Following Lehman Brothers’ push to diversify its business over the past few years, Geraldine Lambe talks to Jeremy Isaacs, Lehman’s CEO of Europe and Asia, about the firm’s new focus and toeing the company line.

In May this year, Lehman Brothers celebrated its tenth anniversary as a public company. In that time, the firm’s stock price has witnessed a compound annual growth of almost 30% and its net income has grown ten-fold. The second quarter results were also good. Even if they were unable to match Lehman’s highest ever figures in the first quarter, a net income of $609m and earnings per share of $2.01 still managed to put smiles on senior faces.

The figures are particularly pleasing for a firm that longs to be seen as more than a bond house and which, since 1999, has gone to considerable effort and expense to build out its expertise in equity capital markets (ECM), investment banking, and wealth and asset management.

Investment banking revenues increased for the fifth consecutive quarter (though by how much is not detailed in the quarterly figures), equity related revenues were up by 16% and assets under management in its private client services business have increased from $9bn in 2002 (before Lehman acquired US asset management firm Neuberger Berman) to $124bn at present.

Observers may think it is a red-blooded American approach to financial markets that has delivered record profits, but insiders argue that it is Lehman Brothers ‘unique culture’ that has played a more significant role in boosting the bottom line.

Corporate culture

Culture is big at Lehman Brothers. Sharing the Lehman ethos is a prerequisite to longevity at the firm. And longevity of service is an easy trait to find, according to Jeremy Isaacs, CEO of Europe and Asia. Mr Isaacs is but a new boy, with only eight years of service, compared to the 35 years of CEO Richard Fuld and the combined 200 years of service offered by the executive committee. Mr Isaacs says the firm’s level of staff ownership – which has ballooned from 4% in 1994 to more than 30% this year – its team spirit and organisational meritocracy are Lehman’s defining characteristics.

While other firms have created organisational overlays to ensure that disparate elements of the business are integrated at the client level, Lehman Brothers aims to inspire the same result through shared ownership and results.

“We do not operate a star system – individuals bring the whole firm to a client,” says Mr Isaacs. “Our culture is about co-operation and the willingness to hand over a client to another colleague if that is the best strategy for the client. We passionately believe that this brings results for the business, which in turn brings rewards for employees. Most people own shares and that acts as a great incentive. Combine this with the longevity of staff and it creates a behaviour that is contagious. People quickly get caught up in operating as a team and on a global basis.”

Whether it’s by esprit de corps or other means, Mr Isaacs’s job has been to build Lehman’s presence outside of its US heartland. “At the moment, the US represents more than 60% of the revenue pool. I want to get to the stage where it’s 50% US and 50% the rest of the world,” he says.

Recruitment drive

To underpin that strategy, he has overseen a growth of the European headcount from 1800 in 1999 to 3500 today, and in Asia to about 1200. The objective is to build out the wealth and asset management platform, develop the private equity platform and to further develop Lehman’s investment banking and debt and equity franchises in Europe and Asia. While acquisitions are not out of the question (Mr Isaacs says Lehman is “thoughtful” about any opportunities) the focus is on an aggressive organic plan that is in different stages of development.

In Europe, he says Lehman has already created a very competitive equity business built on sophisticated technological foundations – one advantage of possessing few legacy systems. “We now have the scale and the infrastructure we need. The key is to leverage that and we need to hire the right people whose relationships will enhance the firm’s broader relationships to give us the ability to extract more on the margin. In Europe, it is all about increasing productivity.”

The hiring is well under way. This year’s recruits include Anthony Fry as head of UK investment banking from Credit Suisse First Boston, Christian Meissner, as co-head of investment banking in Germany from Goldman Sachs, and Jerome Calvet, appointed co-head of investment banking in France from Soc Gen. Jason Tilroe has joined as managing director, European head of corporate and public sector derivatives, and Scott Ferguson as managing director, FIG ECM, both from Goldman. Most recently, Robert Sargent joined from Morgan Stanley Asset Management to head the wealth and asset management platform.

In Asia, Mr Isaacs admits it is a different story. “We are at an earlier stage of our growth cycle in Asia. We don’t yet have the scale. It is a longer, harder process of hiring and building the platform.”

This means appointing two or three more senior investment bankers in China (in addition to the 200 staff already in Hong Kong), augmenting the fixed income and equity sales teams in Korea and Taiwan, and continuing to build on the 850 staff in Japan. In Tokyo, Mr Isaacs says Lehman Brothers is developing a broader research platform and strengthening its distressed asset business (where it is already working with a Japanese bank in a joint venture to restructure its equity portfolio).

China and Japan

Increasing the firm’s penetration in what it sees as fruitful equity and domestic Asian bond markets is also key. “We are now comfortable that Asia is ready for further development,” says Mr Isaacs. “The Japanese recovery is more sustainable now and that is the major investment area for us. As the second biggest economy and with a huge market for equity and fixed income, it has to be a top priority. We are already making great strides in M&A, for example.”

China is clearly in Lehman Brothers’ sights, albeit using a long-range scope. “We have fledgling operations in China but the country is still several years from being profitable overall for firms – the margins are very tight; however, the transactions are important from a global profile and a market share perspective. It is about building for the future. In the short-term I don’t think it will be as lucrative as some people think, but that’s fine; China is a long-term investment. And there are profitable areas – such as distressed assets and non-performing loans – where we have demonstrable expertise.”

Lies, damn lies…

Some mischievous pundits have suggested that in putting so much effort into developing a credible ECM and M&A presence, Lehman has taken its eye off the fixed income ball. To prove that there are lies, damned lies, and statistics, league table data from various sources can be used to support or deny the thesis.

Dealogic’s data for ECM show that in EMEA, Lehman Brothers has come from nowhere three years ago to sixth place year-to-date, while its rankings for global high yield and investment grade bonds for the same time period show Lehman Brothers slipping from sixth to eighth and from fourth to fifth, respectively. In asset backed securities (ABS), Dealogic has Lehman at fourteenth for ABS EMEA and fifth for mortgage-backed securities for EMEA.

Naturally, Mr Isaacs vehemently denies that Lehman has taken its fixed income franchise for granted. Citing Thomson Financial data from January 2003 to date, Mr Isaacs says that among pure-play investment banks, Lehman ranks second in global debt underwriting and second in investment grade corporate debt; additionally, combining Dealogic’s ABS and MBS data together for western Europe and the Nordic region brings Lehman to a far more respectable fourth in 2004 so far. Similarly positive, US analysts Greenwich Associates, ranked Lehman as first in fixed income performance benchmarks and first overall for the quality of its fixed income franchise.

“We are number one in fixed income research and also hold that position in equity research.” he adds. “The ability to build out our businesses together like this relies heavily on our team culture. We firmly believe that making sure we are also thoughtful about the way we build a diversified workforce, and one that cares about the communities in which we work, will also make sure we continue to attract the right people to take the franchise further.”

Career history

Member of Lehman Brothers’ executive committee and management committee. Mr Isaacs is a non-executive director of St Mary’s NHS Trust in London and in 2001 was appointed director on the advisory board of EDS (EMEA region)

2000: April, given additional responsibility for Lehman’s Asian operations

1999: December, promoted to chief executive of the European business

1999: March appointed COO of European operations

1997: promoted to head of Lehman’s overall equity activities in Europe

1996: joins Lehman Brothers as co-chief operating officer of European equities, later that year becomes head of the firm’s global equity derivatives business

1989: joins Goldman Sachs to help set up and then run the firm’s European derivatives business as executive director early 1980s: joins Smith Newcourt as a ‘Blue Button’, later becomes an options trader

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