Ignore the Lehman takeover chatter
There are rumors that the troubled investment bank is for sale. But even if someone is brave enough to buy Lehman, it would probably be at a discount.
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| As Lehman's stock continues to plunge, pressure may be building to sell the firm. But it's unlikely anyone would pay a premium for Lehman. |
NEW YORK (CNNMoney.com) -- Is Lehman Brothers on the shopping block or not?
CNBC reported Wednesday that pressure is growing on Lehman (LEH, Fortune 500) CEO Richard Fuld to sell the embattled firm.
According to the report, British banks Barclays (BCS) and HSBC (HBC), as well as Toronto Dominion, (TD) may be interested in Lehman.
There has also been talk of private-equity shop Blackstone (BX) taking a significant stake in Lehman.
Investors shouldn't buy into all this gossip.
For one thing, it's far from certain that Lehman is in play.
In another report Wednesday, Reuters, citing a source close to the company, said Fuld is not in talks with anyone about a sale, nor is he considering engaging in any merger discussions.
And many on Wall Street don't believe a sale is likely.
"Their primary goal is probably to continue as an independent if the circumstances would permit them to do so - I don't see them looking to sell," said Frank Barkocy, director of research with Mendon Capital Advisors, a firm that invests primarily in financial stocks and has no position in Lehman.
But even if Lehman is actually for sale, I find it hard to believe that any financial institution will buy the company for a significant premium. So there's little, if any, money to be made betting on a takeover scenario.
Just look at the facts. Lehman recently reported a staggering $2.8 billion second-quarter loss and it does not appear that the company is out of the woods just yet.
Lehman has already announced several rounds of layoffs as a result of the credit crunch. There has been speculation that more job cuts may be needed.
Analysts have been busy slashing their earnings estimates for Lehman's third quarter, which ends in August. Currently, the consensus forecast is for a profit of 31 cents per share, according to Thomson Reuters. That's down from expectations just a month ago of $1.24.
And would anyone really be surprised if estimates get cut even further? In fact, one analyst is predicting that Lehman will lose 54 cents per share in the third quarter.
In addition, many troubled banks and brokers, including Lehman, have announced plans to issue more stock at discounted prices in order to raise more capital. That may be necessary to shore up a weak balance sheet, but it also detracts from shareholder value.
With all that in mind, why would any potential Lehman bidder pony up more than what the stock is currently trading at, which is about $25 a share?
To be sure, Lehman doesn't seem to be in as dire straits as Bear Stearns was just before it was forced to sell out to JPMorgan Chase (JPM, Fortune 500) at a fire sale price. But make no mistake, if Lehman were to try and sell itself now, it very likely would be a "takeunder" and not a takeover.
"Lehman Brothers is not the same type of distressed situation as Bear Stearns. But at the same time, I'm not sure they could command much of a premium," Barkocy said.
Finally, all the talk about bidders circling Lehman ignores two other crucial facts. The Bear Stearns deal was made possible because the Federal Reserve stepped in to engineer the sale and assume the majority of the risk related to Bear Stearns' debt.
"It's a difficult merger market for banks right now," said one banking merger expert who asked not to be named. "The only reason Bear Stearns got done was because of government assistance."
In addition, this merger source pointed out that most major banks, including the rumored bidders for Lehman, are struggling right now to figure out just how much exposure they really have to bad loans. So taking on the added risk of buying Lehman could be a foolish move.
"I'm not sure any prospective buyers know their own balance sheets well enough let alone Lehman's balance sheet," the source said.
So it's no surprise then that, despite the Lehman chatter, the stock is down more than 10% in the past three days. It just seems that few banks are in a position to spend big bucks on something that has so many question marks surrounding it.
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