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Lehman Ripe for Takeover as Market Cap Plunges Below $6 Billion

By Jennifer Yousfi
Managing Editor

Lehman Bros. Holdings Inc.’s (LEH) will announce “key strategic initiatives” early today (Wednesday), just one day after its stock nosedived to its lowest level in almost a decade.

Lehman also will announce its expected third-quarter earnings – a week earlier than expected.

Once the fourth largest Wall Street investment bank, Lehman has seen its market capitalization shrink from over $47 billion at its stock’s 52-week high of $67.73 down to just $5.4 billion at today’s new 52-week trading low of $7.64 per share.

By the New York close, Lehman shares had recovered slightly to trade at $7.79, down nearly 45% for the day on reports that negotiations for a capital infusion from state-controlled Korea Development Bank (KDB) had ended without plans for investment.

Korea’s Financial Services Commission refused to confirm that talks with Lehman had ended, but the report was enough to send Lehman shares into a tailspin.

The stock’s slide was enough to cause Standard & Poor’s to revaluate Lehman’s counterparty credit risk.

“The CreditWatch listing stems from heightened uncertainty about Lehman’s ability to raise additional capital, based on the precipitous decline in its share price in recent days,” S&P analyst Scott Sprinzen wrote, Bloomberg News reported. S&P said there is a chance of “lowering the ratings by more than one notch.”

If S&P were to lower Lehman’s credit ratings significantly, the investment bank’s ability to do business, and its very existence, would be in jeopardy. It’s hard not to draw comparisons with the Bear Stearns collapse, which ultimately ended with JPMorgan Chase & Co.’s (JPM) purchase of what was at that time the fifth largest Wall St. investment bank for just $10 per share.

A hypothetical offer of $10 per share for Lehman would represent a 28% premium over yesterday’s closing price.

Richard Bove, an analyst with Ladenburg Thalmann, has been critical of Chief Executive Richard Fuld’s management of the beleagured investment bank for quite some time. Two weeks ago Bove suggested Lehman could find itself the victim of a hostile takeover if Fuld was not able to negotiate an emergency liquidity boost.

“Buyers seem to believe that Lehman is overvaluing its assets and refuse to hit the bid,” Bove wrote in a research note, BusinessWeek reported. “The net result is no action.”

As the list of potential saviors continues to dwindle, so does investor confidence in Lehman Brothers.

After taking $8.2 billion in subprime credit-related losses and writedowns in the past 12 months, Lehman stock is down over 88% year-to-date and is 88.5% off its 52-week peak.

Hungry for substantive news of how Fuld plans to shore up Lehman’s $60 billion mortgage-related portfolio, all investors have been offered so far is some management changes. But the clock is ticking and Fuld will have to face the music soon and come clean with his plans for the future of Lehman Brothers.

Lehman had been slated to announce fiscal third quarter results early next week. But the firm apparently opted to announce its expected results in conjunction with the new initiatives. Shareholders will be looking for reassurance from Fuld and President Bart McDade that the bank has been able to sell assets or obtain necessary capital infusions to bolster a bleeding balance sheet.

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September 9th, 2008

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This entry was posted on Tuesday, September 9th, 2008 at 8:03 pm and is filed under Lehman Bros, Lehman Brothers, Top News. You can follow any responses to this entry through the RSS 2.0 feed. Due to the amount of comments we receive Money Morning will not be able to respond to all questions. If you have not already registered to leave a comment, once doing so you will receive Money Morning's Daily Email.

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  1. Comment by Andrew Smoak on 10 September 2008:

    This was long overdue & hopefully they will be bought out!

  2. Pingback by Two Moves That Will Let You Profit From the Fannie/Freddie Bailout on 10 September 2008:

    [...] U.S. stocks plunged Tuesday – with the Standard & Poor’s 500 Index shedding 3.4% on the way to recording its worst day in a year and a half – after worries about the survival of investment bank Lehman Brothers Holdings Inc. (LEH) doused Monday’s optimism. [For a related story about Lehman’s prospects in today’s issue of Money Morning, please click here.] [...]

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