Will Lehman Pawn This Crown Jewel?

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Yesterday, I wrote about Lehman Brothers’ (NYSE: LEH) discussions to sell $40 billion in real estate assets and securities. The troubled broker has to act to strengthen its balance sheet and restore investor confidence. Today, it emerged that the firm has contacted potential buyers regarding its asset management unit, Neuberger Berman. Is Lehman wisely considering all its options or is it thrashing about aimlessly?

Neuberger is quite a catch
In 2003, Lehman paid $2.8 billion for Neuberger Berman in a cash-and-share deal. Today, analysts believe the unit could be worth $8 billion to $10 billion. (For reference, Lehman’s market capitalization fell below $10 billion today, while fund manager Legg Mason’s (NYSE: LM) market value is less than $6 billion).

In other words, since the acquisition closed almost five years ago, the value of the Neuberger franchise has more than tripled (note that Neuberger’s value creation is somewhat overstated, as Lehman contributed some of the assets under management when they combined) while Lehman shares have lost more than half their value. Understandably, that discrepancy is a sore point for the 30 top portfolio managers who received substantial Lehman share packages with a long-term lock-in. Those key executives would now require sizable guarantees from a buyer, effectively reducing the consideration Lehman can expect to walk away with.

Neuberger is one of Lehman’s crown jewels -- a superb business that delivers a dependable earnings stream. The acquisition has exactly fulfilled Lehman’s ambition to diversify its earnings away from its dominant fixed-income activity. (No wonder Blackstone (NYSE: BX) is circling these waters; Neuberger would add nicely to its asset management business.)

Does Lehman have an endgame?
Naturally, Lehman is now reluctant to part with this jewel out of duress (potential buyers must see this as an extreme buying opportunity). Alas, it doesn’t have a noncore asset in its back pocket like Merrill’s (NYSE: MER) stake in financial information provider Bloomberg or Morgan Stanley’s interest in index/ software provider MSCI (NYSE: MXB).

Furthermore, massive repeated capital raisings from Lehman and other banks such as Morgan Stanley (NYSE: MS) and Citigroup (NYSE: C) have dampened investor appetite for another share offering -- particularly as share prices have continued to fall.

Lehman has managed to string the market along so far (albeit with a heavy toll on its share price), but as speculation rises concerning possible losses in the third quarter, the firm appears to be running out of options very fast.

When you conduct your affairs imprudently, you may ultimately be forced to make difficult decisions to repair the damage. The longer you wait to make those decisions, the narrower your set of choices. Those hard truths are looming like a freight train in front of Lehman and there’s no getting out of its way.

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