Wells Fargo is teaming up with Nikko Securities to form a high-tech investment management firm that will attempt to crack the huge Japanese capital markets.
Under an agreement announced Tuesday, the San Francisco banking company will receive $125 million from Nikko to provide the partnership with the computer-based expertise that has made Wells Fargo the largest U.S. money manager.
Nikko, one of Japan's four big securities houses, will provide Wells Fargo with access to Japanese clients along with the up-front money.
The deal offers Wells Fargo the opportunity to enter the Japanese market shortly before a change in the law opens Japan's pension investment management business to new competition.
Over the next decade, Wells Fargo estimated, Japanese institutions will invest $300 billion to $400 billion in funds managed under "passive," or long-term, strategies based on computer models and broad indexes.
The agreement calls for the bank to merge its highly touted Wells Fargo Investment Advisors and a related trust unit into the new joint venture. The investment subsidiary manages $70 billion for institutional clients, such as corporate and government pension funds.
Nikko will pay the $125 million to Wells Fargo for a 50% interest in the venture and will direct its passive institutional investment activity to the partnership, which will have its headquarters in San Francisco.
The venture will be managed by the existing Wells Fargo team, and its staff of 200 will become employees of the new entity, which has not been named yet. An office also will be opened in Tokyo.
The price represents nearly 10 times the $13 million in profits of the two Wells Fargo units in 1988. When calculated on the basis that Nikko will receive half the profits from the joint venture, the price values the units at close to 20 times earnings.
"The risk is really on Nikko's side because they are putting up the $125 million," said Perrin Long, an analyst with Lipper Analytical Services in New York. "If you look at it that way, it is conceivable that Nikko might not recover its investment for five or 10 years."
Tokyo-based Nikko has been marketing some investment products designed by Wells Fargo to its Japanese clients for two years. It also has been stressing the use of high-tech computer indexing strategies in a push to expand its money-management business worldwide.
Wells Fargo's investment subsidiary pioneered the use of indexing--investing in a basket of securities designed to mimic the movement of the market. Under the leadership of Frederick L. A. Grauer, the unit has applied quantitative strategies to develop long-term portfolios for institutional customers.
"Nikko is a leader in this field in Japan, but they are not nearly as big as we are," said Robert L. Joss, a Wells Fargo vice chairman. "The whole modern portfolio theory is an American innovation, but the Japanese have picked up on it and are adapting it to their markets."
The timing of the deal is important. A letter of intent was negotiated over the last 30 months and a final agreement and regulatory approvals in the United States and Japan are expected by the end of the year.
Pension fund investments in Japan are controlled by 40 insurance companies and trust banks. But in the first quarter of 1990 a new law will open the field to other financial companies.
Yasuo Kanzaki, executive vice president of Nikko, said: "This partnership ensures our further dominance in investment technology, and thus positions us well for the opening of the Japanese pension market."
The proposed joint venture would be the latest partnership between big Japanese financial institutions and their U.S. counterparts.
On June 13, Security Pacific National Bank in Los Angeles said it will sell 5% of its consumer and commercial financing subsidiary to Mitsui Bank for $100 million, which valued the units at about 15 times earnings.
Nomura, the world's largest brokerage, has invested in at least three U.S. financial firms, including Wasserstein, Perella & Co., a top New York investment bank. Nikko owns a stake in the Blackstone Group, a New York investment boutique, and Fuji Bank received approval last week from U.S. regulators to form a joint venture with a New York investment firm, James D. Wolfensohn International.