Chief Executive Officer Richard Fuld's drive to make Lehman Brothers Holdings Inc a top-five banker for mergers and acquisitions (M&A) faltered as the fifth-largest securities firm failed to insert itself in nine of the world's 10 largest takeovers this year.

Procter & Gamble Co's US$57-billion acquisition of Gillette Co, Mitsubishi Tokyo Financial's US$30-billion purchase of UFJ Holdings Inc and Federated Department Stores Inc's US$17-billion takeover of May Department Stores Co generated about US$170 million in fees that eluded Lehman so far in 2005, indicate data compiled by Bloomberg.

Goldman Sachs Group Inc, the M&A king since 2001, was hired about three times as often as Lehman during the past four years, and has earned twice as much so far this year.

"We want to be in the top five in fee share globally," said Hugh "Skip" McGee, 45, Lehman's head of investment banking for the past two years. "We're already there in the United States. We're still not quite top five outside the United States."

Lehman almost reached that perch last year. It handled nine of the 15 largest acquisitions and ranked sixth globally and fourth in the United States, the best showing since Fuld, 58, became CEO in 1994, Bloomberg data indicate.

The slow start this year leaves Lehman ninth globally and sixth in the United States. The firm's biggest prize was San Antonio-based SBC Communications Inc's US$16-billion bid for AT&T Corp of Bedminster, New Jersey.

Sweet pot

"The mix of deals so far this year has been out of Lehman's sweet spot," said Ryan Caldwell, who helps manage US$39 billion at Waddell & Reed Financial Inc in Overland Park, Kansas, which holds 850,000 Lehman shares.

The pursuit of M&A revenues has increased since Fuld led the firm's spin-off from American Express Co in 1994. About 58 per cent of Lehman's revenues came from bond trading and underwriting last year, down from about 65 per cent in 1994, company reports show.

Lehman, which has US$71 billion in capital, posted four straight quarters of higher M&A revenues. Fees from mergers advice generated 5.4 per cent of Lehman's revenues last year, up from 4.4 per cent in 2003.

That's still well below the 8.5 per cent of Goldman's revenues mergers advice represented last year.

Market share

Goldman is involved in 32 per cent of this year's mergers, and is poised to collect about US$250 million in fees for US$132 billion of M&A, Bloomberg data show.

Lehman has been hired for 11 per cent of the world's acquisitions, and has charged about US$123 million for US$47 billion of M&As. Fee estimates are based on disclosed fees, the size of the transaction and whether a bank advises the buyer or the seller.

Lehman's climb hasn't gone unnoticed by shareholders. Since 2000, Lehman's total return, which includes reinvested dividends, exceeds 159 per cent, superior to Goldman's 22 per cent advance, Morgan Stanley's decline of 13 per cent and Merrill Lynch & Co's gain of 22 per cent.

Top three

Still, Lehman needs to increase its M&A revenues to be perceived as a consistent competitor with Goldman, Morgan Stanley and Merrill. The top three New York-based firms have earned annual M&A fees of as much as US$2.6 billion, US$2.1 billion and US$1.4 billion, respectively, all in 2000.

Lehman's best year also was 2000, with US$777 million of M&A fees, indicate company reports.

"They've done a great job of taking share, but they're still not taking it from the big three: Goldman, Morgan Stanley and Merrill," said Waddell & Reed's Caldwell.

"Our strategy from the very beginning was to diversify our business platform," Fuld said at a financial-services conference sponsored by Merrill Lynch last November. "In 1994, we were primarily known as a strong, domestic fixed-income house. We needed to build our businesses to diversify."

Fuld doesn't always focus on M&A superstars in his recruiting. He hired Mark Shafir, 49, formerly of San Francisco-based Thomas Weisel Partners, to run Lehman's mergers department in April 2003.

In 2002, Weisel ranked 97th among global merger advisers, Bloomberg data show. Shafir's brother, Robert Shafir, 46, is head of equities at Lehman.

'US first'

"Dick Fuld does get most of the credit," said Richard X. Bove, an analyst at Punk Ziegel & Co in Pinellas Park, Florida, who rates Lehman a "buy" and doesn't own the shares. "In contrast to (Morgan Stanley CEO) Phil Purcell, he's out there selling. One of his critical skills is his ability to pick good people, such as Mark Shafir."

In 2002, before Shafir was hired, Lehman's global M&A ranking was eighth. Since then, Lehman has gained ground in every region except Europe, where its ranking slipped to 14th last year, from 10th in 2002.

"Lehman has chosen to focus on the United States first," said Anton Schutz, who helps manage US$330 million at Mendon Capital Advisors Corp in Rochester, New York, and holds 40,000 shares of Lehman.

"They've done a nice job moving up in the league tables. They know what they have to do in Europe. You've got to get it right first where you are."

New recruits

Lehman has been trying to win fees in Europe and Asia by hiring bankers with perceived cachet. Christian Meissner and Jerry McConnell were lured from Goldman Sachs to head Lehman's M&A operations in Germany.

"Mark Shafir has got them organized, he's got them marketing, he's energized the M&A bankers," said Michael Koeneke, co-founder of Knightspoint Partners in New York and former head of M&A at Merrill. "You can see the correlation of the results with his arrival."

Lehman hired William Vereker, 38, head of Morgan Stanley's top-ranked European utilities M&A team earlier last month.

Vereker will join Carlos Fierro and Perry Hoffmeister, who was transferred to London in September from New York to help run the mergers group.

Anthony Fry was recruited from Credit Suisse First Boston to boost M&A operations in the United Kingdom and Jerome Calvet was brought in from Societe Generale SA, France's third-biggest bank, to run Lehman's M&A office in Paris.

China, Japan

In Asia, McGee and Shafir lured Yang Zhizhong to run investment banking in China, Akio Katsuragi, 52, to oversee investment banking in Japan, and Masaru Shibata, 39, to run the M&A group in Japan.

Lehman was ninth in Asia last year with US$29 billion worth of deals, and ranks 11th this year with US$6.8 billion in deals.

"Everybody is expected to be in the field with our clients," Shafir said in an interview. "The new hires are already having a meaningful impact."

Fuld helped boost Lehman's M&A ranking by meeting personally with clients, including Chicago-based Exelon Corp CEO John Rowe, as Lehman handled the biggest utility acquisition last year, Exelon's US$26.4-billion takeover of Newark, New Jersey-based Public Service Enterprise Group Inc.

"Dick spoke with John on several occasions so there were CEO-to-CEO discussions," said Exelon's Chief Financial Officer Robert Shapard. "Dick gave John the commitment that he would make every resource available. That made a difference."

Fuld's duties

Lehman's merger-related revenues almost doubled to US$179 million in the quarter ended last November 30, boosted by fees from deals including Atlanta-based Cingular Wireless LLC's US$47-billion acquisition of AT&T Wireless Services of Redmond, Washington, and Chicago-based General Growth Properties Inc's US$11.3-billion takeover of Rouse Co of Columbia, Maryland.

Ever since he joined Lehman in 1969 as a money market trader and became a protege of former CEO Lewis Glucksman, Fuld has been Lehman's best salesman.

A power struggle that elevated Glucksman and ousted co-CEO Peter Peterson, President Nixon's Secretary of Commerce and the current chairman of New York-based buyout firm Blackstone Group LP, resulted in Lehman's sale to American Express Co.

That was supposed to be the end of Lehman.

Instead, Fuld won the support of Lehman shareholders, secured the firm's independence and managed Lehman's comeback in the 1990s, culminating with the US$2.9-billion purchase of New York-based money manager Neuberger Berman LLC, which caters to rich individuals.

Fuld received a 33-per-cent pay raise last year, to US$26.3 million, as Lehman's profits rose to a record US$2.4 billion and its stock outperformed shares of its three bigger Wall Street rivals, Merrill Lynch, Goldman and Morgan Stanley.

Purcell, 61, got the biggest raise among Wall Street's top CEOs last year, a 45-per-cent jump to US$22.5 million, as the No 2 securities firm's shares fell 8.2 per cent in fiscal 2004.

Bloomberg News

(China Daily 04/13/2005 page20)