Lehman may have to raise capital if sells assets

Investment banks have increasingly been looking to sell assets instead of issuing shares since shedding businesses that provide a relatively low amount of revenue may be less painful for shareholders than dramatically boosting outstanding shares.

Merrill sold back its 20 percent stake in Bloomberg LP, the news and financial data company, to Bloomberg Inc for $4.4 billion in July. It also said last month it was in advanced talks to sell a controlling stake in its Financial Data Services Inc unit, in a deal that could value the business at more than $3.5 billion.

Lehman's asset management unit, which includes the Neuberger Berman business that Lehman bought in 2003, generated about $1.88 billion in net revenue in 2007. Analysts estimate the unit could sell for about $8 billion.

Selling a business to raise capital may be better than issuing shares, but it is generally not pleasant, in part because getting a good price in a sale is tough now. Few buyers have the capital to make big acquisitions, and any potential acquirers know the sellers are anxious to sell assets.

Merrill Chief Executive John Thain told investors in June that he saw the Bloomberg business as worth between $5 billion and $6 billion, but the investment bank ended up selling it for less than that.

The Neuberger business is a steady generator of earnings for Lehman, which has helped stabilize Lehman's overall profits.

TIME TO BUY?

Lehman's current market valuation reflects investor concern about potential write-downs and capital raising, analysts said. Its shares traded on Monday at $18.52, or about 0.56 times their book value, a measure of accounting value.

The other major U.S. investment banks all trade at a premium to their book value, and during better times, investment banks typically trade at twice their book value. Lehman's trading so far below book value signals that investors foresee significant future write-downs

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Concern about future write-downs may be baked into Lehman's shares, but if the quality of the bank's assets shows signs of worsening, and raising capital again becomes necessary, shares may fall further, said Michael Cuggino, portfolio manager at Permanent Portfolio funds, which manages about $3.8 billion.

"We're concerned enough about it to stay away from the stock," Cuggino said.

(Editing by Jeffrey Benkoe)