Lehman Brothers' acquisition of Neuberger Berman, both of New York, will permit the two firms to diversify and grow their combined $100 billion in assets.
The two publicly traded firms announced last Tuesday that Lehman would acquire Neuberger for $2.63 billion in a combined cash and Lehman stock deal. The agreement, which culminated weeks of rumored negotiations, also includes the creation of a $120 million retention pool for key Neuberger employees, who will be paid Lehman stock over a five-year vesting schedule, said Richard Fuld, Lehman's chairman and CEO, in a teleconference last week.
The partnering gives Lehman access to Neuberger's network of wealthy individuals and families, while Neuberger gains access to a broader array of investment products and access to Lehman's vast international client base.
Neuberger will be fused into Lehman's wealth and asset management division but will retain its brand name. Most of Neuberger's employees are expected to remain, and top executives will assume new posts at Lehman as part of the arrangement. Jeffrey Lane, currently Neuberger's president and CEO, will assume the added posts of vice chairman of Lehman Brothers and chairman of the wealth division. Robert Matza, currently chief operating officer at Neuberger, will additionally take on the role of president of Neuberger and join Lehman's management committee.
Lane noted that Neuberger was seeking a partner that would be a strategic and a cultural fit and offer the right price. For Lehman, the price was right, although a little on the high side. The price Lehman paid for Neuberger "represents more than a 5% premium to the firm's assets, which is fairly rich for an asset manager," said Matt Snowling, an equity analyst who covers Neuberger for Friedman, Billings, Ramsey Group in Arlington, Va. Furthermore, that represents 26 times next year's expected Neuberger earnings, which is definitely at the upper end of the range, he said. But Lehman was happy to pony up the big bucks in order to further infiltrate the high-net-worth market. "The mutual fund industry is more of a commodity, and it is hard to differentiate yourself within it. Now it's the high touch, high-net-worth market everyone wants," Snowling added.
To most observers, the synergies are obvious. Both firms are headquartered in New York, and both tout their similar team-led cultures. Moreover, Neuberger's top two executives trace their roots back to Lehman or its predecessor company. Matza had been Lehman's CFO as recently as 1996. Lane worked with Fuld and had served as the president and COO of the predecessor firm Shearson Lehman Brothers.
Lehman, which was originally founded by Henry Lehman as a general store in 1844, is best known for its investment-banking and private-client services. It is also the sponsor of several global fixed-income indices. But it has been looking for ways to diversify its revenue streams and grab a larger share of the high-net-worth market. Since 1998, net revenues from Lehman's fixed-income business have steadily climbed. In contrast, net revenues from both the firm's investment banking activities and equities have sunk.
With $64 billion in current assets, Neuberger Berman, founded by famed investor Roy Neuberger in 1939 to cater to wealthy investors, manages 29 open-end mutual funds and four closed-end funds. It also sub-advises $2.2 billion within 18 other sponsors' mutual funds and participates in 14 mutual fund wrap programs. But Neuberger's bread and butter rests within its high-profit-margin private asset management business catering to affluent and institutional investors.
While Neuberger's mutual fund complex ranks as the 60th largest such complex, according to Financial Research Corp. of Boston, the firm has seen overall fund assets erode from $17.1 billion in 1997 to $10.7 billion as of May 2003. Instead, Neuberger has been busily building its private asset management business, largely through a series of selected acquisitions.
In late 2000, Neuberger picked up $230 million in assets when it bought small cap manager Fasciano Co. and another $536 million with its purchase of Delta Capital Management. In February 2001, it scooped up another $1.8 billion with its purchase of wealth manager Executive Monetary Management. In November 2001, Neuberger acquired $800 million in high-net-worth assets from Oscar Capital Management.
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