At some point, the Lehman Brothers saga will end.
But investors shouldn't bank on that ending being happy, judging by recent developments. Those include reports Lehman is planning to sell large amounts of assets, including a piece of Neuberger Berman.
Talk that Lehman is looking to sell a chunk its much-prized asset-management business as well as large amounts of commercial mortgage-related assets, has intensified in the past few days.
The positive view on the putative deals is that management is taking bold steps to put Lehman's balance sheet on a sure footing. Discarding large amounts of problem mortgages may mean taking losses on those assets, but they will cease to poison investors' perceptions of the company.
And while selling a big slice of Neuberger would reduce access to a stable revenue stream -- and undermine Lehman's diversification strategy -- it also could bring in billions of dollars in fresh cash. Bernstein Research values Lehman's asset-management business at $7 billion.
The less charitable view: Lehman's fiscal third quarter, which closes at the end of this month, has turned ugly and the bank is racing to get deals done before the period ends. Once again, Lehman's management has been caught flat-footed by the severity of the credit crunch, pessimists might say. The fact that Lehman is considering selling a piece of Neuberger could be bad news. Two weeks ago, some analysts thought such a deal wouldn't be necessary.
Merrill Lynch's Guy Moszkowski said a Neuberger sale was unlikely, because he felt Lehman's capital levels were high enough to absorb projected losses from write-downs. Even if capital weren't sufficient, he still thought a sale unlikely because Lehman needs Neuberger's revenue stream to retain the favor of ratings agencies and creditors.
Developments within Neuberger also could be forcing Lehman management's hand. Top level Neuberger employees -- having seen much of their wealth wiped out by Lehman's plunging share price and fed up with their healthy firm being overshadowed by a sick parent -- may want an outside firm to take a large stake.
Lehman, led by Chairman and Chief Executive Richard S. Fuld Jr., also will have been hurt by more pain in mortgage world. The performance of commercial mortgages has deteriorated significantly since the end of May. Lehman held $39.8 billion of commercial real-estate-related assets at the end of that month.
As the commercial market continues to slump, it makes life difficult for Lehman in two ways. It increases the size of any write-downs, after adjusting for hedging gains, and it makes for a much tougher selling environment.
Potential buyers could be treating Lehman as a distressed seller and demanding prices that are too low for management to stomach. That might motivate Lehman to try holding off for better prices.
But mortgage prices could fall further. Lehman faces an unenviable choice: It would be a sign of weakness if Lehman ends up selling large amounts of assets under pressure. But doing nothing would only prolong the firm's misery. |
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