"Lehman to Boost Funding with $3 Billion Offering" is the major headline after the close today.
(For more information on the details of this report, please visit cnbc.com)
Analysis:
"The Good"
-Lehman Brothers were able to present this news AFTER they've been able to find buyers to their offering. The release of this news was received with only a mild negativity in the after-hours trading, thanks in big part to announcing the offering that's been FINALIZED.
-In addition to the presence of long term believers of this company, Lehman was able to price their offering some 30-35% premium to the current share price. Getting a higher price for something that's worth less in the current market is a Good thing.
-Lehman is obviously trying very hard to not end up as Bear Stearns #2. They witnessed destruction and that should make them fight to the death.
"The Bad"
-The large, long term investors that purchased the offering are guaranteed 7-7.5% dividend yield. That's quite a rate considering the Treasury Bonds yields in the 3-4% range. Simply put, Lehman is paying lenders twice the rate that the government pays. This certainly won't make their balance sheet look better.
-30-35% premium to the current share price would mean that these shares are being bought at an approximately $50/share (max). The $50 price certainly looks great (a vote of confidence) but if you look closely, just a week ago the stock was trading at a high of $49.64 after Fed rate cut.
-Lehman's CFO Erin Callan was quoted as saying that there was a "window of opportunity in the market" and "significant interest" from several investors. We are merely 10 days away from the most recent market bottom (less than 4% rise in price of S&P500) and she saw a window of opportunity in the market to sell shares?? If she believed that the market will be in better shape 3-6 months, or even a month from now, why would Lehman attend to the significant interest of these investors now.
-Since Bear Stearns left the stage, of the major US brokerage firms, Lehman has the smallest market cap at $20B. Next in line is Merrill Lynch at $40B. It's no surprise that these two stocks have been hit the hardest on any financial weakness.
"The Ugly"
-Lehman Brothers' latest move to find more capital seems like a desperate measure taken during desperate times. Rumors and put buying interests have not tapered off since the collapse of Bear and I believe this is the final act of shooing away the short sellers. But they will be back and in greater number. I will look for an opportunity to join that group if Lehman manages to buoy itself up to $42.50-$45/share range thanks to slight bullishness in the market & bulls comprehending this news in a positive way. I even dare to say that Lehman will follow Bear and disappear. Will the Fed save another private banking institution? I'd say Lehman's has a better chance of filing for bankruptcy than to find itself under Goldman Sachs. The Fed is not going to hold its neck out a second time.
Next drop = Lehman Brothers' Collapse
Rino Choi
Titans of Wallstreet
Market Columnist
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