One of the pet notions of M&A is that anything can be solved by price. Thus even a garbage barge embattled institution like Lehman might could be a screaming bargain at the right level. So it’s possible that HSBC and the unnamed Chinese bank are indeed interested in Lehman, but “interested” covers a multitude of sins.
Given Lehman’s hard to assess and sizable liabilities and the uncertain outlook for the investment banking industry over the next two or three years, how can an investor be confident of his valuation? If I were running the numbers and applied a high enough discount rate to reflect the risk of an investment, I suspect I’d come up with a negative NPV.
The factor that countermands these concerns is that Lehman appears desperate to cinch a deal. Having as many balls as they do in the air on such a short time-frame (they want something wrapped up by mid-September) says they NEED to get a transaction closed. If their negotiating stance is consistent with the sense of urgency, they’ll be making concessions they would have balked at a month ago.
From Reuters:
Europe’s biggest bank HSBC Holdings and an unidentified Chinese bank are among potential buyers of Lehman Brothers, South Korea’s Chosun Ilbo newspaper reported on Wednesday, citing a financial industry source.
HSBC and the Chinese bank, along with top U.S. hedge funds, are competing with Korea Development Bank (KDB), which has proposed to buy 25 percent stake in Lehman for 5 trillion-6 trillion won ($4.4-5.3 billion), the newspaper said.
Yves here. Wonder if “competing” is too strong a word, given that this rumor in a Korean paper appears to come from a single unnamed source.
State-owned KDB confirmed on Tuesday it was in talks with Lehman over a possible joint investment in the U.S. bank with other Korean banks, but declined to give details of its negotiations…
KDB’s proposal also includes a clause which allows the South Korean bank to increase its ownership to 40-50 percent at a later stage, according to Chosun.
Lehman prefers KDB over other contenders as KDB plans to keep its current management after an acquisition, but the bid price is considered low, the South Korean daily said.
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Chosun Ilbo is now reporting that KDB has an offer on the table to Lehman.
http://jessescrossroadscafe.blogspot.com/2008/09/kdb-and-artifice-of-deal-part-3-offer.html
It really seems like a red herring here with a lot of effort being placed into rumors with Korea as a source of bailout. It seems desperate.
A large investment by HSBC would be surprising—they’re already having lots of fun with their existing US RE exposures. And in the past at least, they’ve tended towards wholly-owned acquisitions.
Moin from Germany,
news like this don´t help…..
Ospraie’s flagship fund to be shut down
Ospraie Management, the US hedge fund firm run by commodities trader Dwight Anderson and part owned by Lehman Brothers, is to shut down its flagship fund and return money to investors after the fund suffered heavy losses in August.
The Ospraie Fund, which was launched in February 2005, lost 26.7 per cent in August and was down 38.6 per cent over the year to date. It had about $2.8bn at the start of August.
Lehman bought a 20 per cent stake in Ospraie in 2005, when it managed about $2bn
Its baffling to me why the Chinese would buy Lehman at this time.
Either they are incredibly naive when it comes to world financing since they’re just out of the dark ages re: capitalism
OR
They are on a buying spree to gain influence in the realm of our political arena. Communism through capitalistic levers.
I have a feeling that China will need to start selling their treasuries in order to meet the needs of their people if gdp in china goes down. Once the people get a chicken in every pot, they’ll be expecting it, and lo and behold the outcry if that chicken isn’t in that pot.
So, the financiers are either telling China that buying Lehman is a “good” thing and the Chinese are too stupid to know differently. And we thought they held bitter feelings about the boxer rebellion with the British. Wait for the hurt feelings when China finds out it has bought a paper tiger with 1.3 billion people to feed off its crepe paper bones.
"One of the pet notions of M&A is that anything can be solved by price."
It is true, sort of, if one thinks a little more broadly. For Lehman, the equity might be worth zero absent a capital infusion. Who can tell, it is too opaque.
But perhaps we have to look for the right price further down in the capital structure. Given all of the derivatives, there are a lot of senior unsecured claims. Maybe that is the eventual equity of the firm.
My point is this: anyone buying a significant stake in Lehman should get financials far better than we would ever see, and then do something Buffett-like. Ask for a convertible stake, where your worst case scenario leaves you with (as an example) senior unsecured standing, but allows you to convert to common if things go right.
If you have the money and the best information, that would be the way to go. You have Lehman over a barrel, demand tough terms.
Many make the mistake of assuming the Chinese are naive about capitalisim, but the Chinese have been running a barter economy inside of varying national economies for thousands of years. Anyone participating in a barter economy will also know that the purchase of a ‘pig in a poke’, which is what LEH is, will be done only on very favorable terms.
River
If KDB or some other foreign government-controlled entity (a foreign GSE) takes a controlling stake in LEH or other “major US investment bank,” . . .
I have to wonder what the FED’s authorized role and actual actions will be in the event it threatens to go under??
Taxpayers really won’t like the FED bailing out (or guaranteeing the bailing out) of a foreign-owned bank no matter how “vital” it is to the stability of the international financial system.
Just a thought….
Lehman trying to sell itself like a two bit hooker. Screams of desperation.
Reading about Korea’s need to defend the won and difficulties doing so due to illiquid GSE holdings, it occurred to me that there might be a subtext to KDB’s apparently nonsensical LEH bid, somehow resulting in the “Fannie, Freddie and other US-related agency” paper turning into cash or treasuries as a quid-pro-quo for rescuing LEH.
I read Jesse’s posting, and it looks like “a Wall Street Bond trader” has the same idea. From Jesse:
Curiouser and curiouser. A Wall Street bond trader of our acquaintance has suggested that Hank made some princely gestures vis à vis Korea’s huge holdings of Fannie and Freddie in return for some sugar on the Lehman problem.
Maybe a stealth uncompensated taxpayer bailout of LEH, FNM and FRE can be quietly packaged up and sold in this way.
Korea OT: They are at a loss as to what to do about media reports saying that the prices of vegetables, pork, chickens and other daily necessities have shot up by 10 to 50 percent in a week. Most people are now suffering the brunt of higher inflation triggered by the spiking prices of crude oil, other raw materials, grain and food. Their worries are escalating as their incomes are declining after being adjusted for inflation. The consumer price index surged 5.5 percent in June and 5.9 percent in July year-on-year. The index surpassed the central bank’s target of 2.5-3.5 percent, raising fears of stagflation. The people’s pain has grown more acute due to the economic slowdown.
More serious is that there are growing fears of a financial crisis that could batter the country next month. The so-called September crisis is based on the scenario of a potential liquidity trap since foreign investors are leaving the Korean market. Foreigners purchased $16 billion in Korean bonds on a net basis in the first half this year. But they became net sellers in June and July by disposing of $4.2 billion worth of bond issues.
http://www.koreatimes.co.kr/www/…/ 202_30247.html
and now the London Times tosses Tokyo Misubishi into the mix
http://jessescrossroadscafe.blogspot.com/2008/09/tokyo-mitsubishi-interest-virtual-put.html
Speculation:
An emerging consortium of Asian banks is interested in LEH as an economical way to gain access to the Fed Term Auction Facility: a tear-down with an excellent location.
Once LEH is acquired, it accepts GSE and possibly less desirable paper and uses it as collateral at the TAF, exchanging it for T-bills.
LEH stays nominally afloat. A lot of GSE paper is quietly absorbed by the Fed without touching the open market and without an overt intervention. The Asian participants dump GSE positions in exchange for cash money or equivalent and can defend their currencies against ongoing outflows.
I don’t know if this would work, but if so, it does seem appealing to everyone but US taxpayers, who have already been volunteered to foot the bailout bill.
Yep. the Mitsubishi interest floated out by The Times has also turned out to be a false rumour.
curiouser and curiouser.
http://jessescrossroadscafe.blogspot.com/2008/09/times-of-london-report-another-false.html
Interesting thought cash mundy. This is how I would be thinking in the Asian’s shoes – how do we put all this crap back to the Fed without making a political issue of it.
It all seems so like BofA jumping in on CountryWide though. If I were them I’d be looking at that deal and thinking ‘what did BofA do wrong?’.
And the consortium isn’t consorting. Weird.
Banks Deny Consortium Plan to Buy Lehman Bros.
The Korea Development Bank is trying to form a consortium to buy Lehman Brothers, America’s fourth largest investment bank, but other Korean banks on Wednesday denied they want to join.
http://cashmundy.blogspot.com/2008/09/leh-kabuki-more-of-brides-blush.htm
BofA jumping in on CountryWide indeed, Peedee. Apparently the Koreans are pricing MER and LEH dubious assets.
Korean Kabuki: Enter Merrill
Merrill May Fail to Sell Bad Loans to Korea Asset (Update1)
By Bomi Lim
Sept. 4 (Bloomberg) — Merrill Lynch & Co.'s talks to sell a “significant'' amount of nonperforming loans to Korea Asset Management Corp. are faltering because of a dispute over price, the Korean firm's chief executive officer said.