Lehman Brothers on Sale?

These moments always come in business - the moment where you look into that dark abyss and ask yourself, do I try and catch the falling knife? Is Lehman Brothers (LEH) going the way of Bear Stearns (BSC) or will it survive its current liquidity plight? It is that moment in time where the phrase “gut check” comes to mind. 

Let’s look at this current situation with Lehman pragmatically, while taking out some of the hyperbole and emotion. Any “rally” in this market is nothing more than an intermediate term bear rally (personal opinion). The facts are that the market has a severe liquidity crisis caused by the rapid melt down of these pools of “stuff” called CDOs or CMOs or SIVs, basically a bad alphabet soup. This meltdown was exacerbated by the leverage used with the top tier bulge bracket investment banking houses in order to enhance their yield.

Well, when a trade goes against you and the leverage is extreme the losses are compounded and a liquidity crisis occurs. Bear Stearns was an extreme example of this liquidity crunch which was compounded with the swiftness of the capital calls. 

Lehman has very attractive and valuable assets within its holdings. They have some significant positions in high quality hedge funds, private equity funds and buyout funds. They also have a crown jewel in the form of Neuberger Berman LLC, that has provided a very steady stream of positive results and profit which evens out the highs and lows of its banking and trading business. They also have the option of taking severe haircuts on its portfolios of CDOs and CMOs, similar to what Merrill Lynch (MER) did earlier this year. They have real estate assets and other portfolio companies that could also fetch a decent price. The main asset that Lehman has is probably the name which would be counted as good will.

Basically, all of Lehman’s good will and a buck eighty five will get you a grande Starbucks coffee. I say this tongue and cheek, but actually, the Lehman name is definitely worth something to a large foreign bank, be it investment or traditional. This is evidenced by Lehman’s recent talks with KDB Korean Development Bank which subsequently fell apart. 

Now let’s get to my favorite part the bullet points or the “Tale of the Tape”:

Buy side rationale:

• Lehman has a number of extremely high quality assets that are able to fetch a very good price even in today’s market.
• Lehman is the smallest of the four horseman (bulge bracket firms), which has unfairly made it the target of rumors and previously short selling.
• Lehman’s name is still an extremely valuable asset in the world market, not to mention its book of business.
• Lehman is trading a mere fraction of the other three firms: Goldman Sachs (GS), Morgan Stanley (MS) and Merrill Lynch.
• Lehman is an extremely attractive target for a non-US investor whose currency is strong and who has the ability to ride out the storm.
• Lehman can still swallow a bitter pill and take severe haircuts on its existing portfolios.

Sell side rationale:

• Well as the old saying goes, “where there is smoke there is fire”. What doesn’t the Street know?
• What additional write downs are lurking on the balance sheet that could turn Lehman’s capital position upside down?
• What happens if global trading firms decide that doing business with Lehman is too risky and stop honoring its trades? We saw the negative effect of this on Bear Stearns.
• Is the current market cap of $5.4 billion still too high?
• Can Lehman attract more capital before a fire sale occurs, which tends to wipe out the equity players in the company.
• Can Lehman, in a timely manner, find a strategic partner or buyer for the entire company at the right price in this market?

I am going out on a limb for the entire technorati/blogshpere world to see and will take a stand. I believe that there is inherent value underlying Lehman Brothers. Does this mean that the stock could go lower? Yes. Does this mean that the company could be bought out? Yes. My point is that at a $5.4 billion market cap, Lehman has upside from here. Oh, and tight stops on trades don’t hurt either.

I realize that I am just one of many voices on this issue, but a voice willing to take a side and a stand. Time will prove me right or wrong, but in my head I have built a case for value which outweighs the negatives. 

Disclosure: The writer/author of this piece (me) does not currently own any of the stocks in this article but I will after a full day of this being published.

Comments

[venividivici:]

Well you go and put your money into Lemon, sorry Lehman, mate and I am sure you will get everything you deserve. Based on your article, I wouldn't risk a cent in that black hole.

2008 Sep 10 12:08 PM

[Alex Sebastian:]

If Lehman makes a deal like Merrill's (including financing considerations) on it's $40B of real estate assets - admittedly much higher quality than what Merrill sold - there will be no equity left. And I think to many the Lehman name has lost almost all of its value. You said yourself that they no longer have any goodwill, isn't that what the value of a "name" is?

Also, there haven't been any rumours since July, when the SEC targeted rumour-mongering short sellers. Goldman, Morgan Stanley, Citi and others were all very well behaved yesterday after hours when their spokesmen said that they all continue to trade with Lehman.

2008 Sep 10 05:23 PM

[DonaldRay:]

Hope you are right..I have 25% of my investment in their 7.25% bond.

2008 Sep 11 06:17 AM

[The Market ...:]

Yes Lehman is on sale. They have a financing plan! They've been pursuing that plan for months with no success. They're only hope is a take-under, not a take-over.

2008 Sep 11 11:17 AM

[kurt walter:]

No bailouts. Period. If LEH goes under, so be it. Winning and losing is part of the capitalism deal. If taxpayers always bailout the losers, then we not longer have capitalism. If we don't allow losers to fail, we will have lots more losers in the future looking for a taxpayer handout. The losers will be even more out of control because they know they have a big daddy government safety net.

2008 Sep 11 02:19 PM

[kurt walter:]

In 1 month what will they call a LEH executive? Yeah, waiter.

2008 Sep 11 02:39 PM

[lc_william:]

LEH is finished - greed crushed them, nothing more.

2008 Sep 11 02:45 PM

[lc_william:]

LEH is finished. Equity goes to zero.

Buy your puts now before you miss out on more easy money (FNM,FRE).

2008 Sep 11 02:46 PM

[carpe_diem:]

What happened to the Korean Wealth Fund? Are they completely done with any deal with LEH?

Is there anyone giving me 6 billions? I would go and buy LEH immediately^^

2008 Sep 11 04:08 PM

[OscarBullFrog:]

gee, for $0.99 / share, or maybe even $1.01 i'd throw some money into Lehman ... kinda like a wishing well, eh? not more than a couple thou but hey, what's a party w/o a lottery ...

2008 Sep 12 12:44 PM

[ozcutty2:]

Sorry Andre looks like LEH is toast

2008 Sep 15 12:02 AM