Dissolving the Daiwa Securities SMBC joint venture and buying back the 40% stake (2009)

Attach to a bank, or keep your independence

At the core of this decision lies an old question for securities firms: attach yourself to a bank’s capital in order to take scale, or carry the business yourself in order to keep independence. Daiwa chose the former in 1999, founding its wholesale arm with Sumitomo, and swung back to the latter ten years later by buying back the 40%. Given that the balance broke once Sumitomo Mitsui acquired Nikko Cordial Securities and began to seek control, one can see that a venture dressed as an equal partnership in fact floated on top of a balance of power. The difficulty of holding banking and securities inside one company is concentrated in that tenth-year dissolution.

The price of choosing independence again was not small. The wholesale business it bought back generated consecutive losses in the post-Lehman market, and the amplitude of its earnings has dogged the company ever since. Even so, Daiwa built its banking function in-house through Daiwa Next Bank, reintegrated wholesale into the parent, and redrew its outline as an independent full-line securities house. In an era when bank-affiliated brokers have become the mainstream, the question of what strength Daiwa stands on while keeping the flag of independence flying is one that carries over into the present company as it tries to shift to wealth management.