Will Lehman get value for money from its acquisition of Neuberger Berman?Investment banks have long aimed to smooth out the volatility of their business model by deriving some of their revenues from the steadier income streams of private client business. The potential of cross-selling and repacking products for clients with whom the firm has an existing and, they hope, close relationship is also compelling.
Throughout the bull market this strategy was taken to new heights as investment banks sought to capitalise on the retail appetite for equities. But profits plummeted and many have muttered that the high prices paid for money managers at the peak of the market seemed a few million dollars too far when the equity wave broke over their heads.
Now the bear seems a bit more bullish and investment banks are buying again. But will they get more value for money? Last month, Lehman Brothers entered a definitive agreement to acquire Neuberger Berman for $2.635bn, with about $63.7bn under management. Compare that to Chase Manhattan’s acquisition of UK asset manager Robert Fleming, with $100m assets under management, for $7.75bn in April 2000.
Lehman seems to have timed the transaction well: its share price is high and the price tag more manageable. The deal also continues CEO Dick Fuld’s drive to build a broader business by extending Lehman’s reach in private client services but the combined portfolio of assets of more than $100bn will still be dwarfed by that of players like Goldman Sachs, which boasts about $364bn.
Pundits have asked whether earlier deals added real value to the acquirer or removed volatility from their revenue streams. Acquisitions such as DLJ by Credit Suisse or Paine Webber by UBS failed to garner the profitability in their private client business that purchasers expected. Paine Webber’s broker-type structure seemed like a smart move in the stock market boom but in the subsequent fallout it looked less and less attractive.
It is sometimes noted that the US can be a graveyard for European acquisitions. This may resonate with many European firms, but offers little explanation for dismal results. Is success or failure dictated as much by acquiring the right business model as by increasing assets under management? If decreased earnings volatility is a goal, it is senseless to buy a firm whose revenues are transaction-based and whose income streams will be subject to the same cyclical pressures as the parent. In this sense too, Neuberger Berman – with its fee-based business model – looks like a good play for Lehman.
Much also rests on client approval. A lot of Fleming’s clients jumped ship when it joined the Chase flotilla, and any lucrative private client business loses its lustre when the private clients take their assets elsewhere. It remains to be seen whether Neuberger Berman’s clients will find dealing with Lehman a palatable option.
