Lehman Brothers () appears to have averted a -like financial crisis with
plans to raise $6 billion. But the storied investment bank, now the smallest of
the major Wall Street firms, may ultimately face the same fate: the end of its
independence. Takeover rumors have dogged Lehman ever since the bank went public
A few months after the IPO, Lehman’s stock tanked, prompting speculation that
insurance company Travelers () would swoop in at the sale price. Investors were
betting on much the same for Lehman in 1998 after the collapse of hedge fund
Long Term Capital sparked a bankruptcy scare. Yet Lehman always emerged intact.
investment banking analyst
“Somehow these guys never die,” says Roy Smith, a professor at New York
University’s Stern School of Business. Foreign Suitor? This time around the
outcome could be different. Over the past decade, Lehman CEO pushed aggressively
to remake the onetime bond shop into a diversified financial institution. By
some measures, it worked. In 2007, fixed income accounted for 31% of revenues,
compared with 66% in 1998.
But the business model of Lehman-which now dabbles in everything from bond
trading to equity underwriting to M&A, and dominates none-simply doesn’t work in
an environment that requires either strength or size. Lehman doesn’t have a
distinct specialty like boutique advisory firm Lazard (). Nor does it have the
heft and scale of big, commercial banks like JPMorgan Chase () and Bank of
America () that are market leaders in a number of areas. “It’s hard to see where
Lehman fits in,” says analyst David Hendler.
“Lehman needs a bigger-balance-sheet bank that can use its skill set.” The
question remains, though, which financial company would step up as a potential
suitor for Lehman, whose stock price is currently (BusinessWeek.com, 6/4/08).
JPMorgan Chase and Bank of America ( BusinessWeek , 6/4/08), but the two are
still busy digesting recent acquisitions. And another subprime survivor, Wells
Fargo (), doesn’t want to get into the investment banking game. That leaves a
foreign player such as Britain’s HSBC () or Barclays (). Although both have
their (BusinessWeek.com, 5/13/0 8) from the credit crunch, the two are looking
to expand in the U.S. Rocky History Still, absorbing Lehman would be a yeoman’s
Unlike Bear Stearns, which has a couple of strong assets in its clearinghouse
and prime brokerage business, Lehman has few standouts. The once-proud, fixed
income business, which has had three heads in the past three years, remains in
shambles after moving aggressively into risky subprime securities. Adding to its
woes, top bond executive Rick Rieder left in May to start a hedge fund.
Meanwhile, Lehman pales next to Morgan Stanley () and Goldman Sachs () in
mergers and acquisitions, where it ranks in the middle of the pack. “They don’t
have a long-standing history in investment banking to thrive in this
environment,” says Hendler. Then, of course, the bank has a history of rocky
marriages. When American Express () purchased Lehman back in 1984, it was a poor
fit almost immediately.
The freewheeling style of Lehman’s legendary bond traders didn’t mix well with
the staid atmosphere of its corporate parent. Executives clashed on everything
from pay packages to critical decisions like asset sales. The two finally
divorced a decade later.