNA Securities has opened a call center to acquaint prospective clients with its portfolio of retirement savings products, programs and services.

Roughly four months after it opened for business, money manager NOMURA BLACKROCK ASSET MANAGEMENT CO., LTD. won its first client, SHI-ZUOKA BANK, LTD. The regional bank entrusted $94.3 million to the equally owned joint venture between New York City's BLACKROCK, INC. and NOMURA SECURITIES CO., LTD.'s asset management subsidiary (see Japan-U.S. Business Report No. 355, April 1999, p. 17). The funds will be invested in such U.S. debt instruments as mortgage- and asset-backed securities.

New York City-based MAXCOR FINANCIAL GROUP INC., a brokerage firm specializing in such products as interest rate and currency derivatives through its various Euro Brokers entities, has used a merger to strengthen its operations in Japan and, by extension, elsewhere in Asia. Simplifying a complex deal, the company's half-owned YAGI EURO CORP. subsidiary in Tokyo is combining its derivatives, money market and forward foreign exchange businesses with those of Tokyo-headquartered NITTAN EXCO LTD. The derivatives operation now goes under the YAGI EURO NITTAN CORP. name, while NITTAN YAGI EURO CORP. is in charge of the money market and forward foreign exchange activities.

Direct sales of life, automobile, casualty and other types of insurance coverage to individuals barely registers on the current tally of marketing channels in Japan. However, the two call centers that AMERICAN HOME ASSURANCE CO. operates in Tokyo to sell nonlife policies, especially auto insurance, over the phone are running full out during peak calling hours. Consequently, the AMERICAN INTERNATIONAL GROUP, INC. affiliate, which has roughly 400 people staffing its existing call centers, is giving serious consideration to opening a third facility.

Extending its retail product lineup, CITIBANK N.A. in partnership with SUMITOMO MARINE & FIRE INSURANCE CO., LTD. will begin selling mortgage insurance. This type of coverage normally guarantees that mortgage payments will be made if the policyholder cannot do so because of illness or injury. However, the policy marketed by Citibank and Sumitomo Fire & Marine can be written to provide protection if the insured loses his or her job because of the bankruptcy of an employer. This feature could prove to be very attractive in today's business environment.

KENNEDY-WILSON, INC. purchased a loan portfolio with a face value of $250 million from a Japanese bank described only as major. It paid less than 10 cents on the dollar for the nonperforming assets, demonstrating again the money that experienced American companies potentially stand to make from Japan's economic misfortunes. Over the last year, the diversified real estate services firm has purchased eight pools of soured loans with a book value of more than $1 billion.

An exchange rate of ¥106=$1.00 was used in this report. aaaaaa

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