Given that the words of Ladenburg Thalmann analyst Richard X Bove are being cited as a prime factor behind a rebound in equity indices on both sides of the Atlantic - and the specific reason why Lehman Brothers jumped 10 per cent in early trade on Wall Street - it is probably worth reprinting his note in full.
Lehman Brothers (LEH)
Hostile Takeover?
• The price target on Lehman Brothers has been dropped to $20 per share from $23 per share. The heightened market fears concerning the outlook for the company suggests that the stock will sell at a lower multiple to book value.
• The major question related to this company at the moment is: “Why isn’t anything happening?” The answer, of course, is because management’s perception of the company’s value is meaningfully different than the investors’ perception.
• Investors are convinced that that this company cannot survive or that it will be forced into taking huge losses that will devastate book value. Based on this view they have pushed the stock down to a value that is approximately 48% of tangible book value and 37% of stated book value.
• If one assumes that the Neuberger Berman subsidiary is worth somewhere between $9 to $13 billion, the rest of the company is being valued at less than zero. A valuation of this nature would only make sense if the company were to go out of business and then still owe money to its creditors, which of course could not happen. Once it is bankrupt, it is bankrupt.
• Management clearly views its assets and business operations as having more value than zero. In fact, it is thought that management actually believes that the tangible book value is correct. Based upon this belief it is possible that negotiations to sell a portion of the company to outsiders broke down because management was demanding to paid book value or a premium to book value.
• It is also clear that management does not believe it should be stampeded into selling its real estate backed securities and loans at fire sale prices. It believes these assets have value presumably because the underlying loans are paying principal and interest.
• So the market is at a stand-off. Investors are unwilling to accept any positive view of the company; management is unwilling to sell out at a deeply distressed value. The stage is set for a hostile bid to takeover the whole company.
• A deep pocket buyer would not be under any pressure to sell any assets. It could wait until they mature. It could sell Neuberger for more than the value of the whole company and basically own Lehman Brothers for nothing.
• Will it happen? I do not know. Should it happen? Absolutely, opportunities like this are rarely evident in the markets.
If we were to be cruel here on FT Alphaville (which we are) we would then burrow into the analyst’s research disclosures in the appendix to the report and pull out this:
This is Mr Bove’s forecasting record on Lehman this year: enthusiastic “buy” recommendations between February and April, capitulation in May, before moving to a neutral stance in June.
If the analyst believed it was a buy above $50 six months ago, it must be a screaming buy now the price has fallen 70 per cent.
One more observation: Ladenburg’s corporate, trademarked slogan is “Serving the Smart Money since 1876″.®”
Related links:
Bove says Lehman could see hostile bid - FT Alphaville’s 6am Cut
