Lehman Unit Sale May Hinge on Retention

The threat of defections is reportedly shaping up as a critical obstacle to Lehman Brothers' move to shore up its balance sheet by selling a controlling stake in its asset management division.

Multiple scenarios for Lehman Brothers have moved in and out of focus in recent days, running the gamut from asset sales to an Asian strategic partner to a hostile takeover. The swirl of disparate media reports reflect an institution that needs further infusions of capital to offset a third-quarter loss and billions more in write-downs that Lehman is expected to announce next month.

The bank recently has been seeking a buyer for the asset management division, whose biggest brand is the Neuberger Berman mutual funds and wealth management company acquired in 2003. CNBC reports that some big-ticket private equity firms are balking at Lehman's proposed price of $7 billion for a 70 percent stake in the division.

"But the real cost will be much more than that, because asset management firms are only worth something if employees remain with them following such a transaction," the network says. "Potential bidders believe that unless they set up a large retention pool-something in the neighborhood of $400 million to $500 million to keep employees at their jobs-the talent will walk."

While Neuberger money managers are covered by non-compete agreements, CNBC says they could still "decide to simply quit Lehman and sell their shares." And it says rivals including Morgan Stanley are wooing the asset management division's retail brokers to jump ship - which raises the prospect of retention packages for that segment of the work force as well.

Other news media reports indicate Lehman has shopped the division to Carlyle Group, Hellman & Friedman, General Atlantic Blackstone Group, Kohlberg, Kravis Roberts, J. C. Flowers, and Apollo Management, among others.

Still Seeking Asian Capital

Meanwhile, the bank continues its quest to attract a major Asian investor to buy up to 50 percent of the entire company. China's Citic Securities reportedly walked away, but state-run Korea Development Bank said Friday the door remains open. A KDB spokesman told Reuters, "We are studying a number of options and are open to all possibilities, which could include (buying) Lehman."

KDB's chief executive, Min Euoo-sung, was Lehman's chief executive in Seoul until this past June. According to a Korean newspaper, Lehman contacted Korea Investment Corp. a sovereign wealth fund, before approaching KDB.

Still another possibility - a hostile takeover bid - was posed by Ladenburg Thalmann & Co analyst Richard Bove, according to Reuters. On Thursday Bove raised his rating on Lehman "buy" from "neutral" and explained that if Neuberger Berman is worth $9 billion to $13 billion, then the rest of New York-based Lehman "is being valued at less than zero" based on its recent share price. "A deep pocket buyer... could sell Neuberger for more than the value of the whole company and basically own Lehman Brothers for nothing," Bove wrote in a note to investors.

Bove said Lehman management refuses to sell some of its real estate securities and loans at fire-sale prices. However, other reports indicate that the bank is at least talking with private equity firms about those assets, and may already have sold a portion of its $40 billion commercial mortgage portfolio.