http://www.nytimes.com/2008/08/19/business/19lehman.html Lehman May Put a Prized Unit on the Block By JENNY ANDERSON and LOUISE STORY Published: August 18, 2008 Lehman Brothers, the troubled investment bank, is considering the sale of all or part of its prized money management division to private equity firms to raise billions of dollars of capital and ease the pressure caused by losses related to real estate. Richard Fuld, Lehman Brothersâ chief executive, could face write-downs. The move would be the latest by a Wall Street firm forced to sell off high-end assets, following the recent sale by Merrill Lynch of its stake in Bloomberg L.P. and the sale by Citigroup last month of its large German consumer banking franchise. Lehman sent letters last week to a number of financial companies, including private equity firms like Kohlberg, Kravis & Roberts, J. C. Flowers, the Blackstone Group, the Carlyle Group and Apollo Management, to test interest in its money management division, according to several people briefed on its contents. The letter, a so-called memorandum of understanding, did not put a value on the division. It said that interested parties could bid for all or some of the pieces but encouraged bidders to make an offer for the whole business. The investment management division includes Neuberger Berman, which Lehman Brothers acquired in 2003 for $2.6 billion, Lehman Brothers Asset Management and its private client brokers. There has been widespread speculation that Lehman was contemplating a sale of Neuberger Berman, whose value is estimated by analysts to vary from less than $7 billion to as high as $13 billion (Lehmanâs entire market capitalization is about $10.5 billion). Lehmanâs current talks with private equity are an attempt to put price tags on Neuberger and other pieces of its asset management unit, which should provide flexibility for Lehman executives when they sit down to review third-quarter earnings and calculate if they need to raise capital. A spokesman from Lehman declined to comment. Lehman now faces the capital-raising problem that haunted Merrill Lynch last month. As the third quarter draws to a close, it is looking more likely that Lehman will have to write down the value of its mortgage and other investments to a degree that could wipe out all of the investment bankâs earnings. In the last 12 months, the stock is down 74 percent, compared with a 33 percent decline in the Amex XBD broker dealer index. Earlier this summer, analysts expected Lehman Brothers to earn a small third-quarter profit, but now some expect a loss of $1.8 billion. Through the mortgage boom, Lehman was a major player in the selling and packaging of residential and commercial mortgages. That has come back to haunt the firm, whose top management has extolled the virtues of conservative risk management. In the second quarter, Lehman lost $2.8 billion, mostly caused by write-downs from residential real estate investments, and was forced to raise $6 billion. Investors who bought into that deal have been burned as Lehmanâs stock has continued to fall. Like Merrill, Lehman has run out of easy options to raise money. That forces Lehman to consider selling some of its more valuable assets. Aside from the potential sale of its investment management unit, Lehman is looking to offload assets, including a portfolio of up to $40 billion worth of troubled commercial real estate assets, according to investors involved in that sale. Asset management â the business of managing money for wealthy individuals and institutions and creating instruments for them to invest in, such as mutual funds and hedge funds â provides among the steadiest form of earnings for banks, and analysts are split on whether it makes sense for Lehman to sell the unit. Capital markets and investment banking businesses, on the other hand, have unpredictable profits in good markets and potentially deadly results in down markets. Some analysts favor spinning a stake in Neuberger Berman off to the public, a move that would allow the investment bank to continue to benefit from its earnings. âThe best would be to sell 20 percent to the public,â Richard X. Bove, an analyst at Ladenburg Thalman, said after he published a research note on Aug. 6. But selling all or part of Lehmanâs investment management unit reverses years of trying to diversify its business. After turbulent markets rocked Lehman Brothers in 1998, Richard S. Fuld Jr., the chief executive, focused on building asset management to provide investors a more stable stream of earnings. In late 2002, Lehman bought the fixed-income division of Lincoln Capital Management. The following year, it bought Neuberger Berman, the asset management company, for $2.6 billion, along with Crossroads Group, a private equity fund manager based in Dallas. In recent years, Lehmanâs investment management division bought minority stakes in hedge funds, including D. E. Shaw and Ospraie, though those stakes are not thought to be for sale. As of May 31, Lehmanâs investment management unit had $277 billion under management, making it a relatively small operation on Wall Street. Lehman has 27 mutual funds in the asset management division, including 21 sold under the Neuberger brand name. Neuberger also manages private client money. In total, the mutual funds manage $22 billion, according to Morningstar, a tiny fraction of the total mutual fund industry. âTheyâve generally done pretty well,â said David Kathman, a mutual fund analyst for Morningstar. âThe one thing that sets them apart is they tend to make pretty bold moves.â While that makes the funds attractive, one of the complications to any potential sale of Lehmanâs investment management business is that ratings agencies could determine that the division or its parts are too important to Lehmanâs business to sell. At the same time, many bidders are not interested in buying the whole business because it does not fit with their own model. Currently, Lehman has brokers who sell products like investments in the D. E. Shaw hedge fund, or investments in Neuberger funds. If a private equity firm were to buy Neuberger, but not these brokers, it would not have anyone to sell the products. On the other hand, Wall Street banks like Merrill Lynch are potentially interested in the brokers to add to their own huge sales force â but not in Neuberger Berman, said one person briefed on the negotiations. For example, Blackstone is not interested in buying the whole asset management unit, said one person briefed on the firmâs plans. But the publicly traded private equity firm (not Blackstoneâs private equity funds) is potentially interested in some of the pieces of Lehmanâs asset management group, this person said. Andrew Ross Sorkin contributed reporting.