Monday, August 25, 2008

What Is Lehman Really Now Worth?

The weekend edition of the Wall Street Journal reported Lehman shares rising 16% on alleged interest in the ailing investment bank by the Korea Development Bank. However, later reports indicated that the bank was not anywhere near a deal to rescue Dick Fuld's house of cards, a/k/a Lehman Brothers Holdings Inc.

With all of the write-downs and drama involving Lehman's fighting with a prominent bearish hedge fund manager regarding its asset valuations and losses, one has to wonder, at this point, just what is the firm actually worth?

What would a buyer presumably be acquiring if it were to bid for Lehman?

It wouldn't seem to be getting good management. Fuld and his obliging lieutenants are now on record, asset-valuation style, as having made disastrous operations decisions in the past few years. To quote the Journal's piece,

"Friday's stock-price surge shows how hungry investors are for nearly any scenario that would help Lehman finally rid itself of the doubts and problem assets haunting the firm."

How'd those problem assets get on Lehman's balance sheet? Did some wicked finance fairy drop them there one night? Or did Dick Fuld's managers buy them of their own free, if misguided and ill-considered wills?

Granted, Lehman owns asset manager Neuberger Berman. This is a classic example, on a par with GE, of how collecting unrelated businesses does nothing much in the long term for shareholders that they cannot do better themselves. It's a good bet that Lehman, being under pressure, will have to sell Neuberger for less than if the parent were not in financial straits. I don't know the accounting, but one would hope that at least Lehman is going to get more for Neuberger than they paid for it.

In the meantime, since Neuberger, being in a different business than the rest of Lehman, presumably was unaffected by the parent's bad risk management decisions, Lehman shareholders are left with the problem of what they actually own that isn't easily sold.

Or won't be sold to someone for more than it is probably actually worth in the long run.

Having messed up Lehman's balance sheet and, due to the write downs, income statement, Fuld's team would not seem to be the reason anyone would buy the firm. More likely are two other reasons.

One would be a bottom-fishing private equity firm that is interested in fire sale prices for exotic instruments that may actually perform reasonably well over time. As I've written elsewhere in prior posts, non-bank, non-publicly-held financial service firms can afford to buy and hold instruments whose market values are now crippling publicly-held institutions.

A second reason for buying Lehman might be the overall pressure on virtually all of its assets, given Lehman's near-death situation. There are probably some decent assets, either for trading or investing purposes, which aren't damaged due to problematic market values, but only because they are on Lehman's balance sheet.

If the dross can be bought sufficiently cheaply and either sold or simply held at little cost, then the decent assets might pay off as they rise in value when held by a going concern with a viable future.

Either way, it wouldn't seem that any of the assets on Lehman's balance sheet are now worth to the firm's shareholders what they will be worth to almost any other firm which can buy them.

And for that, they have Dick Fuld to thank, for having managed Lehman to the point that it's continued existence, being doubtful, has now placed a large discount on the value of any assets which the firm currently owns.

So let's be clear. Are we discussing the sale of Lehman, or simply the sale of its assets, as the firm is dismembered in the wake of bad management?

I believe it is the latter.

And, oh, yes, Dick Fuld (and probably a few very close lieutenants) will keep some juicy past bonuses and other compensation, while shareholders will, as usual, be left holding the empty bag. Don't expect Fuld to offer to repay any of his past lush compensation in exchange for the losses his shareholders will now suffer. This is the Wall Street way. Bonuses for the managers now, losses for the shareholders later.

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