Lehman a big gamble for any buyer


Any buyer of Lehman Brothers Holdings Inc would likely be taking a big gamble even if they picked it up at a fire sale price.

Lehman’s shares plunged 45% on Tuesday and touched their lowest level since October 1998 on growing concerns that the fourth-largest Wall Street investment bank won’t be able to raise the capital it desperately needs to survive the global credit crisis.

The firm’s market capitalization fell to a mere $5.4 billion, valuing the whole company at even less than its asset management business, which analysts have said could be worth around $8 billion. But despite the plunging price and attractive businesses like its Neuberger Berman wealth management unit, Lehman remains a difficult company to value. That is largely because of the uncertainty about the value of troublesome assets such as commercial real estate related holdings, experts said.

It will take someone with deep pockets and possibly government backing to attempt a takeover, as in the case of JPMorgan Chase & Co’s purchase of Bear Stearns earlier this year, said Michael Farr, president of investment management company Farr, Miller & Washington. “It’s not so much the price as we found out with Bear Stearns,” Farr said. “It’s what are you really buying -- what sort of potential liabilities, what type of counterparty risk could you be forced to assume. That is anything but transparent.”

Lehman has already taken $7 billion in credit-related write-downs and losses since the start of the global credit crisis. It has raised about $12 billion in capital this year through common equity, preferred stock and convertible securities offerings, but analysts say that may not be enough. The company had a Q2 loss of $2.8 billion, or $5.14 per share. Analysts on average expect a Q3 loss of $3.04 per share, according to Reuters Estimates.

On Monday, Merrill Lynch analyst Guy Moszkowski increased his projected loss for Lehman to $6.50 per share from $3.94, saying the write-down could total $7.1 billion. Ladenburg Thalmann analyst Richard Bove increased his estimate to $3.17 per share from $2.32. Late on Tuesday, Lehman announced that it will report its Q3 results and “key strategic initiatives” on Wednesday at 7:30 a.m. in New York (1130 GMT).


Lehman has considered selling all or a part of its asset management business and disposing of commercial real estate related assets, sources have previously said. Dow Jones Newswires reported on Tuesday that talks on a possible investment from Korea Development Bank broke down, citing the chairman of South Korea’s top securities regulator, Jun Kwang-woo. But a spokesman for the Korean regulator denied the report, telling Reuters that Jun never made the statement. The Dow article also quoted an unnamed government official as saying KDB had decided not to invest in Lehman.

Ladenburg’s Bove said the company has had trouble raising capital as there is a gap between what the management thinks its assets are worth and what the market is willing to pay. “Clearly the company does not believe that it has a serious balance sheet problem and it simply refuses to take what it believes are fire sale prices for its key assets,” Bove wrote in a research note. “Buyers seem to believe that Lehman is overvaluing its assets and refuse to hit the bid.”


Analysts said buyers with different motivations may be tempted to look at buying Lehman. These could include foreign banks, such as KDB and Barclays Plc, which may want an investment banking franchise. Other companies such as investment manager BlackRock Inc could be attracted to Lehman for its asset management business. “If the current stock price made it attractive, then the question is what the other parts are worth or what would they cost,” said Joel Greenberg, a partner at law firm Kaye Scholer.

Potential suitors could also make unsolicited bids just for the part of the business they want, such as asset management, but that may be tough to pull off as well. “There are lots of built-in shark repellents,” Greenberg said. “There are lots of contracts that have change of control provisions in them.” Taking on the whole business will likely need government support, Farr said. “Somebody’s got to be prepared to draw a line and say it won’t get any worse than this.”

Some say a bailout by Washington is less likely because of the rescue of Bear and last weekend’s US government takeover of housing finance behemoths, the government sponsored enterprises Fannie Mae and Freddie Mac. “Given the combination of moral hazard and their focus on the GSEs, I would see it unlikely that Lehman would get a government bailout,” said Tim Backshall, chief analyst at Credit Derivatives Research. Without someone giving that kind of guaranty, it will be hard for a potential buyer to come to terms with the risk, Farr said. “What do you pay for an unknown liability?” said Farr, whose firm manages more than $550 million. “Go to Las Vegas ... they will give you a free drink. You will have more fun when you lose your money.” (Reuters)

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