Japan’s SMFG readies itself for possible takeover of Jefferies
Sumitomo Mitsui’s banking unit holds minority stake in US investment bank
Japan’s second-largest lender, Sumitomo Mitsui Financial Group, is working on plans for a possible takeover of Jefferies, as investor concerns continue to weigh on one of Wall Street’s most aggressive investment banks.
SMFG, whose banking subsidiary Sumitomo Mitsui Banking Corporation holds a minority stake in Jefferies, has tasked a small team with making sure it is ready to act if Jefferies’ falling share price presents an opportunity, according to people familiar with the matter.
A takeover would have to overcome significant barriers, including regulatory obstacles and a culture gap. Any move by SMFG is not imminent, the people warned, and it is also uncertain whether Jefferies executives would be willing to sell at a depressed share price.
Executives in Japan believe that senior Jefferies bankers and large shareholders will be looking for an eventual exit with SMFG the most likely buyer, however. Chief executive Rich Handler, president Brian Friedman and chair Joe Steinberg all have substantial stakes in the investment bank.
Jefferies declined to comment. A spokesperson for SMFG said: “Jefferies is our important partner. We decline to comment on hypothetical assumptions or rumours.”
SMFG’s latest preparations follow five years of stake building in Jefferies. The bank first took a 5 per cent stake in 2021 and agreed in September to increase its position to up to 20 per cent.
Jefferies shares have fallen about 40 per cent since September, amid questions about its exposure to the collapsed auto-parts group First Brands and wider underwriting standards. Jefferies’ market capitalisation has now fallen to about $8bn, while SMFG’s sits at nearly ¥20tn ($125bn).
Taking control of the Wall Street name remains key to SMFG’s strategy to join the ranks of the world’s top investment banks, said senior figures.
The bank has sought to increase global reach before through the acquisition of securities firm Nikko from Citi in 2009 and then via a partnership with boutique Moelis in 2011.
“That’s when we started to think about an alliance with a full [investment banking] firm, knowing we needed to do something to enhance global capacity and that in [equity capital markets] and cross-border M&A were two areas we really needed to enhance,” said one person with knowledge of the bank’s long-term strategy.
People familiar with the matter said senior Jefferies bankers, including Handler and Friedman, would be in Tokyo this week to celebrate the partnership and forge closer relationships between the two firms. The US bank will also hold a board meeting in Japan.
SMFG has a voting interest of less than 5 per cent in Jefferies, as exceeding that threshold would trigger regulatory consequences.
Jefferies and SMFG recently agreed to launch an equities joint venture in Japan — with securities arm SMBC Nikko — which the Japanese lender is treating as a test case for integration and a form of due diligence.
Others within SMFG are wary of the move, believing that it could alienate SMBC bankers in Japan and provoke a culture clash. Senior bankers at SMFG and SMBC admit that it would be challenging to integrate the cultures of the conservative Japanese institution and the hard-charging investment bank.
With Jefferies, SMFG hopes to emulate the partnership between its local megabank rival MUFG and the US investment bank Morgan Stanley, formed as part of a rescue fundraising package during the 2008 global financial crisis.
The combination of a blue-chip Wall Street name with the balance sheet of a Japanese megabank has given MUFG a leading position in the Tokyo market and access to global fundraising and deal flow.
Japan’s third megabank Mizuho is also bulking up through international acquisitions, buying boutique US investment bank Greenhill for $550mn in 2023.
However, the history of Japanese banking is littered with examples of troubled M&A, including Nomura’s purchase of Asian and European assets from the collapsing Lehman Brothers.
SMFG is willing to hold off on a deal if market conditions or Jefferies management do not allow a full takeover, the people familiar with the matter said.