Jones Lang LaSalle
Once-staid Lehman now a powerhouse
Outpaces peers by focusing on mergers, other profitable lines
By Aaron Elstein
Published on February 13, 2006
When Reuters Group executives were looking for investment bankers in 2001, they couldn't help but notice that a crew of persistent bankers from Lehman Brothers wanted their business.
"We hadn't worked with them before, but they kept on coming to us over and over with ideas and advice," recalls Eric Lint, global head of business development at Reuters. "Finally we decided, why not give them a shot?"
Lehman made the most of its opportunity, helping Reuters win an auction for wire service Bridge Information Systems with a $275 million bid. Then last year, Reuters called again, and Lehman's bankers caught an even bigger prize: millions of dollars in fees for advising the media company on its $2 billion sale of stock-trading firm Instinet Group.
Such successes have become the norm at Lehman, which under longtime Chief Executive Richard Fuld has aggressively transformed itself from a middling brokerage that was overly dependent on bond sales and trading into a global powerhouse that regularly beats out much larger rivals for high-profile and highly lucrative banking assignments.
For years, Lehman had been considered a takeover target. Now it's on the prowl for acquisitions.
"There's no doubt that Lehman has grown into a world-class firm," says Michael Madden, managing partner at private equity firm BlackEagle Partners and a former co-head of investment banking at Lehman. "Fuld pursued the riskiest strategy by building the firm when he could have sold it or kept it the same midsized place it used to be. You have to say, what he did worked."
The change in Lehman's results over the past five years tells the story. The firm's stock price soared by nearly 80%, or 10 times more than its peer group index. Its pretax income nearly tripled, and its army of bankers and traders nearly doubled to 23,000. Lehman doubled its market share in such profitable lines of business as advising on corporate mergers and selling junk bonds, and its share of underwriting initial public offerings nearly tripled. During the real estate frenzy, Lehman's bond desk prospered enormously by trading mortgages.
Achilles heel
With every line of business performing well, the firm posted record pretax income last year of $4.8 billion, a 37% increase over 2004, on revenues of $14.6 billion.
But Lehman continues to have one major vulnerability. While the firm doesn't rely on bond work as heavily as it once did, bonds still account for nearly 60% of its revenue, or twice as much as at Morgan Stanley and Merrill Lynch. Now, with the mortgage market cooling, Lehman's mortgage revenue will decline about 10% this year, while earnings will grow by just 2% overall, less than those of any major brokerage house, according to analysts at Citigroup, Lehman's largest shareholder.
"It's getting late in the game for bonds, and I don't know how many innings are left before Lehman's revenues start to weaken," says Peter Kovalski, a money manager at Alpine Woods Investments. "I'd like to see them redirect some of the capital they've generated to make acquisitions."
Lehman executives wholeheartedly agree.
"If we could find an acquisition that ... would be a good fit for Lehman Brothers, we would absolutely look at it," said Chief Administrative Officer David Goldfarb during a conference call after the firm released fourth-quarter results in December. Lehman executives, asked to comment further for this article, declined to elaborate.
One possibility would be to build the asset management business, which got a big lift after Lehman acquired money manager Neuberger Berman three years ago. The most desirable target is BlackRock, a money management firm that recently broke off negotiations with Morgan Stanley and whose bond expertise complements Lehman's. But a BlackRock merger would be expensive, and Chief Executive Larry Fink would surely demand a senior management slot if he sold his firm. Mr. Fuld, who has run Lehman since 1993 and owns better than $650 million worth of his company's stock, isn't likely to offer a meaningful position to any outsider.
Changing fortunes
Still, the fact that Lehman is openly thinking about acquisitions underscores just how radically its fortunes have changed. The firm posted losses of nearly $1 billion over four years before it was spun off in 1994 by its former owner, American Express. When bond markets seized up in 1998, employees figured it was only a matter of time before Lehman was bought by a larger financial institution, probably one based in Europe.
"There was a lot of gallows humor back then," says Raphael Soifer, a former brokerage industry analyst. "People at the firm said the optimists were learning Dutch and the pessimists were learning German."
Comments? AElstein@crain.com
©2006 Crain Communications Inc.
Once-staid Lehman now a powerhouse
Outpaces peers by focusing on mergers, other profitable lines
By Aaron Elstein
Published on February 13, 2006
When Reuters Group executives were looking for investment bankers in 2001, they couldn't help but notice that a crew of persistent bankers from Lehman Brothers wanted their business.
"We hadn't worked with them before, but they kept on coming to us over and over with ideas and advice," recalls Eric Lint, global head of business development at Reuters. "Finally we decided, why not give them a shot?"
Lehman made the most of its opportunity, helping Reuters win an auction for wire service Bridge Information Systems with a $275 million bid. Then last year, Reuters called again, and Lehman's bankers caught an even bigger prize: millions of dollars in fees for advising the media company on its $2 billion sale of stock-trading firm Instinet Group.
Such successes have become the norm at Lehman, which under longtime Chief Executive Richard Fuld has aggressively transformed itself from a middling brokerage that was overly dependent on bond sales and trading into a global powerhouse that regularly beats out much larger rivals for high-profile and highly lucrative banking assignments.
For years, Lehman had been considered a takeover target. Now it's on the prowl for acquisitions.
"There's no doubt that Lehman has grown into a world-class firm," says Michael Madden, managing partner at private equity firm BlackEagle Partners and a former co-head of investment banking at Lehman. "Fuld pursued the riskiest strategy by building the firm when he could have sold it or kept it the same midsized place it used to be. You have to say, what he did worked."
The change in Lehman's results over the past five years tells the story. The firm's stock price soared by nearly 80%, or 10 times more than its peer group index. Its pretax income nearly tripled, and its army of bankers and traders nearly doubled to 23,000. Lehman doubled its market share in such profitable lines of business as advising on corporate mergers and selling junk bonds, and its share of underwriting initial public offerings nearly tripled. During the real estate frenzy, Lehman's bond desk prospered enormously by trading mortgages.
Achilles heel
With every line of business performing well, the firm posted record pretax income last year of $4.8 billion, a 37% increase over 2004, on revenues of $14.6 billion.
But Lehman continues to have one major vulnerability. While the firm doesn't rely on bond work as heavily as it once did, bonds still account for nearly 60% of its revenue, or twice as much as at Morgan Stanley and Merrill Lynch. Now, with the mortgage market cooling, Lehman's mortgage revenue will decline about 10% this year, while earnings will grow by just 2% overall, less than those of any major brokerage house, according to analysts at Citigroup, Lehman's largest shareholder.
"It's getting late in the game for bonds, and I don't know how many innings are left before Lehman's revenues start to weaken," says Peter Kovalski, a money manager at Alpine Woods Investments. "I'd like to see them redirect some of the capital they've generated to make acquisitions."
Lehman executives wholeheartedly agree.
"If we could find an acquisition that ... would be a good fit for Lehman Brothers, we would absolutely look at it," said Chief Administrative Officer David Goldfarb during a conference call after the firm released fourth-quarter results in December. Lehman executives, asked to comment further for this article, declined to elaborate.
One possibility would be to build the asset management business, which got a big lift after Lehman acquired money manager Neuberger Berman three years ago. The most desirable target is BlackRock, a money management firm that recently broke off negotiations with Morgan Stanley and whose bond expertise complements Lehman's. But a BlackRock merger would be expensive, and Chief Executive Larry Fink would surely demand a senior management slot if he sold his firm. Mr. Fuld, who has run Lehman since 1993 and owns better than $650 million worth of his company's stock, isn't likely to offer a meaningful position to any outsider.
Changing fortunes
Still, the fact that Lehman is openly thinking about acquisitions underscores just how radically its fortunes have changed. The firm posted losses of nearly $1 billion over four years before it was spun off in 1994 by its former owner, American Express. When bond markets seized up in 1998, employees figured it was only a matter of time before Lehman was bought by a larger financial institution, probably one based in Europe.
"There was a lot of gallows humor back then," says Raphael Soifer, a former brokerage industry analyst. "People at the firm said the optimists were learning Dutch and the pessimists were learning German."
Comments? AElstein@crain.com
©2006 Crain Communications Inc.
posted by Jones Lang LaSalle NJ News Blog at 12:56 PM
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