2012Lehman Likely to Face Hard Bargaining Over Neuberger
By: PARITOSH BANSAL And MEGAN DAVIES
Reuters
September 11, 2008
NEW YORK: Lehman Brothers has made a tough call by deciding to sell a big piece of its investment management business, seen as one of its crown jewels. Now, it could face an even harder task: getting a good price for it. The U.S. investment bank has struggled to raise capital to offset write-downs taken because of the credit crisis. Some bankers have said that Lehman's plan to sell a majority stake in its valuable management business, including the asset manager Neuberger Berman, is a sign of the desperate straits it is in.
"Neuberger Berman is a first-class property that people will be interested in," said Eric Weber, chief operating officer of Freeman & Co., a merger advisory firm focused on financial services. "You certainly have a stressed seller who needs capital. That presents interest plus opportunity. People smell blood in the water." Lehman released its quarterly results and plans for raising capital Wednesday, about a week earlier than planned, after investors sold the stock heavily on concerns that it would not be able to raise sufficient funds to continue operating, putting the company's survival in doubt.
It posted a quarterly loss of $3.9 billion and said it would shed some assets, including the sale of about 55 percent of a portion of the investment management division. That includes Neuberger and the private equity and wealth management businesses. Analysts say that the businesses could be worth about $8 billion. The division - which is headed by George Walker, a former partner at Goldman Sachs partner and the second cousin of President George W. Bush - is a steady source of income for Lehman, and the decision to sell a stake is not a happy one.
The company had $273 billion in assets under management as of Aug. 31, with $98 billion in stocks, $93 billion in bonds and other fixed-income investments, $44 billion in money markets and $38 billion in alternative investments. That makes it roughly the same size as Wachovia's Evergreen Investments, which had about $245 billion in assets under management as of June 30, but it is far smaller than BlackRock's $1.428 trillion, also as of June 30. Revenue for Lehman's investment management unit was $634 million in the third quarter, down 21 percent from a year earlier.
"As a long-time industry observer, it is a heartbreak to watch," said Elizabeth Nesvold, managing partner at the investment bank Silver Lane Advisors. "Neuberger is a special asset. For some lucky buyer, there is a phenomenal opportunity." Lehman said that a majority stake sale would improve its capital ratios and increase its tangible book value by more than $3 billion. It bought Neuberger in 2003 for about $3.1 billion.
Lehman said it was in "advanced discussions with a number of potential partners." Its chief executive, Dick Fuld, noted that company executives had spoken to financial and strategic investors about the unit. Private equity firms like Kohlberg Kravis Roberts, Hellman & Friedman and Bain Capital have been reported to be interested in acquiring the business.
Having several bidders in competition for the unit would give Lehman more leverage in the sale negotiations, said William Bates, a partner at the law firm King & Spalding. A partial sale also reduces the amount of cash a potential buyer has to come up with, opening the field to an even bigger universe of companies, said Nesvold, of Silver Lane.
The planned stake sale excludes the part of the management unit that consists of Lehman's minority stakes in hedge fund managers like Ospraie Management. Ospraie closed its flagship fund this month after heavy losses. Analysts said that trying to sell those assets as well would have complicated the sale process further. Bankers said Lehman would probably have to sell the management business at a discount. Several also said that Lehman might also have to agree to help finance the purchase for a buyer.
"I think they'll end up with a softer price but not an awful price, because it's a good asset and there will be competition for it," said Marshall Sonenshine, chairman of the investment bank Sonenshine Partners.
Sonenshine Partners is a leading independent investment bank focused on providing integrated strategic, financial and corporate advisory services. The firm was founded in 2000 and is headquartered in New York City.