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Wednesday, April 02, 2008 2:11 AM


April Fool's Offering At Lehman


With much fanfare Lehman was bragging that it does not need capital but raised it anyway simply to prove it could. Clearly this is nonsense, but here is the story as reported by Bloomberg: Lehman to Sell $3 Billion of Shares to Raise Capital.

Lehman Brothers Holdings Inc. is selling at least $3 billion of new shares to bolster capital and squash speculation about a cash shortage that pushed the stock down 42 percent this year.

Lehman, the fourth-biggest U.S. securities firm, will offer 3 million convertible preferred shares, the company said in a statement today. Demand for the shares was already three times greater than the amount offered as of 6:30 p.m. in New York, according to a person familiar with the offering who declined to be identified before the sale is completed tomorrow.

"We still maintain that we don't need capital, but we've realized that perception is the dominant issue in today's markets," Chief Financial Officer Erin Callan said in an interview. "This is an endorsement of our balance sheet by investors."

Merrill Lynch & Co., Citigroup Inc. and Morgan Stanley have also raised cash from investors after more than $200 billion of writedowns and losses tied to the collapse mortgage markets at the world's biggest financial companies.
April Fool's Offering

Professor Bennet Sedacca on Minyanville has a more believable version of the story:
Lehman (LEH) is announcing a $3 billion convertible preferred to 'institutional investors'. In other words, retail will never get their hands on the paper and it is likely a way for LEH to pay back some clients with a cheap deal.

If everything is so rosy, and just a few months back, LEH announced it was going to buy 100,000,000 shares at around $65 a share (stock it never bought) then why would it dilute itself at $37?

Because it has to.

Expect more of this folks. Lots of it.
Fool's Day Offering Over Subscribed

Institutional investors were so excited by deal that Lehman offered another million shares. Bloomberg is reporting Lehman Gains as $4 Billion Share Sale Calms Investors.
Lehman gained 18 percent after the New York-based firm increased the size of the deal to 4 million convertible preferred shares from 3 million and said it had enough demand for 14 million. The stock climbed $6.70 to $44.34 at 4:15 p.m. in New York Stock Exchange composite trading.

Investors who bought the new shares are betting Lehman will escape the fate of rival Bear Stearns Cos., which agreed to sell itself last month for a fraction of its market value after a run on the company. The shares pay a coupon of 7.25 percent, or 4 times the rate available on 2-year Treasury notes, and are convertible to stock when Lehman shares reach $49.87.

"The ability to raise over $3 billion in capital in a difficult environment represents a vote of confidence from the equity markets," Sandler O'Neill & Partners analyst Jeffrey Harte said.

Lehman can buy back the preferred shares after five years. Regular shares pay a quarterly dividend of 17 cents, or the equivalent of an annual yield of about 1.5 percent. The conversion will dilute outstanding shares by 7 percent, according Wachovia Corp. analyst Douglas Sipkin.

The $14 billion demand coming from investors last night got the "message out loud and clear" about trust in the firm, Chief Financial Officer Erin Callan said in an interview with CNBC television.

The investment bank is sharing information on short-sellers of its stock with the Securities and Exchange Commission, Callan said. The SEC is investigating whether some investors have been spreading false rumors about Lehman while benefiting from a drop in the share price. Short-sellers borrow stock to sell, with the expectation that they can buy them cheaper as the price falls.
Fools Cheer Loud And Clear

So the market cheered a 7% shareholder dilution by a company that does not need capital but raised it anyway at 7.25% interest. It's fitting that this story began on April Fool's Day, but the next time Lehman raises money it does not need, shareholders will not be cheering so loudly.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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