Thursday, February 7, 2008

Lehman Brothers - Strategy - 1997

Lehman's story since its spinoff in May 1994 is a lesson in the difficulties of rebuilding a weakened investment bank, even in the strongest bull market in history.

Wall Street is in the throes of a round of consolidation. It is mating season in the brokerage business. Commercial banks, reacting to a loosening of Federal Reserve rules that had limited their securities businesses, are rushing to get into the booming securities markets.

Dean Witter, Discover has merged with Morgan Stanley, Bankers Trust New York is buying Alex. Brown, and Swiss Bank said last month that it would acquire Dillon, Read. Oppenheimer and Montgomery Securities are practically advertising for partners.

While some analysts feel Lehman is also looking for an acquirer, Richard S. Fuld, Lehman's 51-year-old chairman and chief executive, says no such thing is going on. ''We are building a strong independent investment bank.'' ''We are certainly not looking to be bought.''

Under Mr. Fuld, Lehman has sought to bolster its equity, banking and high-yield bond businesses while maintaining and extending its established franchise in the world's bond markets. It is also gathering a new fund of at least $1.5 billion to invest in merchant banking ventures. Two years before, most of its experts in that business left to set up Cypress Partners, an independent buyout firm.

Lehman had historically had the lowest profit margins of all the big firms in New York. They are now trying to get more profit out of the company.

Lehman has certainly made big strides since it regained its independence, raising its return on equity to close to 14 percent for the last year and nearly 16 percent in the quarter ended Feb. 28, 2007, from as low as 3 percent just after it parted ways with American Express. It has also clambered up the industry rankings in some securities markets.

The firm has been able to cut costs. Some of the credit for that goes to Fuld.

But Lehman still lags behind many big competitors in profitability. It is still struggling to recreate franchises that ebbed away after a famous and painful struggle in the early 1980's between its traders, led by Lewis L. Glucksman, and its investment bankers, led by Peter G. Peterson. The struggle is described in detail by Ken Auletta in his 1986 best seller, ''Greed and Glory on Wall Street: The Fall of the House of Lehman'' (Warner publications). In the struggle, the traders triumphed, but Mr. Peterson and other bankers left. The banking franchise became weak. The firm, to insure its survival, had to stagger into a 1984 merger with Shearson-American Express.

Mr. Fuld and his closest partner T. Christopher Pettit (both were proteges of Mr. Glucksman in Lehman's commercial paper department) led the firm back to independence in 1994.

But there were growing tensions between them over the daily running of the firm. Mr. Fuld, wanted to delegate to a larger operating committee made up of several managing directors. He felt that it was important to broaden the ranks of top management and to draw in a younger generation of leaders. Mr. Pettit, the president and chief operating officer, wanted to continue running the firm with a loyal coterie.

In April 1996, Mr. Pettit stepped down from his posts, as Lehman promoted some of its younger tyros, and left the firm altogether last November. He died in February 2007 in a snowmobile accident.

In the present set up, there is no chief operating officer at Lehman, and Mr. Pettit's former duties have been taken over by an enlarged operating committee and to some extent by John L. Cecil, the chief administrative officer and cost-cutter. The firm is struggling to push up profits by building new and existing businesses as well as by controlling costs and making big bets.

Pure investment banks are increasingly going in one of two directions. Some are striving to combine a nationwide retail broking operation with investment banking business in the mold of Merrill Lynch, as Morgan Stanley and Dean Witter are doing. Some others are joining big commercial banks selling out. Alex. Brown and Dillon, Read are following that mode.

Lehman tried the Merrill Lynch route in its marriage to Shearson and its American Express parent, and Mr. Fuld and his colleagues vehemently deny any interest in repeating that experience. The different management styles of the Shearson, Lehman and American Express components did not work well together, and the combined firm never succeeded in generating the expected synergies and profits.

Mr. Fuld adamantly maintains that there is still a place for the independent investment bank serving institutional clients around the globe. As an independent entity focused on institutional customers, he said, Lehman can be more agile and stay better focused on its customers' needs and its chosen businesses and markets.

Lehman is using the bull market to restore its advisory and equity capital-raising businesses. Lehman executives say there have already been some successes. Marc L. Paley, who helps to manage Lehman's stock underwriting business, reels off such recent coups as the $963 million issue for Unibanco, a $660 million issue for Qualcomm and issues of $150 million for Prentiss Properties Trust and $200 million for Premier Parks as examples of fruits of efforts in a much tough market.

Among other efforts, Lehman has broadened its high-yield bond business and its ability to finance acquisitions, seeking to make sure that it catered to more of its clients' needs. The broadening is to provide one-stop shopping. ''There are a number of clients who value one-stop shopping,'' said Robert D. Redmond, a managing director in the firm's high-yield and leveraged finance division.

Sallie L. Krawcheck, an analyst at Sanford Bernstein & Company, projects that in more ''normal'' markets, Lehman's return on equity would be close to 10 percent, rather than the 16 percent of the most recent quarter and they still have to put in more efforts to improve their profitability in line with the industry leaders.

While It's Merger Season on Wall St., Some Question the Firm's Intentions
New York Times, June 3, 1997

For more about Richard Fuld, Current CEO of Lehman

For post about recent strategy at Lehman

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