Chapter - 1

1.1 The History of Lehman Brothers

Like its most aggressive rival Goldman Sachs, Lehmans history traces back to a German immigrant. Henry Lehman of Rimpar, northern Bavaria, settled in Montgomery, Alabama in 1844 and opened a small general store. Only in 1850, Henry Lehman and his brothers, Emanuel and Mayer, founded Lehman Brothers, which at this time was a cotton trading company. Until the late 19th century Lehman Brothers remained focused on the cotton market. The Lehman brothers moved the firm to New York after the civil war and were involved in the foundation of the New York Cotton Exchange in 1870. Only in 1883 Lehman went on to enter the coffee market, becoming a member of the Coffee Exchange. Four years later, in 1887, Lehman became a member of the New York Stock Exchange.

Lehman expanded into the profitable equity underwriting business which was strongly linked to the rapid industrialization of the United States. In 1899, it underwrote its first public offering, the preferred and common stock of the International Steam Pump Company and subsequently developed to one of the most active equity underwriters. While the firm prospered over the following decades as the US economy grew into an international powerhouse, Lehman had to contend with plenty of challenges over the years. Lehman survived them all:

The railroad bankruptcies of the 1800s The Great Depression of the 1930 Two world wars
Page | 1

 A capital shortage when it was spun off by American Express in 1994 and losses had depleted shareholder equity to less than 2% of assets The Long Term Capital Management collapse The Russian debt default of 1998 And the 2001 attack on the World Trade Center where Lehman had 3 floors of office space.

In 1975 the firm merged with Kuhn, Loeb and Company to form at the time the 4th largest investment bank. The merger didnt go quite as planned and strife arose in the firm. The firm was sold to American Express. AMEX started to break away from banking and brokerage operations and sold off operations to Primerica which in 1994 was broken off as an IPO for the current Lehman Brothers ticker. The firm did exceptionally well purchasing fixed income such as Lincoln Capital Management and Neuberger Berman which still are profitable today. Since the IPO in 1994 Lehman had steadily increased revenues and grew in employees from 8,500 to approximately 28,000.

However, despite its ability to survive past disasters, the collapse of the US housing market ultimately brought Lehman Brothers to its knees, as its headlong rush into the subprime mortgage market proved to be a disastrous step. However, even at the time of the bankruptcy most units of Lehman were profitable and Lehmans last CEO, Richard Fuld, had spent most of his tenure with diversifying the company, making sure it would have other businesses to depend on if one collapsed.

1.2 Lehmans Big Man: Dick Fuld

The last CEO of Lehman Brothers was Richard S. Fuld, Jr. who joined the company at the age of 23 and spent his entire 39-year career at Lehman, the last 15 in the top job. Fuld was considered as a trader by nature and nurture and was described as highly competitive and keeping a straight face.

Page | 2

In 1993, he became CEO of what was then the Lehman Brothers unit of American Express. When American Express spun off Lehman as a public company in1994, Fuld became its first chief executive. That was widely perceived as a signal of the rising power of traders on Wall Street.

1.3 Lehman and the Subprime Mortgage Market

In 2003 and 2004, with the US housing market soaring, Lehman acquired five mortgage lenders, including:

Irvine, California-based subprime lender BNC Mortgage, which lent to homeowners with poor credit or heavy debt loads. Aurora Loan Services, which specialized in Alt-A loans (a notch above subprime, to more-creditworthy borrowers who do not provide full documentation for their assets).

Benefits of the Acquisitions

In the first quarter of 2006, BNC was lending more than $1 billion a month, while Aurora was originating more than $3 billion a month of such loans in the first half of 2007. Lehmans acquisitions at first seemed prescient; record revenues from Lehmans real estate businesses enabled revenues in the capital markets unit to surge 56% from 2004 to 2006, a faster rate of growth than other businesses in investment banking or asset management.

Page | 3

 The firm securitized $146 billion of mortgages in 2006, a 10% increase from 2005. Lehman reported record profits every year from 2005 to 2007. In 2007, the firm reported net income of a record $4.2 billion on revenue of $19.3 billion. At the time Lehman was the biggest underwriter of US bonds backed by mortgages, accumulating an $85 billion portfolio, 44% more than Morgan Stanley and almost four times the $22.5 billion of shareholder equity Lehman had as a buffer against losses.

In February 2007, Lehmans stock reached a record $86.18, giving Lehman a market capitalization of close to $60 billion.

Lehman's Colossal Miscalculation

However, by the first quarter of 2007, cracks in the US housing market were already becoming apparent as defaults on subprime mortgages rose to a sevenyear high. On March 14, 2007, a day after the stock had its biggest one-day drop in five years on concerns that rising defaults would affect Lehmans profitability; the firm reported record revenues and profit for its fiscal first quarter. In the postearnings conference call, Lehmans CFO said that the risks posed by rising home delinquencies were well contained and would have little impact on the firms earnings. He also said that he did not foresee problems in the subprime market spreading to the rest of the housing market or hurting the US economy. Prices of securities backed by their mortgages sank, ultimately forcing Bear Stearns, Lehmans main competitor in subprime underwriting, to tell investors in two of its hedge funds, which bet heavily on home loans, that their investments had been wiped out.

Page | 4

1.4 Causes of the financial turmoil

The US housing market

1.

Creation of a housing bubble

US house prices rose dramatically from 1998 until late 2005, more than doubling over this period , and far faster than average wages. Further support for the existence of a bubble came from the ratio of house prices to renting costs which rocketed upwards around 1999. Furthermore, Yale economist Robert Schiller found that inflation-adjusted house prices had remained relatively constant over the period 1899-1995. Pointing to the escalation in house prices and marked regional disparities, Shiller correctly predicted the imminent collapse of what he believed was a housing bubble

The rise in house prices reflected large increases in demand for housing and happened despite a rise in the supply of housing. The significant increase in the demand for housing is attributed to a number of factors.

a.

Low interest rates

Sustained low interest rates from 1999 until 2004 made adjustable-rate mortgages (ARMs) appear very attractive to potential buyers. At least in part, low interest rates were driven by the large current account deficit run by the USA, mirrored by capital inflows from countries like China which avidly purchased US Treasury bonds, but also the decision (justified by a new economic paradigm) on the part of the Fed to keep interest rates lower than in similar previous scenarios.The Fed - and many of the worlds other leading central banks - continued to pump liquidity into credit markets to ensure credit would continue to flow at low rates of interest
Page | 5

b.

Speculation

The upward rise in house prices was accentuated by property speculation. In some markets, 10% to 15% of buyers were speculators, estimates Bruce Karatz of KB Home. Harvard economist Robert Shiller adds: Home buyers typically expect price appreciation of 10% [a year) Speculative activity was exacerbated by the USs comparatively generous foreclosure rules: unlike in the UK, where foreclosure is likely to result in personal bankruptcy, homeowners in the US can generally just walk away from their home and mortgage.

Together, these factors created a huge housing bubble. By 2005-06, the value of subprime mortgages relative to total new mortgages was estimated at 20% - as opposed to less than 7% in 2001.44 Subprime mortgage lending rose from $180bn in 2001 to $625bn in 2005.45 New Alt-A mortgages, the risk level between subprime and prime,46 had risen from 2% in 2001 to 14% by 2006.Dean Baker, co-director of the Center for Economic and Policy Research, valued the housing bubble at $8 trillion.

2.

The collapse of the bubble

By 2006 a number of factors had conspired to burst the bubble.

First, average hourly wages in the US had remained stagnant or declined since 2002 until 2009 in real terms this represented a decline. Consequently, prices could not continue to rise as housing became increasingly unaffordable.

Page | 6

Second, growth in housing supply tracked price rises.While prices were able to withstand this downward pressure until 2005, once demand had subsided excess supply exacerbated the sharp fall in prices. Third, as interest rates rose to a peak of 5.25%, ARMs became less attractive and effectively removed many non-prime prospective buyers from the market - in the first half of 2006, the Mortgage Bankers Association found the value, and total number, of subprime mortgages to be down 30% on the second half of 2005.

Fourth, as personal saving from disposable income fell below zero, fewer households had the requisite finance to support increases in debt.

The collapse in house prices affected the ability, and the willingness, of mortgage-owners to meet their payments. In some cases, house-owners with ARMs simply could not face the rise in their payments resulting from the steep rise in the Fed funds rate. As house prices fell, the options of either selling the property or re-financing the mortgage also diminished. This unfortunate position was exacerbated by the decline in the net savings rate, which meant homeowners had fewer financial reserves to help themselves. In other cases, there existed an incentive to voluntarily foreclose where the value of the house (and future gains associated with a stronger credit rating) was smaller than the value of the outstanding mortgage because of generous foreclosure legislation.

Consequently, 2007 and 2008 saw significant rises in delinquency and foreclosures.Serious mortgage delinquency rates rose in both the prime and subprime markets, although the latters rise from just over 6% in 2006 to 18% in 2008 was particularly salient. The number of properties subject to foreclosure filings rose by 79% in 2006 to reach 1.3m in 2007, and increased by a further 81% to 2.3m in 2008 (a 225% increase on 2006).

Page | 7

1.5 The Beginning of the End

Toward the end of 2006, people familiar with Lehmans risk management operations say, executives at the firm started seeing trouble in the mortgage market.

The securitization division raised rates on its bonds to reflect higher risk, which meant higher interest on the loans Lehmans mortgage units made to home owners. When that did not slow borrowing, lending standards were tightened, a decision that was met with resistance by BNC and Aurora executives, whose fees depended on volume, the people say. By the end of 2006, Lehman started hedging against its mortgage exposure. Some traders were allowed to bet against the prices of home loans by shorting indexes tied to mortgage securities. Still, Lehman President Gregory did not move fast enough to reduce risk, the people say.

As the credit crisis erupted in August 2007 with the failure of two Bear Stearns hedge funds, Lehmans stock fell sharply.

Lehman Brothers became the first firm on Wall Street to close its subprimelending unit and lay off 2500 employees of the BNC and other mortgage related units. Against the statements of the CFO from March 2007, shuttering BNC Mortgage LLC would cut third-quarter earnings by $52 million Lehman calculated at the time.

BNC made about $2 billion of loans in the first quarter of 2007, already down 40% from a year earlier, according to industry newsletter National Mortgage News. BNC had 23 offices in eight states of which all were closed. In addition, it also closed offices of Alt-A lender Aurora in three states. Even as the correction in the US housing market gained momentum, Lehman continued to be a major player in the mortgage market.
Page | 8

In the fourth quarter of 2007, Lehmans stock rebounded, as global equity markets reached new highs and prices for fixed-income assets staged a temporary rebound. However, the firm did not take the opportunity to trim its massive mortgage portfolio, which in retrospect, would turn out to be its last chance.

Some of Lehmans losses in that period were from leveraged loans, which are used by private equity firms and others for buyouts. The firm was stuck with the loans, which they had aimed to package and sell, when the leveraged buyout market froze in the second half of 2007.Fuld used the temporary recovery of credit markets in the first quarter of 2008 to offload one-fifth of the firms leveragedloan portfolio. Yet he also tried to gain market share by borrowing against the firms capital to trade other fixed-income products for Lehmans clients, people say. That increased Lehmans risk in the event of a renewed downturn, as did its growing inventory of Alt-A loans. Fuld had bet the wrong way: In March, markets tumbled as defaults by homeowners surged, housing prices fell further and the US headed toward a recession.

Reversing course, he ordered his associates to hunker down, people say. Traders were told to sell troubled assets or buy credit protection for further potential losses, which meant that if prices were to recover, Lehman couldnt benefit. In other words, things werent going to turn around anytime soon.

Before the bankruptcy, Lehman Brothers risk management department had identified five specific risks inherent in their business.

Market risk represents the potential unfavorable change in the value of a portfolio of financial instruments due to changes in market rates, prices and volatilities Credit risk represents the possibility that a counterparty or obligor will be unable or unwilling to honor its contractual obligations to Lehman Brothers.
Page | 9

 Liquidity risk is the risk that Lehman brothers are unable to meet their payment obligations, borrow funds in the market at a good price on a regular basis, to fund actual or proposed commitments or to liquidate assets. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Reputational risk concerns the risk of losing confidence from the customers, public and the government due to unfortunate decisions about client selection and the conduct of their business.

In summary, the market, credit, liquidity, operational and reputational risks constituted the total risk in Lehman Brothers business (Lehman Brothers Annual Report, 2007). In order for successful and sustainable investment banking they must be carefully managed and balanced. On the other hand, if treated with disrespect they could have disastrous consequences and destroying whole companies.

Page | 10

It is hard to believe that only one year ago, this once behemoth of Wall Street had a $47 billion market cap and now is filing for bankruptcy. As the troubles mounted in late August rumors started piling on that a bailout from the Korea Development Bank was in the works. This never materialized. On September 10 Lehman announced another stunning loss of $3.9 billion and made it clear that they were also in the works of selling off the prized jewel in Neuberger Berman to raise capital. The rest we already know and weekend talks broke down and Lehman was forced with no other option but to file for bankruptcy.

Page | 11

Chapter -2
The Bankruptcy of Lehman Brothers
My goodness, Ive been in the business 35 years, and these are the Most extraordinary events Ive ever seen
Peter G. Peterson, co-founder of Blackstone Group, and former head of Lehman

Page | 12

The difficulties the financial services industry was facing during the year 2008, which were mainly caused by the subprime crisis, hit Lehman particularly hard: Pulling out BNC Mortgage of business and thus eliminating 2500 jobs in August 2007 was just part of Lehmans decline, which should reach its nadir at the weekend of September 14, 2008. Lehmans high degree of leverage - the ratio of total assets to shareholders equity was 31 in 2007, and its huge portfolio of mortgage securities made it increasingly vulnerable to deteriorating market conditions. On March 17, 2008, following the near-collapse of Bear Stearns - the second-largest underwriter of mortgage-backed securities Lehman shares fell as much as 48% on concern it would be the next Wall Street firm to fail. Confidence in the company returned to some extent in April, after it raised $4 billion through an issue of preferred stock that was convertible into Lehman shares at a 32% premium to its price at the time. However, the stock resumed its decline as hedge fund managers began questioning the valuation of Lehmans mortgage portfolio. Throughout the year 2008 Lehman had to suffer bigger and bigger losses caused by lower-rated mortgage-backed securities, culminating in $2.8 billion losses and a decline of its stock value of 73% at the end of the second fiscal year, announced on June 9. Lehmans second-quarter losses, four times more than the worst analyst estimate and its first loss since being spun off by American Express. It also arranged a $6 billion share sale.

As painful as this quarterly loss has been, now is the time to look forward, Fuld wrote to employees. In past down cycles, the firm has always emerged stronger. We have done it before, and we will do it again. The firm also said that it had boosted its liquidity pool to an estimated $45 billion, decreased gross assets by $147 billion, reduced its exposure to residential and commercial mortgages by 20%, and cut down leverage from a factor of 32 to about 25. However, selling $147 billion of assets in a jittery market meant taking significant losses. On top of that, people familiar with the transactions say, some of the hedges did not work. For example, Lehman bet against the CMBX index, a gauge of bonds backed by commercial mortgage bonds, to hedge its residential mortgage portfolio. In the second quarter, the index improved - the cost of
Page | 13

protecting against losses on commercial mortgage bonds narrowed to 100 basis points from 150 while the prices of residential mortgages continued to drop, resulting in losses on both sides of the trade.

However, the above described measures were perceived as being too little and too late. Over the summer of 2008, Lehmans management made unsuccessful overtures to a number of potential partners. a) The stock plunged 77% in the first week of September 2008, amid plummeting equity markets worldwide, as investors questioned CEO Richard Fulds plan to keep the firm independent by selling part of its asset management unit and spinning off commercial real estate assets. b) In August 2008, shortly before the third-quarter announcements in midSeptember, Lehman made public to lay off 1500 jobs, being 6% of its workforce. Having already laid off more than 6000 workers since June 2007, this round of Lehmans head-count reductions should not only affect its mortgage origination and securitization businesses. Now, as business was stumbling from one somber quarter to the next, jobs in investment banking and trading were also in jeopardy.

In August 22, 2008 investors confidence in Lehman reached a small peak after the state-run South Korean firm Korea Development Bank announced it was considering buying Lehman. On that day Lehmans stock value appreciated by 5% and 16% over the week. After this short moment of euphoria Lehmans shares finally fell sharply by 45% to mediocre $7.79 on September 9, when the Korean bank had to report to hold the negotiations due to difficulties pleasing regulators and attracting partners for the deal On that day the fresh concerns over Lehmans stability and investors worries that Lehman could have major difficulties in finding new sources of capital pulled down the Dow Jones by 300 points and the S&P by 3.4%. This decline more than wiped out the markets revival on the day before, after the Bush administration rescued the mortgage giants Fannie Mae and Freddie Mac.

Page | 14

The outlook and fear that the government might not come to rescue Lehman and that it may have to solve its problems on its own finally lead to the market decline on that day. The news was a deathblow to Lehman, leading to a 45% plunge in the stock and a 66% spike in credit-default swaps on the companys debt. The companys hedge fund clients began pulling out, while its short-term creditors cut credit lines. On September 10, Lehmans share further dropped by 41% to $4.22, as it had to announce a loss of $3.9 billion and indicated its intention to sell its prized investment managing division, including Neuberger Berman. Among the potential buyers were Barclays of Britain, the Bank of America and private equity firms. As the potential buyers were seeking assistance from the Federal Reserve in form of assurances guaranteeing a part of Lehmans troubled assets, it was still unclear whether the Fed would help. The same day, Moodys Investor Service announced that it was reviewing Lehmans credit ratings, and also said that Lehman would have to sell a majority stake to a strategic partner in order to avoid a rating downgrade. These developments led to a 42% plunge in the stock on September 11.

On Friday September 12, the New York Federal Reserves president Timothy F. Geithner summoned the heads of major Wall Street firms, so they could review their financial exposures to Lehman and work out plans over the possibility that the government had to co-ordinate an orderly liquidation of Lehmans assets the next Monday. The meeting was very reminiscent to the meeting held ten years ago before the collapse of Long Term Capital Management (LTCM), a hedge fund firm that dealt with esoteric securities, when Bear Stearns, the hedge funds clearing broker, refused to contribute in an investment saving the fund.

The Wall Street banks involved in this meeting argued that Lehman overreached and brought its troubles on itself. If a buyer of Lehman could not be found, they could collect their collateral and liquidate Lehmans assets. Finally, after nervous around-the-clock negotiations over the weekend, on Sunday September 14, Merrill Lynch agreed to sell itself to Bank of America. Lehman announced
Page | 15

Barclays has ended the bid to buy all or part of Lehman and a deal to rescue the bank could not be settled. Bank of America, also rumored to be involved in bidding for Lehman, had to reject its interests, too, as the regulators declined a governmental involvement in Lehmans sale. It was finally on that day when Lehman announced to file for bankruptcy protection on Monday September 15.

2.1 THE THREE LS THAT KILLED LEHMAN

Leverage
During the good times, the best way to enhance your returns is to 'gear up' by borrowing money to invest in assets which are rising in value. This enables you to 'leverage' (magnify) your returns, which is particularly useful when interest rates are low. However, leverage cuts both ways, as it also magnifies your losses when asset prices fall. (Witness the recent return of negative equity to the UK property market.)

A sensibly run retail bank would have leverage of, say, 12 times. In other words, for every 1 of cash and other readily available capital, it would lend 12. In 2004, Lehman's leverage was running at 20. Later, it rose past the twenties and thirties before peaking at an incredible 44 in 2007. Thus, Lehman was leveraged 44 to 1 when asset prices began heading south. Think of it this way: it's a bit like someone on a wage of 10,000 buying a house using a 440,000 mortgage. If property prices started to slide, or interest rates moved up, then this borrower would be doomed. Thanks to its sky-high leverage, Lehman was in a similar pickle.

Page | 16

 Liquidity
Most businesses fail not because of lack of profits but because of cash-flow problems. Like all banks, Lehman was an upturned pyramid balanced on a small sliver of cash. Although it had a massive asset base (and equally impressive liabilities), Lehman didn't have enough in the way of liquidity. In other words, it lacked ready cash and other easily sold assets. As markets fell, other banks started to worry about Lehman's shaky finances, so they moved to protect their own interests by pulling Lehman's lines of credit. This meant that Lehman was losing liquidity fast, which is a dangerous state for any bank. Only six months earlier, in March 2008, Lehman rival Bear Stearns faced a similar loss of liquidity before JPMorgan Chase rode to its rescue. Believing that Lehman did not have enough liquidity at hand, other banks refused to trade with it. Once a bank loses market confidence, it loses everything. Being unable to trade meant that Lehman and its business ceased to exist in other banks' eyes.

Losses
After the terrorist attacks of 11 September 2001, US interest rates plummeted, causing a five-year boom in domestic and commercial property prices. This boom ended in 2006 and US housing prices have since fallen for three years in a row. Lehman was heavily exposed to the US real-estate market, having been the largest underwriter of property loans in 2007. By the end of that year, Lehman had over $60 billion invested in commercial real estate (CRE) and was very big in subprime mortgages (loans to risky homebuyers).
Page | 17

Also, it had huge exposure to innovative yet arcane investments such as collateralized debt obligations (CDO) and credit default swaps (CDS). As property prices crashed and repossessions and arrears sky-rocketed, Lehman was caught in a perfect storm. In its third-quarter results, Lehman announced a $2.5 billion write-down due to its exposure to commercial real estate. Lehman's total announced losses in 2008 came to $6.5 billion, but there was far more 'toxic waste' waiting to be unearthed.

2.2 The Bankruptcy Law in the United States

Bankruptcy in the United States of America is permitted by the US Constitution and codified in Title 11 of the United States Code, commonly known as The Bankruptcy Code. The Code has been amended several times, especially in 2005 through the Bankruptcy Abuse Prevention and Consumer Protection Act, BAPCPA, which has particular significance for the financial industry. Bankruptcy cases are filed in US Bankruptcy Courts and governed under federal law, but state laws play usually a major role in bankruptcy cases, because these are often applied in property rights issues.

Chapters of the Bankruptcy Code:

Chapter 7: Liquidation

Liquidation under this chapter involves the selling of non-exempt property of the debtor and the distribution of the proceedings to his creditors. Most Chapter 7 cases are no-asset cases, i.e. the debtor keeps all his essential property.

Page | 18

 Chapter 9: Reorganization for municipalities

This chapter is only available to municipalities and is a form of reorganization, e.g. Orange County in 1994.

Chapter 11: Reorganization

Chapter 11 of the Bankruptcy Code allows reorganization of any business, with the basic rationale behind, that a reorganized business is more valuable as a going-concern than the value of its parts in case of liquidation. In most cases the debtor remains in control of its business operations as a debtor in possession and is subject to the oversight of a jurisdiction of the court. The rights and interests of the owners of companies filing under Chapter 11 with debts exceeding its assets are ended and the creditors are left with ownership of the newly reorganized company.

Chapter 11 features tools and mechanisms to facilitate the debtor to restructure its business. The debtor in possession may acquire financing and loans on a favorable basis, providing the lender first priority on the earnings obtained by his advances. The priority scheme in Chapter 11 is the same as in the other chapters of Title 11, i.e. giving secured creditors (with security interest or collateral in the debtors property) higher priority than unsecured creditors, e.g. giving then employees higher priority than others. Each priority level has to be paid off in full before the next lower one can be served. The debtor can also obtain the permit to cancel or reject executory contracts, such as labour union contracts, supply/operating contracts or real estate leases, in case it would be favorable to the company and its creditors. The Chapter 11 plan for reorganization, with the goal to emerge debtors from the bankruptcy within months or years, is voted upon by the interested creditors. A confirmed plan becomes binding and identifies the treatment of debts and business operations. Debtors have the exclusive right to propose a plan for a specific duration (in most cases 120 days), after which creditors may also propose a plan.
Page | 19

In case the involved parties cannot confirm a plan, the bankruptcy case may be converted into Chapter 7 liquidation or dismissed to return to the status quo before the bankruptcy filing, allowing the creditors to claim their rights by use of non-bankruptcy law.

If a publicly listed company files under Chapter 11, its stocks are immediately de-listed from the stock exchange, but remain very often listed as over-thecounter (OTC) stock, or in many cases the confirmed Chapter 11 plans render the shares of the company valueless.

Chapter 12: Reorganization for family farmers/fishermen

This chapter is very similar to Chapter 13, but only available in certain situations.

Chapter 13: Reorganization for consumers

Bankruptcy under Chapters 11-13 is a complex form of reorganization and allows the debtor to keep part or all of his property and use future earnings to pay off his creditors.

Chapter 15: Cross-border insolvency

BAPCPA added this chapter to deal with foreign companies with US debts.

Bankruptcy cases are either voluntary, where debtors petition the court, or involuntary, where creditors file the petition, e.g. To force a company into bankruptcy to enforce their rights. Voluntary cases are by far the majority of all bankruptcy cases.

Page | 20

All bankruptcy cases commence with the establishment of the debtors estate, which consists of all property interests at the time of the case commencement, subject to certain exclusions. The bankruptcy estate of a company, partnership and other collective entities is for federal income tax purposes not a separate taxable entity from the debtor, contrary to individuals filing under Chapters 7 or 11, where the estate is separate. In particular, the estate is the net worth of an individual or company, being the sum of the assets (legal rights, interests and entitlements to property of any kind available for distribution to the creditors) less all liabilities, and is administered by a trustee in bankruptcy. The moment the petition for bankruptcy is filed, an automatic stay is imposed. An automatic stay is an injunction, which prohibits the commencement, enforcement and appeal of actions and judgments by creditors against the debtor for the collection of a claim. Actions and proceedings towards the estate itself are prohibited, too. Violations of the automatic stay are treated as void ab initio or voidable, depending on the circuit.

2.3 Lehmans Bankruptcy Filing

Lehman filed on Monday September 15, 2008 for bankruptcy protection under Chapter 11 of Title 11 of the United States Code. The case is in re Lehman Brothers Holdings Inc. (LBHI), US Bankruptcy Court, Southern District of New York (Manhattan), being by far the largest corporate bankruptcy in history, listing a total of $639 billion in assets, $613 billion in bank debt and $155 billion in bond debt. As only the holding filed, Lehman further announced that its subsidiaries would continue to operate business as usual. The way that Lehman filed for Chapter 11 shows that its executives hired the bankruptcy attorney as late as possible to avoid hints to its employees and to the markets, that bankruptcy was in consideration. Hence, there was no wellplanned contingency plan to allow a seamless transition to the Chapter 11 state and to avoid a financial meltdown during the first days after the bankruptcy filing.

Page | 21

But possibly a better plan wouldnt have changed much since the BAPCPA added provisions that affected Lehman in a per se unfortunate manner. Actually, Lehman filed only three, non-substantial motions to open the bankruptcy case:

First motion asks the court to enforce the automatic stay provisions. Second motion asks the court to extend the time to file required lists and schedules. Third motion asks the court to waive the requirement that a filing include the list of creditors.

Major Asset Dispositions

On September 20, 2008, a revised proposal to sell the brokerage part of Lehman was approved by the bankruptcy court. Barclays was to acquire the Manhattan core business of Lehman for $1.35 billion, with the responsibility of around 9000 employees. With the deal, Barclays absorbed assumed $47.4 billion in securities and $45.5 billion in trading liabilities.

The fact that only the real estate, which was acquired with the deal, was worth $1.29 billion (including the Manhattan headquarters skyscraper) shows the exceptional nature of the deal.

Finally, on September 22 and 23, Nomuras agreement to buy Lehmans franchise in Japan, Hong Kong and Australia and its intentions to buy Lehmans investment banking and equities businesses in Europe and Middle East were announced, and the deal became legally effective on October 13.

Page | 22

2.4 Conclusion

Lehmans collapse roiled global financial markets for weeks, given the size of the company and its status as a major player in the US and internationally. Many questioned the US governments decision to let Lehman fail, as compared to its tacit support for Bear Stearns (which was acquired by JPMorgan Chase) in March 2008. Lehmans bankruptcy led to more than $46 billion of its market value being wiped out. Its collapse also served as the catalyst for the purchase of Merrill Lynch by Bank of America. Less than a week later, on September 21, the Wall Street that had shaped the financial world for two decades ended, when Goldman Sachs Group Inc. and Morgan Stanley became bank .Holding companies concluding that there was no future in remaining investment banks as investors had determined the model is broken.

When analyzing Lehman Brothers risk management one can conclude that Lehmans Management countless times exceeded their own risk limits, ultimately exceeding their risk polices by margins of 70% as to commercial real estate and by 100% as to leverage loans. One explanation of this rather dangerous behavior is the compensation system. In order to attract and keep the sharpest minds in the industry, investment banks normally rewarded their most revenue generating employees with big monetary bonuses.

Page | 23

2.5

The significance of Lehman Brothers bankruptcy

Key issues arising from Lehman Brothers bankruptcy continue to challenge industry participants. Firms on both the buy- and sell-sides of the market are beginning to identify and implement risk mitigation measures to reduce the likelihood of future credit and liquidity-based losses.

1. Market participants, in particular large and complex financial institutions, continue to address the challenges of accurately quantifying, aggregating, monitoring, and reporting market, credit, and liquidity risks.

2. Clients have placed increased scrutiny on selecting and monitoring derivative and other counterparties, including their prime brokerage relationships.

3. This focus includes evaluating risks inherent in contractual agreements and the legal rights and remedies afforded by such arrangements. 4. Investors and counterparties are requiring added assurance that their assets and trade obligations are adequately safeguarded, moving business and assets away from arrangements and institutions perceived as less secure, or seeking to modify existing contractual arrangements.

Lehman Brothers global footprint meant that thousands of financial market participants were directly impacted by its collapse. In addition, numerous aftershocks were felt throughout the world resulting from numerous cross-border and cross-entity interdependencies. Lehmans insolvency has resulted in more than 75 separate and distinct bankruptcy proceedings.

Page | 24

2.6
2007

Lehman Specific Events

13th Mar 22th Aug originator.

Announced investments to 20% of D. E. Shaw group. Announced closure of BNC Mortgage, Subprime-loan

2008
17th Jan 9th Jun 16th Jun 22nd Aug Announced reduction of retail mortgage and suspend wholesale mortgage lending business in U.S Announced to raise USD 6 bl. in common and preferred stock. Posts USD 2.8 bl. in losses for 2Q results. Report says S. Korea's KDB having interest in acquiring Lehman
Page | 25

9th Sep 10th Sep 15th Sep 17th Sep business. 22nd Sep

Report says KDB's negotiation failed, strong plunge in stock prices. Announces USD 6.9 bl. for 3Q results, further plunge in stock prices amid reform strategies Lehman files Chapter 11 Barclays Plc announces acquisition of Lehman's North American

Nomura Holdings announces agreement on acquisition of Lehman's Asia Pacific franchise. 23rd Sep Nomura Holdings announces agreement on acquisition of Lehman's European equities and Investment Banking businesses. 29th Sep Bain Capital and Hellman & Friedman agrees in acquisition of asset management business (Neuberger Berman)

Page | 26

Chapter 3
The Nomura Group has been founded in 1919 in Osaka by Tokushichi Nomura II, a wealthy Japanese stock broking tycoon. Everything begun much earlier with Tokushichi IIs father, Tokushich Nomura. His father created a money changer business in Osaka in 1872, the Nomura Shoten. His son first helped him in his business and then went on to start in a new business in Japan at that time, stock brokering. This led Tokushichi Nomura II to found the nowadays called Nomura Group based on the idea that a long and sound customer relationship is the key to a successful business.

3.1

The History of Nomura

The Nomura Group is the financial institution of a wider conglomerate named Nomura Holding. This conglomerate is based on the Japanese business model Keiretsu. Companies in a Keiretsu have strong and interwoven relationships but stay independent in their management. Those business groups are usually organized around a bank which lent to Keiretsu companies, hold equities in them and bail Keiretsu members out if needed. Nomura Holding is a horizontal Keiretsu with companies present in many industries from oil and gas to construction, chemicals and foodstuff. The bank in this case is Nomura Group with a noteworthy group member named Nomura Securities (NSC). NSC is Japans most internationally famous stock brokerage firm. It has been established in 1925 in Osaka, when it spun off from Nomura Group. It was first a bond trading firm and became famous for inventing the conduit commercial mortgage.
Page | 27

NSC has managed throughout the 20th century to take advantage of political and economical difficult situations like the end of the Second World War, the 1965 Japanese recession or the oil shocks. This was made possible by the visionary company beliefs, always one step ahead of the industry competitors.

An Economist once wrote What Nomura does this morning, the rest of the Japanese securities industry will do after lunch. For example in 1965, guided by the belief that economics and technology would be closely intertwined in the future, NSC founded an independent research institute to serve Nomuras needs but those of Japan as well. Today Nomura Research Institute is one of the leading research organizations in Japan and the companys belief at that time has been proved to be correct. During the 1980s, a cutting edge computer system was one of the competitive advantages Nomura had on the market.

NSC was the first Japanese company to be listed on an American stock exchange (Boston) in 1969 and the first Japanese company to be listed on the New York Stock Exchange in 1981. However they never really succeeded in taking a significant part on the American securities market. They founded the very successful European branch in the 1970s with its headquarters in Frankfurt. At the beginning of the 1990s during the Japanese economy crash, things started to get nasty. NSC faced many scandals and market troubles. However, they managed to stay financially sound and took the crisis as an opportunity to restructure their business and management model to become competitive again.

Page | 28

3.2 Nomuras Acquisition of Lehman Brothers

Nomura started to move to acquire Lehman Brothers after the company filing for bankruptcy. After one week of decision, on September 22, Nomura declared the acquisition of Lehman Brothers franchise in the Asia Pacific region, including Japan and Australia. On September 23, Nomura acquired Lehmans European and Middle Eastern equities and investment banking divisions. On October 7, Nomura moved further to hire former Lehman Brothers fixed income staff. Then on October 14, Nomura completely integrated the acquisition of three companies in Lehmans eleven services platform in India which are LB Services India, LB Financial Services (India), and LB Structured Financial Services. The acquisition of Lehman will help Nomura to increase the number of international investors. While Nomura holds a top share of JGB underwriting for domestic investors, Lehman holds a top rank for international investors. Furthermore, the Lehman investment banking branches in Asia and Europe will complement the client base, since Lehman is a top player in this market. Nomura can still maintain a top share in Japan and emerging markets such as India and Eastern Europe. The person who broke the status quo and boldly led the acquisition of Lehman was Kenichi Watanabe, who was appointed CEO in April 2008. Nomuras previous top management was also aware of the need for globalization, but conservative attitudes failed to deliver meaningful results. Watanabe is known for putting particular emphasis on speed in management, and his appointment as CEO reflected Nomuras strong desire for change. Joining Watanabe on as chief operating officer on Nomuras top management was Takumi Shibata, who would later go on to lead the actual negotiations in the Lehman deal.Along with Watanabe and Shibata, Sadeq Sayeed, the long time head of Nomuras overseas operations, was recognized as being a key contributor in the Lehman deal. Sayeed is said to have extolled his colleagues to dare to be bold in pushing ahead with the Lehman deal, and is considered by some as the architect of the plan to acquire Lehmans Europe and Middle East operations. From the summer of 2008, Watanabe and Shibata began to keep a close eye on market movements related to Lehman and developed acquisition plans.
Page | 29

When it became evident, on September 16, that Lehmans US operations would go to Barclays Plc., Watanabe and Shibata quickly shifted their focus to Lehmans Asia-Pacific, Europe, and Middle East operations.

Nomura succeeded in winning the deal for Lehmans Asia-Pacific business, outbidding its competitors with a price of $225 million. On October 6, Nomura additionally announced the acquisition of Lehmans India offices and IT services units. Lehmans India operations would provide a support platform for Nomuras global business, as well as upgrade its IT capabilities, such as adding a high frequency trading engine.

Given the low overlap of their existing business portfolios, there was high potential for creating synergy between Nomura and Lehman. In 2008, only 20% or so of Nomuras revenues came from overseas, while for Lehman its Europe, Middle East, and Africa (EMEA, 35%) and Asia-Pacific (17%) units accounted for 52% of revenues. In terms of core customers, Nomuras primary base was domestic mutual funds and institutional investors, while Lehman had a global client list, especially among hedge funds. Also, while Nomuras equity capital markets business overseas only occupied a niche market position, Lehman was one of the leading players globally.

Page | 30

Nomura to acquire Lehman Brothers' Asia Pacific franchise

Tokyo, September 22, 2008 Nomura Holdings, Inc. today announced it has agreed to acquire Lehman Brothers' franchise in the Asia Pacific region including Japan and Australia. The transaction is subject to a number of conditions. The deal includes all of Lehman Brothers' franchises and approximately 3,000 employees in multiple locations in the Asia-Pacific region. Lehman has been a strong player in the investment banking field, particularly M&A, execution services, non-cash business including derivatives, electronic trading and prime brokerage. By combining two strong client franchises, the partnership will enable Nomura to strengthen its wholesale business and to further realize its strategy of delivering Asia to the world. Under the terms of the transaction all employees in Asia Pacific will be offered employment with Nomura. The deal does not include any trading assets or trading liabilities. Kenichi Watanabe, Nomura's President and CEO, said: "This is a transformational deal that allows us to bring together the strengths of Nomura and Lehman Brothers to further deliver value to our clients. It will significantly extend our reach in Asia. We see immediate strategic benefits, delivering the scale and scope to realize our vision to be a world-class investment bank. "The businesses we are acquiring are hugely successful with excellent management and staff. This is a once in a generation opportunity and we are delighted to be able to partner with Lehman Brothers' talented people to create one of the biggest independent global financial institutions that provides worldclass investment banking services to clients across the globe. Our ability to capitalize on this opportunity in spite of such volatile markets reflects our financial strength and demonstrates how well we have managed the credit crisis. This deal is validation for our strategy," said Mr. Watanabe. Jesse Bhattal, CEO of Lehman Brothers Asia, added: "To partner with such a reputable firm as Nomura is truly a remarkable opportunity for both firms, as it creates a completely complementary platform across an expanded range
Page | 31

3.3 Lehmanization of Nomura

Since its acquisition of Lehmans Asia, Europe, and India operations, Nomura has undergone changes in its human resources, business, and governance structure, in what can be described as the Lehmanization of Nomura. While many of these may have been planned from the outset, some key changes were responses to unexpected turn of events. The case of Nomuras acquisition and post merger integration of Lehman provides important lessons for cross-border M&As, including the importance of early involvement by top management, flexibility in response to unexpected events, and management of divergent corporate cultures

3.3.1 The New Workforce Resources The new world-class human capital came from the former Lehman employees, which were around 8,000 people. Approximately 2,650 employees worked in equities, investment banking and fixed income in Europe. Approximately 1,100 people worked in the former Japan franchise. Approximately 1,500 people worked in Asia Pacific (ex-Japan), and around 2,900 worked in the subsidiary in India. The acquisition gave access to a broad range of clients and be complimentary in the business areas. Through the India acquisition, Nomura gained the strength of Lehmans IT platform, being a crucial element for global business operations, i.e. one of Lehmans strengths was the high-velocity trading engine, which allowed Lehman to trade the stocks and bonds significantly fast. This is highly beneficial to the customers such as hedge funds. 3.3.2 Nomuras Key Strategy The key strategy behind the acquisition was to quickly overhaul the wholesale business by enhancing the product and service delivery as well as significantly expanding the international franchise and client base. Nomura also aimed to create substantial value to the customers by investing in the infrastructure system.

Page | 32

Another strategy was to reduce the cost of operation due to the acquisition and powerful infrastructure model. The last key strategy is to promote the world-class management structure in terms of organization, management bodies, and corporate systems.

3.3.3 Transition: The Road to Revenue

There were four phases which Nomura aimed to follow to integrate Lehman.

The first phase was to acquire Lehman and offer the former Lehman employees to join Nomura.

The second phase is to start the joint operations, integrate infrastructure and run up the business.

The third phase is to promote the efficiency in the combined operation and infrastructure.

The last phase Nomura can expect revenues generated from the synergies in the next fiscal year.

In addition, in the management structure, Nomura allowed increase in the diverse pool of management. This enhanced the performance of management to support the sophisticated nature of financial business. Furthermore, Nomura tries to promote the right persons for each job and not only Japanese bankers.

Page | 33

In the medium to long term, Nomura wants to become a world class player in investment banking. The benefit from the acquisition will dramatically help Nomura in many ways such as having world-class human resources, world-class services and solutions, and a world-class client base. In addition, a well structured synergy and the integration of infrastructure will provide Nomura to become a world-class investment bank in the near future.

3.4 Post Merger Integration Process

While differences between Nomura and Lehman in terms of business portfolio bode well for creating synergies, the differences in culture worked in the opposite direction. Nomura set up a transition team immediately after the acquisition and dispatched them to all the overseas offices to aid the integration process. There was a formidable set of challenges, and Nomura ran into trouble from the onset. Episodes of culture shock were quickly reported by the media: Teams of Nomura traders singing company songs each morning to kick off the day; the unilateral decision by the Nomura HR department to change former Lehman female employees e-mail addresses to their married names without asking which they used professionally; the new employees training session where the women were taught how to wear their hair and serve tea, just to name a few. While these problems may simply be chalked up to differences in customs between the East and West, the more fundamental issues stemmed from the differences in corporate culture.

Lehmans corporate culture was in large part an embodiment of the personality of its former CEO, Richard Fuld. He was a trader by nature, and during his tenure as CEO, he instilled an aggressive and bold attitude among his employees. Lehman bankers were used to a culture of high risk tolerance, frequent use of leverage, and swift decision making.
Page | 34

Nomuras corporate personality, on the other hand, was more hierarchical, conservative, and favored more stable revenues based on moderate levels or risk taking.

The difference in corporate culture between the two firms also was evident in their approach to client prioritization. Lehman used to place more emphasis on fee generation as a determinant of which client to serve, while Nomura tended to place more weight on factors such as length of relationship and loyalty in regards to client relations. Consequently, conflicts arose between former Lehman and Nomura bankers regarding which client deals to take on. The former complained that Nomuras overly conservative attitudes were costing them opportunities to make money, while the latter looked down upon the formers all too willingness to abandon long term clients for the sake of a quick buck.

Watanabes plan to remedy the gap between Nomura and Lehman was to establish a new hybrid corporate culture.

1. He envisioned a situation where the Lehman system of pay-forperformance and low job security and the Nomura system of moderate pay with high job guarantees co-existed in the same organization. The results, however, looked closer to a Lehmanization of Nomura with some even describing it as a case of a reverse takeover of Nomura by Lehman. Lehmans influence became evident on many fronts. As the interaction between Nomura and former Lehman bankers increased in frequency, the main language of communication within Nomura, even in its Tokyo headquarters, quickly became English. According to one Nomura executive, more than half of conversations and 70% of e-mails are in English. 2. Nomuras HR system also changed.
Page | 35

Nomura employees were also offered a choice between the existing compensation scheme and a Lehman style performance based system with lower employment guarantees, and 45% chose the Lehman style package. In addition, the method of career development changed from Nomuras old generalist system, where employees rotated across different departments, to a Lehman style specialist system, where employees remained in one department to build up expertise. Also, many Lehman bankers were given key posts as heads of overseas business units. This may not have been a hard decision, given that those Lehman bankers had a track record of solid performance, while Nomuras past overseas achievements were mediocre at best. The heads of EMEA and Asia-Pacific equity markets, fixed income and investment banking all were occupied by former Lehman banker.

Nomura, however, did not accede to full control of the overseas business to the former Lehman bankers, opting to maintain the positions of global business unit chiefs with senior Nomura personnel. Instead, to help the globalization process, the business unit chiefs, who traditionally resided in Japan, were sent to the local foreign offices. Hiromi Yamaji, the global head of investment banking moved to London, and Naoki Matsuba, global head of equity capital markets relocated to New York. Despite the high titles and responsibilities given, the former Lehman bankers were not awarded commensurate levels of independence and decision making authority that they were accustomed to. In major deals, they often had to get approval from the Nomura global unit chiefs and frustrations began to mount regarding the slow and conservative pace of decision making.

Despite the high titles and responsibilities given, the former Lehman bankers were not awarded commensurate levels of independence and decision making authority that they were accustomed to. In major deals, they often had to get approval from the Nomura global unit chiefs and frustrations began to mount regarding the slow and conservative pace of decision making. Another major point of contention among ex-Lehman bankers was the lack of representation at the highest level of Nomuras management. One who felt such frustrations was Bhattal who, in July 2009, announced that he would be resigning within a years time. With Bhattals announcement the tension between the Nomura and former Lehman bankers reached a new level.
Page | 36

Things came to a head on March 2010, when the last of the guaranteed bonuses was paid out. Within a span of a month, 12 high level former Lehman bankers resigned. Nomuras top brass had anticipated a certain amount of defections with the end of guaranteed pay, but they were caught by surprise at the level and speed with which ex-Lehman talent began to leave. Soon they began to fear that, with the looming departure of Bhattal as well, the trickle would turn into a flood, resulting in a mass exodus of ex-Lehman personnel

In order to subdue a potential crisis, Nomuras top management made a major announcement on April 2010. Jasjit Bhattal was appointed a seat on Nomuras executive management board, responsible for setting the groups strategy and budget, the first foreigner to take such a position in Nomuras history. In addition, Nomura also announced that Bhattal would be in charge, as president and COO, of the newly created wholesale division that encompassed all of the overseas operations

Page | 37

Chapter -4
Re-entry into the US Market

Recently, Nomura has been making a strong push into re-establishing its US operations. Having lost out to Barclays Plc. in its bid for Lehmans US units, Nomura has been organically building up its US business since 2008.

It is scheduled to invest up to $2.5 billion towards this effort, and in 2009, it increased its US workforce by more than 1,200 persons. A solid US presence is necessary, in Nomura's view, to maximize the synergies from the talent and product capabilities gained through the Lehman acquisition, as well as to attract and maintain top class talent. In 2010 raised $3 billion, through a US bond offering, to fund its endeavors. Also, it has increased its US workforce from 650 in 2008 to 1,900 in 2010. Nomura has been successful in recruiting from its rivals, such as Bank of America and Deutsche Bank. In particular, many of those joining Nomura in the US are former Lehman bankers, who are reuniting with their colleagues in Europe and Asia. The chief risk officer, chief economist, fixed income head, and many traders and sales personnel of Nomuras US operations are former Lehman bankers.

Nomura considers the expansion of its US operations as a key piece of the puzzle of its overall global strategy for several reasons.

First, the US is attractive, in and of itself, as the worlds largest financial market. Second, a US presence is needed to attract and maintain top level talent.
Page | 38

Third, the US component is required in order to be able to provide customers global solutions and maximize the synergies with the Europe and Asia parts of the business acquired through the Lehman deal.

Page | 39

Page | 40

Chapter - 5
Financial Performance

Nomuras financial performance, since its acquisition of Lehman, has been turbulent.

In FY2008, Nomura recorded a net loss of 708.2 billion yen, the worst not only in its own but in the history of all public Japanese companies, for which Watanabe had to apologize to shareholders. While the financial crisis and disposal of distressed assets were the main contributors to the loss, the cost associated with absorbing the Lehman workforce also played a significant part. According to Nomuras 2009 Annual Report, of the net loss in FY2008, around 120 billion yen (16.9%) was attributable to the cost of integrating Lehmans operations. Recovery began from the second quarter of 2009, and for FY2009 Nomura recorded a net profit of 67.8 billion yen. In addition to the rise in the Japanese stock market, gains from Nomuras European units contributed to the turnaround. Recently, Nomura has posted seven consecutive quarters in the black, up to the fourth quarter of 2010.

In addition to returning to profitability, Nomuras standing in the global financial markets is also rising. For example, Nomura was the leading equities trader on the London Stock Exchange for six months running in the second half of 2009, a position previously held by Lehman before its collapse.
Page | 41

It is also participating in deals that were previously out of reach, such as being the sole M&A adviser in KKRs $1.5 billion bid for UKs Pets at Home. Also, helped by the acquisition of Lehman, Nomura has succeeded in regional revenue diversification, with its overseas revenue share rising to 43% in the first quarter of 2010. Overseas revenue even surpassed domestic revenue at one time, with the foreign share of revenue reaching 53% in the second quarter of 2009.

However, not all is positive.

Nomuras pace of recovery lags behind those of its global investment bank competitors. In the first quarter of 2010, when Nomura posted a net gain of $207 million, Goldman Sachs recorded $3.46 billion, Morgan Stanley $1.78 billion, and Citigroup $4.43 billion in profits during the same period. Nomuras ROE (Return on Equity) also falls short of its competitors.

For the third quarter of fiscal year 2009, Nomuras ROE was3.6%, a low level when compared to past performances as well as against Goldman Sachs 32% and Barclays Capitals 24%. Also, in terms of revenue per employee, Nomura garnered $137,000 per head, while Goldman Sachs employees made $434,000, and Morgan Stanley employees brought in $168,000 each.

These figures are an indication that Nomura has yet to fully realize the synergy potential from its Lehman acquisition, while, despite efforts at reducing redundancies in head count in 2009, the cost of compensation and benefits remains a financial burden.

Page | 42

Page | 43

Page | 44

Page | 45

Page | 46

Chapter 6
Conclusion
Following the acquisition of Lehmans operations, Watanabe said he plans to complete the integration of Lehmans employees within three years. To this end, Nomura has made significant inroads, along various dimensions, and Shibata assesses the post merger integration process to be 50% complete at this point. The merger of Nomura and Lehman is still a work in progress and it is too early to impart a final verdict on its success or failure. However, the case of Nomuras acquisition of Lehman provides meaningful lessons relevant to successful M&As, as much in the process as in the final outcome.

Lessons relevant to successful Mergers & Acquisitions

The Nomura case highlights the importance of early interest and involvement by the top management in the M&A process. The acquisition of Lehmans operations was planned and executed in a top down manner, with Watanabe himself taking the lead. As such, the deal was a high priority agenda from the get go and Nomura was able to act swiftly when the opportunity presented itself. Also, there was a clear top management division of labor allowing for efficient decision making: Watanabe at home communicating with regulatory authorities and board members, and Shibata on the ground negotiating the deal.

Nomuras case shows the importance of flexibility and room to move in the event of unexpected occurrences. Employee defections was a scenario anticipated by Nomura, however, they were caught off guard at the level and speed with which it occurred following the payment of the last bonuses.
Page | 47

In cross-border M&As, a typical dilemma is the issue of how much authority and independence to give foreign operations, as well as how much trust to have in the personnel of the target firm, whom there is a natural tendency to view as foreigners. Acquiring firms should consider honestly what forms and to what extent they are willing to empower the target firms employees as part of an M&A process Nomuras post merger integration process reaffirms the importance of culture as a key component of successful M&As. As expected, the biggest issue in the integration of Lehman was the conflict arising from the divergent corporate cultures of the two firms. To remedy the situation, Nomura has tried to mesh the two cultures, but the result, so far, has looked closer to a Lehmanization of Nomura.

A key factor common to all successful M&As is the level of open mindedness of the acquiring firm, and when the merger is between two firms of different nationalities, it becomes even more important. Thus, for those Korean firms that are seriously contemplating cross-border M&As as a means to overseas expansion, an open mindset towards foreign cultures is a prerequisite. And such a mindset is best developed beforehand, rather than waiting until after the acquisition.

Page | 48

Bibliography

1. Britannica Online Encyclopedia. 2. Wikipedia. 3. Funding Universe, Nomura Securities Company, Limited.

4. Laura Kulikowski, Lehman Brothers TheStreet.com (August 22, 2007).

Amputates

Mortgage

Arm,

5. Wall Street Journal, Nomura Stumbles In New Global Push, 2009 (July 29). 6. Wall Street Journal, Nomura Turns to a Foreigner from Lehman, 2010 (March 17). 7. Bankruptcy Litigation Blog

8. Forbes.com, Nomura Profit Vindicates Lehman Gambit, 2009 (July 29) 9. Financial Times, Fresh push at Nomura to realize ambitions, 2010 (March 18).

10. Financial Times, Nomura offers Lehman-style contracts, 2009 (April 5). 11. Foley, C.F., Meyer, L.N., 2009, Nomuras Global Growth: Picking up Pieces of Lehman, Harvard Business Review.

Page | 49