The New York-based investment bank Lehman Brothers (LEH) remains fully aware of its critical situation as one of the hardest hit casualties of the credit mess. At the same time, the investment bank has recognized its urgency for financial stability as the only way to prevent it from facing insolvency and subsequent failure. However, in Lehman’s case, stability can only be achieved by securing billions of dollars in new equity capital. Not an easy task, considering the financial sector still finds itself in a cash-strapped environment; and more importantly, if liabilities are greater than assets, objective expectations of financial stability should be realistically evaluated.
Nevertheless, Lehman remains persistent in its attempts to achieve survival.
As reported by the Sunday Telegraph, over the weekend Lehman held direct talks with a group of foreign government-backed investment funds. The investment firm particularly intensified talks for a capital injection of $6 billion with the South Korean government-backed lender Korea Development Bank. Based on the structure currently under discussions by Lehman’s top execs, the Korean bank could buy up to 25% of the company, which, based on Lehman’s PPS, has a current market cap of $11.17 billion on a negative 3.7% trailing twelve operating margin. The talks, notes the Telegraph, could be concluded this week.
If the talks fall through, the firm says it has lined up alternative investment from other sources, including the Chinese brokerage Citic Securities, as well as a number of sovereign funds from the Middle East, with investors from Abu Dhabi and Qatar. All the funds have been invited to participate in a capital-raising; however, Lehman is likely to sell no more than 10% of itself to each of these funds.
As Lehman promotes the process of raising capital, which involves a proper sequencing and coordination of a range of financial policies, the company is also trying very hard to avoid at all cost a sale of the bank’s prized assets at distressed prices. Companies such as JC Flowers, Kohlberg Kravis Roberts and many other parties have expressed interest in Lehman’s crown jewel Neuberger Berman, valued at $10 billion. It is understood that Lehman’s CEO Fuld has assigned several of his key executives to look at different fund-raising scenarios with this purpose.
While Lehman’s tendency to preserve its most valued assets is understandable, the reality is that the firm isn’t negotiating from a position of strength, which further weakens the company’s business strategy on the negotiating table. In addition, CEO Fuld and other members of the management team are eager to conclude a deal with potential investors before the firm reports earnings on Sept 15.