Daiwa Pins Hopes on a Big Idea

Euromoney, April 2018

Daiwa has to do something – and everybody knows it. A bold ambition to become a global advisory mid-market leader leapt forward with the recent acquisition and merger of two leading US M&A boutiques, but can Daiwa really deliver globally? 

Daiwa, it is commonly accepted, faces challenges tough even by the gruelling standards of Japanese banking.

It is eight and a half years since it announced its intention to buy itself out of its joint venture with Sumitomo Mitsui Banking Corporation (SMBC), and ever since then it has faced questions about its future. It has a powerful (although second-best) retail distribution network in Japan but faces challenges at every turn.

Just how bad is it for Daiwa? In a strong year for Japan’s economy, Daiwa reported a 28.9% quarter-on-quarter drop in profits in its most recent results, for the third quarter, and a 9.4% year-on-year drop for the first three quarters, as a provision for litigation torpedoed its momentum.

President and chief executive Seiji Nakata talks about evolution and history, about innovation and stability. But questions swirl in Tokyo about the firm’s relevance, visibility and its long-term independence.

“Daiwa has its retail distribution – and that’s really the only thing of true value,” says one investment banker in Tokyo. “The end game must be for it to merge with someone who wants that.”

Lately, however, it has set about a plan to become a global mid-market M&A advisory player.

“We know the growth possibility is limited in Japan,” says Hiroki Ikeda, co-head of the global investment banking division at Daiwa, who runs the M&A business. “That trend will unfortunately never change. It is extremely important for us to look for cross-border opportunities to pursue growth.”

It has to be advisory, because the rest of investment banking is not delivering like it used to either. “In the past, debt and equity market transactions were the main revenue drivers for us,” Ikeda tells Euromoney at Daiwa’s Tokyo headquarters. “But the situation has changed, especially as corporates have become more hesitant to raise equity. Over the past seven or eight years, the importance of the M&A advisory business has risen.”

The plan, initially, was to follow Japanese corporates seeking to buy assets overseas; in order to capitalize on this, Daiwa set about building a global network. In 2007, it took a 20% stake in Sagent Advisors in the US and created a strategic alliance; in 2009, it bought the corporate finance unit of the UK’s Close Brothers, creating a European stronghold now called DC Advisory.

Other alliances were built without making acquisitions, such as with ANZ in Australia.

Then Daiwa sought to get itself onto deals increasingly distant from Japan.

“The past focus was Japan-related business, but as we grew the network, the regional business in each part of the world has expanded,” Ikeda says. “Now we think on a global basis. Cross-border business has been growing not just from Japan but among other regions.”

Overseas business, he says, “may be more than 80% of local business,” meaning that in-out deals, in which Japanese corporates acquire foreign assets, are at least 80% of the total cross-border M&A market.

Daiwa’s clearest sign of commitment to this global vision came in two acquisitions announced last year. In July, it said it would buy the rest of Sagent Advisors, as well as another US advisory boutique called Signal Hill and then combine the two to create a new North America-focused M&A advisory firm called DCS Advisory.

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