A tight focus on the customer, cautious staffing and an eye for new markets has led to Lehman Brothers growing market share across a range of business segments, while its peers are shrinking. Benoit d’Angelin explains to Geraldine Lambe why the firm eschews the product-led approach.
“There is a gross misconception that Lehman Brothers is just a bond house,” says Benoit d’Angelin, the firm’s head of European investment banking. “We are the only firm that has gained market share across most business segments over the last couple of years.”
Mr d’Angelin’s belief is built on pretty solid ground. According to a July report from Citigroup’s Smith Barney research organisation, Lehman has grown its market share from 4.7% in 2001 to 5.4% in the year to date in M&A, for example, while competitors such as Morgan Stanley and Merrill Lynch have seen their share of the pie shrink since 1998, from 12.1% to 10.7% and from 9.8% to 8.5%, respectively. In equity trading, Lehman has more than doubled its share from 2.5% to 5.2% in the same period. Moreover, the Citigroup figures are not based on the traditional league tables. Instead, Citi has developed a proprietary calculation of worldwide revenue pools and each major firm’s share of each pool.
While Lehman has concentrated on diversifying its business model, some analysts believe that the firm has also benefited from the side effects of the bear market. Naturally, a house famed for its fixed income skills is going to see a bigger upside when equities go through the floor but, less predictably, the brutal staff cuts suffered elsewhere have led to Lehman getting closer to headcount parity with its peers simply because competitors have chopped numbers more savagely. Analysts estimate that CSFB cut almost half of its investment banking staff from its peak, while Goldman Sachs and Merrill disposed of almost 40%, making Lehman’s cuts of around 20% look mild.
At the business level, analysts think that as more limited resources were forcing most firms to focus their coverage on fewer clients, Lehman’s catch-up enabled it to penetrate relationships that in the past were out of reach.
Says Mr d’Angelin: “We didn’t hire extensively in 1999 and 2000, so our structure hadn’t ballooned as much as our competitors’. Some firms have had to make such savage cuts that when the market recovers they may lose some of their key people. We have retained our best people and maintained motivation.”
Better client service
More importantly, he says, faced with the horrendous market conditions of 2001/2002, the European business didn’t inflict “death by a thousand cuts” like its rivals, just a single reorganisation. He says that the real driver behind the change was the desire to facilitate better client service. Lehman took its 30 most seasoned bankers and put them in charge of its biggest clients in Europe. “We wanted them to get even closer to clients, to be like a family doctor – really understanding clients and helping them to identify and solve their problems. Then they could use their knowledge of the products to engineer and deliver the right solutions. The key element was to focus on the client rather than selling the product.”
In Germany for example, he says this strategy has been successful in marshalling Landesbank business. Between August 2002 and April this year Lehman was M&A adviser in five transactions.
Niche awareness
Mr d’Angelin says that client focus does not mean Lehman has sidelined product expertise, however. If it sees a niche where it can gain traction, the firm is quick to drive it forward. Three years ago, Lehman had virtually no presence in European mortgage-backed or asset-backed securities but saw the market’s potential. It hired product specialists to work closely with the bankers and is currently first and fifth in Dealogic’s league tables respectively.
Similarly, he says, a few years ago Lehman identified bank capital as one of the biggest challenges for financial institutions – one that will become more pressing when Basel II is implemented – so it created a team to focus on quantitative research of bank capital and to develop a deep understanding of the associated regulations and complex tax rules.
This effort dovetailed well with Lehman’s strong Landesbank relationships as the publicly-owned organisations prepare for the impending removal of state support. As lead manager of the E500m Tier 1 issue for LB Kiel Sparc Securities in February 2002, Lehman helped the bank to score several firsts: the first listed Tier 1 issue from a German Landesbank; the first international placement of a Tier 1 issue from a Landesbank; and the first security issued by a Landesbank with a credit rating determined on a standalone basis. “A few years ago we took a view that Landesbanks faced particular issues and the client group was focused on resolving them. But it was not a product-led strategy. It was built on strong relations with the banks and an understanding of their needs,” says Mr d’Angelin.
Analysts following Lehman Brothers have voiced concerns, however, that while it has made substantial gains in its equity and M&A franchises, the business model remains skewed to fixed income-driven revenue and that it will be difficult for increases in other areas to offset the decline of fixed income revenues that is predicted for 2004. For Lehman, Citigroup analysts are estimating that the loss could represent 15%-20% of the firm’s 2003 revenues.
Product balance
Mr d’Angelin maintains that this view undervalues the headway the firm has made in redressing the product balance. He cites its global net revenue figure in the year to November 2002 ($6.155bn) that divides by business area as follows: fixed income 42.55%; equities 16.26%; investment banking 28.12% (which in turn can be split as debt underwriting 14.39%, equity underwriting 6.82% and M&A advisory 6.9%); and client services 13.06%. The latter figure does not take into account the increased exposure to equities and the asset management fee pool brought about by Lehman’s acquisition of US private client services firm, Neuberger Berman.
The expected fixed income decline is a question for the industry as a whole, says Mr d’Angelin. “It will take a significant increase of M&A and equity business to offset the profits that have been generated in fixed income over the last couple of years at most major firms.” That said, he believes that structurally Lehman is in as good a position as any to withstand the market shift. “We have built a strong equity and investment banking platform in Europe and have achieved critical mass.”
But equally, he says seeking to be number one in every league table is a product-led strategy that Lehman does not follow. “Investment banking is prone to conflicts of interest and being at the top of every league table would lead you into conflicts – either between your clients, or with the regulators or your shareholders. You have to put your client at the centre of your business and ensure that you serve them, not the league tables.”
Balance sheet strategy
Mr d’Angelin also decries the idea that Lehman does not use its balance sheet. “It is not a misperception, rather a different understanding of the use of a balance sheet. We have a $300bn balance sheet that we use strategically. Unlike some commercial banks that use it in an evergreen way, we put it to work, but it is used to facilitate transactions – to keep positions on the books for a certain amount of time. We are not in the business of lending forever.”
He cites Olivetti’s hostile takeover of Telecom Italia, in which Chase Manhattan (then) and Lehman Brothers raised E20bn. “That debt was taken onto the books to facilitate the transaction. After it was concluded, the debt was repaid, restructured, securitised or there were take outs to high yield bonds.”
Lehman Brothers is not the same firm that looked unable to continue alone in 1998. Since then it has been aggressive in reducing its net leverage: it has brought the profile down from its peak of 25x in 1996 to less than 18x now. It has cut liquidity risk by terming out debt and reducing overall reliance on commercial paper, from 15% in 1997 to less than 3% today. It believes its business model is more able to withstand a decline in its core fixed income business by continuing to build its exposure to others.
Future success will depend on the ability to deepen client relationships, says Mr d’Angelin, which means being at clients’ disposal. “You have to win the mindshare of the CEO, so that they want to speak to you when they have a problem; whenever that may be. When I get that call at the weekend, I know we’re getting it right.”
Career history:
Member of Lehman Brothers European Executive Committee, the Investment Banking Global Executive Committee and part of the Global Management Committee of Lehman Brothers. Graduated from the Institut des Sciences Politiques de Paris.
2000: Head of European investment banking
1998: Head of European capital markets
1993: Joins Lehman Brothers in Paris as head of French capital markets
1988: BNP Paribas, co-head of capital markets in London
1986: UBS Warburg, investment banker
1984: Credit Lyonnais, Atlanta, US, analyst
