Lehman expected to follow Merrill's route
Commodities were best performing asset in 2007Brad Hintz, an analyst at Sanford C. Bernstein, wrote in a note on Monday that any loss much greater than $1.5 billion - which translates to selling $30 billion at a discount of at least a 5 percent to their current value on Lehman's books - would likely force Lehman to issue at least some common equity.
Selling assets at enough of a loss would force Lehman to record a quarterly charge - eating into capital for an investment bank that many investors already believe is undercapitalized. Any big reduction in Lehman's capital could bring pressure from regulators and rating agencies to raise capital.
Depending on the price that the assets are sold for, Lehman might have to raise $4.5 billion to $7 billion in capital to offset losses, CreditSights' Hendler said. Given that Lehman's market capitalization, or value in the stock market, is currently about $13 billion, such a capital raise could leave existing shareholders owning a much smaller portion of the company.
NEUBERGER UP FOR SALE?
If Lehman needs to raise more capital, it may consider selling all or a portion of its asset management business, analysts said - a move mentioned in media reports as a possibility for weeks.
Investment banks have increasingly been looking to sell assets instead of issuing shares since shedding businesses that provide a relatively low amount of revenue may be less painful for shareholders than dramatically boosting outstanding shares.
Merrill sold back its 20 percent stake in Bloomberg LP, the news and financial data company, to Bloomberg Inc for $4.4 billion in July. It also said last month it was in advanced talks to sell a controlling stake in its Financial Data Services Inc unit, in a deal that could value the business at more than $3.5 billion.
Lehman's asset management unit, which includes the Neuberger Berman business that Lehman bought in 2003, generated about $1.88 billion in net revenue in 2007. Analysts estimate the unit could sell for about $8 billion.
Selling a business to raise capital may be better than issuing shares, but it is generally not pleasant, in part because getting a good price in a sale is tough now. Few buyers have the capital to make big acquisitions, and any potential acquirers know the sellers are anxious to sell assets.
Merrill Chief Executive John Thain told investors in June that he saw the Bloomberg business as worth between $5 billion and $6 billion, but the investment bank ended up selling it for less than that.
|
|
