Lehman Brothers' Greedy Acquisition Strategies

If you take a look at the mission of Lehman Brothers, you will note in its mission statement the phrase “an innovator in global finance.” However, if you search the history of Lehman Brothers, such phrases as “its growth parallels the growth of the United States” pop up. Its business sector has covered equities, fixed income, investment banking, and investment management. The financial records had reflected sound management until the end of the fiscal year 2005. Then the greed in the CEO’s approach to maximize his total compensation may have led to the acquisition of certain financial operations/assets that were not in the best interest of Lehman Brothers’ shareholders, but rather in the interest of Richard S. Fuld Jr., Lehman Brothers’ CEO, who according to Yahoo Finance, had a total annual compensation in exercising his stocks and options of $45.28 million.

According to the balance sheet of Lehman Brothers, from the end of November of ’05 to the end of November of ’07, the total assets grew by approximately 68.5% using November ’05 as a base year. If you analyze the growth, you will find that approximately 67.3% of that growth is in long term investments, which were mostly completed through acquisitions. How were these acquisitions financed? One can wonder, but it is evident from the balance sheet that the total liabilities for that same period increased by approximately 70%. Based on these figures, it seems that management was irresponsible in making such high risk decisions in designing and implementing these acquisition strategies. Fuld’s financial greed has led to this financial disaster today. As the CEO, he is to be blamed for this leadership style. Although according to the Lehman Brothers’ web site, management had a divestiture plan, mainly of the spin-off of some of its assets and debt into the Real Estate Investment Global (REI Global) company. As of today’s news, it is evident that Lehman Brothers is short-lived to see this spin-off activity completed since it is all over the news that Lehman Brothers is filing for bankruptcy and the stock is trading, at the time of this writing, at approximately $.20 rather than $67.73 as it was a year ago.

One has to wonder how CEOs such as Fuld get to these positions, making such important decisions that impact the lives of so many stakeholders such as employees, clients, stockholders, etc. Do these CEOs forget about their ethical standards when they acquire high risk assets, or do they only believe that as long as they are operating within the law that they are serving their stakeholders in the best manner possible? For Fuld to lead the company into such a financial disaster, moving its market capitalization from $44.3 billion a year ago today to the current figure of $144.7 million filing for bankruptcy protection under Chapter 11 of the US Bankruptcy Code and leaving a cloud of confusion on the financial horizon raise serious questions on his ability to manage. Management is supposed to be a process that utilizes the human, financial, and capital resources in the pursuit of the company’s goals.

Lehman Brothers, who employs approximately 28,600 and operates from their headquarters in New York City with offices in London and Tokyo, has products in derivatives, secured financing, and structured instruments and investments. The investment banking segment of Lehman serves as an advising arm to corporate and institutional clients on acquisitions/mergers and divestments and assists companies in raising funds for takeovers as well as Leverage Buy-outs (LBO). How can such a global company serve as financial advisor to multinational corporations and still be unable to manage its own finances? Management literature states that the leadership style is the answer because the style of leadership must be matched to the situation the leader is confronted with. Each situation differs from the other and thus requires a unique approach to managing the behavior of others thus assisting the company in successfully achieving its goals. Did Fuld as the CEO of Lehman Brothers perform his job in achieving the company’s goals? Or were his decisions influenced by his own greed of achieving his own financial reward, disregarding the consequences of his expansion strategies that were high risk acquisitions that resulted in the company’s failure? It is evident from the financial information that these strategies of acquisitions were mostly financed through debt rather than equity thus increasing the debt ratio of the company and putting it at high risk which lead to the current financial crisis.

Are we in this financial crisis today because of Ronald Reagan’s deregulations of the financial markets as part of his government reform strategy? Stay tuned for further analysis that will be reflected in future articles.

Sam is the author of Strategic Acquisition, Divestment, and LBO: Global Dealmaking

Strategic Acquisitions, Divestment, and LBO: Global Dealmaking (Paperback)

The content of this book covers strategic mergers, divestments, and leveraged buy-outs dealing with domestic and international transactions. It explains how these acquisitions and divestments are handled in domestic and international situations. It supplements the information with resources, examples, tax implications and regulations covering the US and European Union.

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