Thursday, February 7, 2008

Lehman Brothers Spinoff 1994

American Express announced in January 1994 that Lehman Brothers would be spun off. According to the announcement, the spinoff is expected to be completed in May or June,at which time Lehman will become independent, with its employees owning about 10 percent of Lehman's stock after investing $160 million.

Lehman Brothers, a specialist in corporate finance and trading, has been a leading underwriter on Wall Street, gaining considerable business in recent years. It has been owned by American Express since 1984.

Over the last two years, American Express has retreated from the Wall Street securities business to concentrate on its charge-card, travel and financial planning operations.

In 1992, American Express sold the Boston Company, a money manager and specialist in mutual-fund record keeping. In March 1993, American Express sold its Shearson retail brokerage operation to the Primerica Corporation, which owned Smith Barney, Harris Upham & Company, for $1 billion and a share of future profits.

American Express said it would buy $890 million of newly issued common stock in Lehman, then pass that stock to American Express shareholders as a special dividend. It will invest another $200 million in Lehman preferred shares, which it will hold as an investment. It will have no representation on the Lehman board.

In exchange for the capital infusion, American Express anticipates recouping more than $400 million in cash from the deal. It will receive 50 percent of any Lehman net income exceeding $400 million over eight years, with a limit of $50 million a year. It will also receive up to $50 million annually for three years from revenue and earnings-related participations due Lehman from Travelers as part of the Shearson deal last year.

The capital infusion would bring Lehman's equity base to $3.3 billion.

"Our objective has been to bring Lehman Brothers to the point where it could sustain a stand-alone 'A' credit rating based on its earnings, capital structure and management strength," Mr. Golub, Chairman and CEO of American Express said.
With the planned equity fusion, American Express has been assured by the major rating companies that Lehman will receive its A.

The American Express Company had completed the spinoff of its Lehman Brothers brokerage unit to shareholders by 31st May. The travel and financial services company had distributed its 98.2 million common shares in Lehman Brothers through a tax-free dividend to shareholders. American Express stockholders of record on May 20 received one Lehman share for every five of their shares. Lehman stock, which has been trading on the New York Stock Exchange on a when-issued basis since May 2. It closed on 31st May at $18.


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