On Tuesday, international banking giant Citigroup (NYSE:C) announced that it will put up $10.8 billion in a tender offer for Japan's Nikko Cordial. The acquisition would be the largest deal ever for Citi CEO Charles Prince, who has a stated goal of upping the company's international contribution from the current mid-40% range to 60%. The takeover would also be the largest acquisition by a foreign company in Japan.
Citigroup serves more than 200 million customers worldwide and has a brand that can be found globally (similar to, for example, Coca-Cola). As one of the largest global financial centers, Japan is not a new market for Citigroup. Besides the bank's namesake operations in the country, Citi already has a joint venture with Nikko, Nikko Citigroup, which focuses on corporate banking and brokerage services.
The past
Thus far, Citi's experience in Japan has been less than stellar. Last year, the bank faced the same judgment day as other consumer lending organizations when Japan's government lowered the cap on consumer lending rates. The changes lowered the maximum interest rate for consumer lending to 20% from nearly 30%, prompting Citi to take a $375 million charge to increase loss reserves and decide to scale back its Japanese consumer finance operations by 80%.
This followed a big debacle in 2004, when Japan kicked Citi's private banking operations out of the country following some questionable activities, including alleged money laundering. Though private banking was a relatively small contributor to Citi's overall results, it's hard to calculate the cost of the kind of business connections brought by high-net-worth clients in private banking, as well as the harm to the brand's reputation in Japan.
The future
With a successful purchase of Nikko, Citi would be staking a bigger claim in Japan under similarly questionable circumstances. Nikko has been suffering recently because of a profit-inflating accounting scandal that has landed the firm hefty fines and a possible delisting from the Tokyo Stock Exchange. While official disciplinary actions came just recently, questions were raised much earlier, and Nikko's stock has suffered -- it's down more than 30% since it peaked last March, while competitors like Nomura Securities (NYSE:NMR) have recently been pushing new 52-week highs.
So is it all a crazy move for Citi? Probably not. Despite Citi's troubled history in Japan and the current troubles at Nikko, the move could prove very successful. Going forward, success in investment banking is widely expected to come outside the U.S., as underscored by Morgan Stanley's (NYSE:MS) recent move to buy out its JV partner in India.
Japan in particular is well-positioned to be a force in global markets in the coming years. It houses the most established exchange in the hot Asia region, and the country itself is in the process of recovering from a 13-year bear market that sent its markets down 80%. Since its low point in 2003, the Nikkei Index is up more than 100%, and the economy has been strong enough that Japan's central bank has begun bringing interest rates off their previous "free money" levels.
The possibilities
Price could also make the acquisition a big success for Citi. With the stock still depressed from a combination of 2006's mid-year slippage and the accounting scandal, buying Nikko now could be a sweet deal. Citi's offer represented a premium of roughly 15%, though a surge in the stock just prior to the offer left the proposal looking far less generous.
Of course, price could also hold up Citi's move. Nikko's largest shareholder, Chicago-based Harris Associates, has been very public about the fact that it sees Citi's offer as far too low. Recent reports have quoted David Herro, the chief investment officer at Harris, as saying that Nikko is worth at least 2,000 yen per share, or 48% more than Citi is currently offering. Investors currently seem to be betting with Harris, as Nikko's shares rose above Citi's offering price in Wednesday's trading. The low-price bar set by Citi could also encourage rival bidders to hop into the ring and lob a competing offer.
The acquisition offers a mixed bag for Nikko shareholders. Though the price is low, a takeover by Citi would kill the possibility of a drastic fall in share price if the Tokyo Stock Exchange did decide to delist the firm. For Citi shareholders, the deal would represent the most recent move by Chuck Prince to bring some spark back to the sleepy banking giant. Citi could end up having to cough up some more scratch to get the deal done, but a strong presence in the Asian underwriting and banking markets should pay off in the coming years.
If you'd like to see how Citigroup has been doing on the research side, you can check out its performance on The Motley Fool's CAPS service.
Fool contributor Matt Koppenheffer has not been involved in any Japanese scandals of any sort (yet) and does not own shares of any of the companies mentioned. The Fool's disclosure policy is always sparkly clean and scandal-free. You can check out Matt's CAPS performance here or visit his blog here.
