Excellent article in today’s Economist about not only KDB’s desire to buy Lehman, but also in Korea’s bigger desire to be a global financial player.
Per the article:
KDB, like other Korean banks, dreams of turning itself into a force in global banking. Lehman may be that once-in-a-lifetime opportunity to buy into the big league. It is cheap. It does not appear to have suffered large client and counterpart defections. And unlike Bear Stearns, its erstwhile rival, it can access liquidity at the Federal Reserve’s discount window. If Lehman survives, it could be a profitable — and strategic — investment.
But the whole idea is also a big gamble… KDB’s potential allies in South Korea have expressed little interest in the deal, fearing huge additional write-downs when Lehman reports its third-quarter earnings this month.
Despite the risks, it appears KDB is pressing hard to get a deal done. Much of this is probably driven by the fact that KDB’s head (official title “Governor”) is Min Euoo-sung, the former CEO of Lehman’s Korea branch, who has expressly indicated his desire to turn KDB into a global investment bank through aggressive mergers & acquisitions. The Financial Times has a good write-up on Min here.
However, one of the biggest dampers to this deal is that Korean financial regulators are not too enthusiastic and would only support a deal if KDB found a “consortium” of other banks to invest along with it. In other words, the regulators are telling KDB not to use tax payer money to buy Lehman. According to Reuters, Korean’s other large banks, Shinhan and Woori, don’t appear to be interested, since they already have significant losses from securities backed by U.S. subprime mortgages. According to the Financial Times, Korea’s Military Mutual Aid Association, a military pension fund, has stepped forward (unsolicited) to provide capital for the deal. Ironically, the MMAA has been called a “protector” of South Korean companies against “foreign predators.”
Lastly, there are difficulties coming from the Lehman side as well. Lehman’s head, Dick Fuld, wants a premium price. The last indication appears to be talks are in the range of $5.3 billion for just a 25% stake. To give you some order of magnitude, if you sold all of Lehman’s stock (i.e. its market capitalization) that would only be $10.6 billion. With prices like that, it’s a tough swallow, especially for a business that’s losing billions this year and with a lot of worthless mortgage backed assets. Keep in mind, once you lift the curtain to its balance sheet, Lehman’s losses could be even greater.
Given the complex dynamics, this is going to be a tough deal to get done, if it ever gets done at all. Apparently, the Chinese and the British are looming in the shadows…
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“Lehman’s head, Dick Fuld”
Sounds like a character in a short story about Juicy bars.
Good write-up, Wangkon.
Speaking of funny names: “Euoo”? WTF?
“The last indication appears to be talks are in the range of $5.3 billion for just a 25% stake. To give you some order of magnitude, if you sold all of Lehman’s stock (i.e. its market capitalization) that would only be $10.6 billion.”
But if Lehman doesn’t raise something like $6 billion in liquidity before they announce 3rd Qtr losses at the end of the month, they are going under completely. The KDB smells a bargain, but they don’t want to pay the price for playing with the Big Boys. And the only reason Lehman is talking to KDB is they need to raise cash.
It’s always a gamble in this type of situation, but if KDB assists (by buying in) Lehman from going under then KDB would stand to make really big money over the next 20-25 years. That’s a long term vision I have rarely witnessed in Korea.
US$5.3 billion won’t begin to cover Lehman’s capital needs, which means that not only will KDB be paying quite a premium for that 25% stake, it will almost immediately have to ante up for additional capital — or otherwise the previous investment would be wasted. Lehman Brothers, although full of fine professionals (who were nevertheless badly burned by hubris and greed), is a tar baby right now.
Yes, the proposal in any bank restructuring is to firewall the liabilities in a “bad bank” and take the good assets forward, but that requires good due diligence and some help from the United States taxpayer. Politically I’m not convinced that the US can justify sticking American taxpayers with a bill so that Korean investors can avoid Lehman’s liabilities.
Meanwhile Lone Star, having rescued and restructured a failed Korean bank, has to threaten the Korean government with litigation in order to be able to recover its successful, lawful investment returns. Pathetic.
I know so little about the banking biz, but: doesn’t this just risk throwing the spotlight on Korea’s misbehavior visa vis lone star?
Will American regulators have any leverage here to force a fair resolution on Lone Star’s sale of KEB, perhaps as a precondition of getting the Lehman deal through?
The way it stands… it’s a shit deal. $5.3B for 25% of the company when market cap is $11B? That’s a 100% premium. A shit deal as it stands.
If KDB wants it, it will have to pay some kind of premium. Typically, for a publicly traded company, the buyout premium is 20%. That’s the market. But a 100% premium? Ridiculous. I expect (well hope) no deal by mid-September and Dick has to go talk to shareholders when he announces 3rd quarter results feeling like he’s dressed in nothing but underwear.
But a big premium is what Dick wants (probably to save his job). Investment bankers are greedy. What can I say? I’ll give Min the boobie award if he caves into what Dick wants.
Given that Korea is trying to buy an American bank on the cheap, it’s absolutely criminally ironic that Lone Star has to try and sue Korea to try and get its profits back from their deal in KEB. Absolutely criminal…
Isn’t Woori bank under ownership of the South Korean government? It really is a state bank right now. Must be some personal jockying about ego that is keeping heads apart.
Nice article on Min in today’s Reuters. Sounds like he’s the man to change KDB from a bureaucracy to an investment bank. However, it will be like a cowboy trying to steer a brontosaurus.
I wish him luck… he’s gonna need it!
http://www.reuters.com/article.....nnel=10218
According to this week’s BusinessWeek, the deal went south.
My gut told me it would go south… too much of a gap. Lehman won’t sell itself for cheap (i.e. market price) unless it has to. It doesn’t have to now, but later this month it will, at which point KDB will just be one fish among many in a feeding frenzy over Lehman’s bleeding and lifeless carcass.
“at which point KDB will just be one fish among many in a feeding frenzy over Lehman’s bleeding and lifeless carcass.”
like a writhing heap of maggots burrowing into the fetid flesh of the damned?
WangGon you’re smart but very morbid.
The scene around the purchase of a dead/dying company is morbid.
I’m just calling a spade a spade.
This is unfolding exactly as I thought it would…
http://www.forbes.com/business.....ehman.html
Fuld tried to wrangle the Koreans into a shit deal… the Koreans were smart enough to know it and walked… now Lehman is going to hell in a handbasket and won’t be worth a fraction of what KDB originally offered… The government (i.e. U.S. tax payers!) will have to foot the bill to bail Lehman out and it will be a feeding frenzy by the Koreans, Chinese, Japanese, Private Equity, every other Tom, Dick and Harry with a little money and a lot of balls, to buy up what remains of Lehman after its fall…
All because Fuld and the other senior Lehman execs got greedy and were too smart (or perceived themselves to be so) for their own good…
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[...] at the Marmot’s Hole has compiled an excellent roundup of the situation. Here’s a taste, quoting the Economist: KDB, like other Korean banks, dreams of turning [...]