JAPAN'S SOFTBANK IS SHAKING UP A ONCE-SHELTERED FINANCIAL SYSTEM
By BILL SPINDLE
Staff Reporter of THE WALL STREET JOURNAL
June 21, 1999
TOKYO -- When Yoshitaka Kitao set out to build a financial-services franchise on the Internet, he did something no Japanese financier in his right mind would have done a few years ago. He skipped the courtesy call to the mighty Ministry of Finance.
"Why visit them?" Mr. Kitao asks. "They're responsible for delaying Japan's financial revolution."
Instead, Mr. Kitao, a senior executive at Softbank Corp., made fact-finding visits to dozens of Internet-based financial companies in the U.S. Now, he and Softbank have harnessed a team of U.S. Internet upstarts -- making large investments in E*Trade Group Inc., InsWeb Corp., Sonnet Financial Corp. and E-Loan Inc. -- to mount an assault on nearly every niche in Japan's previously sheltered financial system: stock trading, currency dealing, insurance, auctions, and more. "We're trying to create an entirely new financial empire," says Mr. Kitao.
Softbank is also taking on Japanese financial markets themselves. The company last week grabbed headlines by announcing a deal to help the Nasdaq Stock Market set up in Japan a market similar to the one operated by Japan's leading securities industry group (see article).
Softbank's would-be empire is the stuff dreams are suddenly made of in this country's rapidly changing financial industry. Mr. Kitao, 48 years old, quit a prestigious job at Japan's top broker to join a software distributor, hardly a step up in the eyes of Japan's traditional financial hierarchy. He hired a team of his former charges, who themselves had become disenchanted with traditional Japanese business careers.
The blitzkrieg of deals they have cut over the past year to import online finance is one of the clearest signs yet that the country's financial deregulation is energizing an industry long hampered by outdated business practices and bureaucratic guidance. It has also made Mr. Kitao and Softbank the go-to guys in Japan for a half dozen U.S. Internet companies and now for Nasdaq. "They're one of the smartest companies I've ever come across, much less worked with," said InsWeb founder Hussein Enan.
Through its remarkable string of early investments in U.S. players such as Yahoo! Inc. and GeoCities, Softbank is already a force in Silicon Valley. Its plan now is to link a raft of financial services through the hub of Yahoo Japan Corp., a Softbank-controlled joint-venture with Yahoo of the U.S., into perhaps the most comprehensive financial supermarket on the Web.
Still, Mr. Kitao's plans represent a gamble. His E*Trade Japan joint venture, for instance, is only now starting operations -- and so are several other U.S. online traders such as Charles Schwab Corp. and Donaldson, Lufkin & Jenrette Inc.'s DLJdirect online service. Skeptics question whether online finance will catch on fast enough to pose a real challenge to traditional financial institutions here. Financial "supermarkets" outside of cyberspace have never lived up to their promise, critics say, and it is unclear that they will take off on the Net.
Softbank's move into electronic finance is part of a broader push by outsiders taking on Japan's financial institutions. Convenience stores are looking at moving into financial services, and trading companies are hawking mutual funds and buying brokers. But no other upstart in Japan, domestic or foreign, has attempted to take on Japan's whole entrenched financial industry at once.
"The financial community in Japan is a flock of sheep," says Softbank's president, Masayoshi Son. "Kitao is different. He's not afraid to break the rules."
'I Planned to Be President'
Mr. Kitao's idea was first formed in a flurry of reading when Mr. Son asked him to sign on with Softbank in 1995. Mr. Kitao, then at Nomura Securities Co., handled Softbank's account as an investment banker. He had never seriously thought about leaving, despite offers from Wall Street investment banks. "I planned to be president someday," he says.
Nonetheless, Mr. Kitao plowed through 20 books on the Internet, which then was increasingly becoming the focus of Softbank's business. It was clear, he says, "that the Internet was coming to Japan and financial services would fit well." He decided to take the leap.
A year later, Messrs. Kitao and Son decided the time was right to move on the financial industry. And the first thing Mr. Kitao did was begin assembling the group he would need to make it work.
Robert Takeuchi, a Japanese-American, had worked two years for Mr. Kitao selling Japanese stocks in Nomura's New York office in the late 1980s. Mr. Takeuchi had come to admire Mr. Kitao for his grueling work schedule; he worked all day, then stayed up half the night badgering the traders who executed his customers' orders in Tokyo. But what most impressed him about Mr. Kitao was his advice to look beyond Nomura. Mr. Takeuchi's career at Nomura would be doomed by the company's inbred culture, Mr. Kitao said.
Mr. Takeuchi left Nomura for a Wall Street investment bank, with the help of contacts provided by Mr. Kitao. But Mr. Kitao kept in touch, and Mr. Takeuchi wasn't surprised to get a call from him at work in 1996, more or less ordering him to sign on with Softbank. "I always figured I'd work for him again," Mr. Takeuchi says.
The Big Bang
Within months, Mr. Takeuchi was trying to keep up with Mr. Kitao as he paced the streets of Manhattan one evening, talking excitedly about the potential for financial services on the Net in Japan. The Japanese government had embarked on a sweeping financial-industry liberalization -- dubbed the Big Bang -- that would knock down regulatory walls stifling competition in everything from foreign-exchange dealing to mutual-fund sales. Meanwhile, the Internet was finally catching on among Japanese.
The pair made one of their first moves in January 1998, when Mr. Kitao noticed a small newspaper article about Morningstar Inc. establishing a joint venture with a Japanese company. He had been eyeing the U.S. mutual-fund ratings company as a potential Softbank partner, a company that could offer the sort of independent mutual-fund analysis he wanted as part of Softbank's financial-services supermarket. He picked up the phone, called Mr. Takeuchi in New York, and told him to work fast.
Mr. Takeuchi telephoned Morningstar Chairman Joe Mansueto that day. He was on a plane to Chicago within 72 hours, arranged a meeting between Messrs. Kitao and Mansueto in San Francisco inside a week, and had what Morningstar officials decided was a superior joint-venture offer before them within 10 days. Morningstar executives were impressed by the speed of the deal. "Unlike so many Japanese companies, they moved quickly and decisively," Mr. Mansueto says.
Mr. Kitao acted again in June. He needed an e-broker as the linchpin of Softbank's financial-services package. To get it, he used Softbank's secret weapon in dealing with the U.S. market: Mr. Son, the Softbank founder who masterminded the company's U.S. Internet efforts. When Mr. Son picked up his phone in Tokyo to call E*Trade Chairman Christos Cotsakos, Mr. Cotsakos knew who he was. Mr. Son was one of E*Trade's earliest investors.
Within weeks, Mr. Cotsakos and a trio of E*Trade officials flew to Tokyo and agreed to give Softbank a 60% stake in a Japan joint venture. A few weeks later, Messrs. Son and Kitao flew to San Francisco, and with a few minutes discussion in Mr. Cotsakos's office, they agreed to give him $450 million for a 28% stake in E*Trade itself.
With that, Mr. Kitao turned his attention back to Japan. To get E*Trade up and running he needed two things: a Japanese chief executive and a seat on the Tokyo Stock Exchange. For the first, he turned again to one of his former employees at Nomura. Taro Izuchi, 42, had worked for Mr. Kitao in Nomura's corporate-finance division in the early 1990s, and began growing disillusioned with the big brokerage firm after a payoffs-to-racketeers scandal swept Nomura and the rest of the industry. As details of the payoffs emerged and Nomura's fortunes sank, Mr. Izuchi and Mr. Kitao met for lunch regularly, often hashing over Mr. Izuchi's frustrations. Last year, Mr. Izuchi jumped ship to his old boss, and soon he was president of E*Trade Japan, the country's first Internet trading company.
'Out of the Woodwork'
The pair considered buying a stock-exchange license, but decided it would be more efficient to simply buy a broker. That would provide a back office and accounting division, as well. Putting out some feelers through Mr. Kitao's contacts, even they were stunned at the response. Full deregulation of brokerage commissions -- a key liberalization the Japanese government has promised -- was more than a year away. But small brokers all over Japan could see the writing on the wall. "Candidates came out of the woodwork," says Mr. Izuchi. "It was extraordinary."
In October, Softbank made headlines in the financial press with its purchase of Osawa Securities Co., a small broker in the suburbs of Tokyo.
Meanwhile, Softbank's tear through the U.S. continued -- with the help of another new member of the team. Shinji Yamauchi, 40, had bailed out of traditional corporate Japan long before even Mr. Kitao, quitting a top-flight trading company after a stint at Columbia Business School in 1989 to join Morgan Stanley. He figured he would never work for a Japanese company again.
It was while he was with Morgan Stanley, and Mr. Kitao with Nomura, that the two first met across a table at Softbank in 1994. They were competing to represent Mr. Son in a bid to purchase Ziff-Davis Inc. Mr. Yamauchi won, a victory that led to Mr. Kitao's call a few years later asking him to join Softbank.
After guiding a Softbank subsidiary through a public offering, Mr. Yamauchi began working closely with Messrs. Kitao and Takeuchi as they moved through Silicon Valley on intense weeklong trips filled with meetings. In October, they cut a deal with Sonnet Financial, which aggregates small-lot foreign-exchange trades into cheaper-to-trade bundles. In December, they signed on InsWeb and its online insurance marketplace. During one January trip, the trio crammed in 13 meetings in only a few days, including one in the airport lounge before taking off to return to Tokyo. That helped paved the way for a deal with E-Loan.
Mr. Kitao conducted the negotiations with bravado. He surprised even his own staff when Mr. Enan of InsWeb insisted on a confidentiality agreement, a step that could have ground discussions to a halt while lawyers were called in to sign off. Mr. Kitao whipped out a pen on the spot, signed the document and tossed the papers back on the table, saying, "OK, now talk," according to people who attended the meeting.
Today, Mr. Kitao sits in a new office, surrounded by bouquets of flowers sent by Wall Street bankers as congratulations for the recent opening of E*Trade. And in his spare time, Mr. Kitao says, he is now writing a book on the Internet.
|
