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Lehman's clock is ticking

As a Korean bank signals interest in a deal, pressure mounts on CEO Dick Fuld to do something fast.

By Roddy Boyd, writer
Last Updated: August 22, 2008: 6:32 PM EDT


NEW YORK (Fortune) -- Lehman Brothers' latest march toward the once-unthinkable price of $10 a share was interrupted when a Korean bank expressed interest Friday in the struggling brokerage firm. The question now is whether CEO Dick Fuld is willing to reciprocate.

A spokesman at the Korea Development Bank in Seoul said Friday that the state-run firm "is considering all kinds of options [with respect to] Lehman Brothers," including an outright purchase. The news sent Lehman's stock, which has lost three-quarters of its value this year as investors worry about potential losses on the firm's big mortgage portfolio, up more than $2, to $15.93 a share in heavy trading. The shares closed up 69 cents at $14.41.

A Lehman spokesman declined comment on the story. But the market was upbeat because Fuld - after weeks scouring the globe for a strategic investor and getting rebuffed at every turn - now has a chance to do a deal that will put the firm on stronger footing.

One high-profile analyst says the clock is ticking. Richard Bove, of Ladenburg Thalmann, told Bloomberg TV on Friday, that Lehman risks a hostile takeover if it doesn't act soon.

Slow to act

For now, it matters not that Korea Development Bank wasn't Lehman's first choice. Korean newspapers report that the New York-based brokerage firm first approached sovereign wealth fund Korean Investment Corp. But KDB apparently wasn't upset by the snub, perhaps because of some personal ties to Lehman: Its chief executive, Min Euoo-Sung, was the head of Lehman's Korean operations for three years before taking over at KDB last year.

Of particular note is whether the KDB would buy Lehman outright or simply take a big stake. The past year has been busy for sovereign wealth funds and financial companies hit hard by the collapse of the credit bubble. Singapore's Temasek has made two multibillion-dollar investments in Merrill Lynch (MER, Fortune 500), the state-run China Investment Corp. has put $5 billion into Morgan Stanley (MS, Fortune 500) and Abu Dhabi has forked over $7.5 billion for a big hunk of Citi (C, Fortune 500).

For Lehman shareholders, the distinction between a buyout and an equity infusion is the difference between taking pain all at once or continuing to suffer for an undetermined time.

If Lehman were purchased outright, the firm would no longer need to peddle a piece of its crown jewel, the investment management arm led by the former Neuberger Berman. Nor, presumably, would Lehman need to imminently offload nearly $40 billion in various commercial real estate loans and securities, which are sinking in value on a daily basis.

On the other hand, if KDB is looking at a mere equity investment, then Lehman may have to keep reducing the size of its balance sheet. So the firm would get some new cash and a deep-pocketed partner, but it would still be facing big losses selling into an unfriendly market.

The Neuberger stake has been valued at anywhere from $8 billion (by Bernstein Research) to well north of $10 billion (various published reports), though it is unclear if Lehman seeks a direct sale or only wants to off-load a percentage of the unit. The issues with the commercial real estate paper are clearer: That portfolio is almost certainly a large slice of the rumored $2 billion to $4 billion hit the firm is said to be looking at for next quarter.

Either way, a KDB accord would be a breakthrough because, despite actively seeking bidders and interested parties for the investment management arm and the commercial real estate paper for more than two weeks, Lehman has not come close to striking a deal.

Up to this point, Lehman management has taken a very different approach to this crisis from its rivals at Citi and especially Merrill Lynch. Citi and Merrill's leaders have relentlessly struck deals to sell troubled portfolios and reduce their balance sheet issues, even financing transactions at favorable terms to get risky assets off their books.

Ultimately, should it fail to do a deal, Lehman is telling the market that CEO Fuld hasn't made a clean break with a failed strategy and wants only another investor to help it through a proverbial rough-spot. That's not a message investors are likely to welcome.

Wall Street should soon know where it stands vis a vis Lehman. Richard Bove, the Ladenburg Thalmann analyst, said Friday on Bloomberg TV that Lehman and Fuld have through the weekend to structure some sort of transaction that would give investors the reassurance they seek about the state of the firm's balance sheet.

According to Bove, if a deal doesn't materialize by Monday, then "Lehman is in play." He suggested a stock price of around $20 might get a deal done. Given Lehman's recent lows, and the memory of what happened to Bear Stearns earlier this year, that might not sound like a bad price.

Despite the ominous warning, it's unlikely that Lehman would become the target of a hostile bid. For one thing, Lehman employees own about 30% of the firm's shares.

Still, Fuld has been trying to draw an investor willing to pay a 20% premium to book value, Bove said - or in the low $40 range. While Lehman shareholders, would surely prefer $40 to $20 a share, Bove scoffed that the firm "doesn't have a prayer" of getting the higher price.

For Fuld, time may be running out. To top of page

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