Lesson from the Microsoft Deal with Facebook

You don’t need to buy the whole company, you only need to make sure your competitors can’t afford it.

In October 2007 Microsoft made headlines by paying $240 million for a mere 1.6% stake in Facebook.  From one perspective this was an idiotic valuation for a social networking site.  However, from the other point of view it was brilliant as Microsoft essentially put all other suiters to bed.  Who knows what Facebook might really have been worth.  A couple of billion, maybe?  But such strategic buying is not about paying top dollar, its about sparing cash and stock for less speculative transactions.  The best way to conserve is to take less of the target, boosting its value, and sending potential rivals home for good.

Well, Neuberger Berman’s “management” was awarded the firm in a contentious bidding process that ended yesterday.  In the deal, the current management team (comprised now heavily by former Lehman top-brass), bought 51% of the firm for an undisclosed sum giving them control of the once venerable money management firm.  While the details of the deal were not released, I’m willing to be that they pulled a Microsoft on this one.  Giving the firm a much higher valuation than another suitor would consider, but saving themselves the out of pocket expense by only acquiring half of the firm.

This pitch apparently went over well with the bankruptcy attorneys and judge, under the assumption that the balance of the equity could now be sold at a later date, and presumably at a richer valuation to pay off Lehman’s creditors.  By only selling 51% to Neuberger management, the Lehman estate maintains ownership of the remaining 49%, giving it the option to wait for markets to normalize and logically to try to sell it for a higher price.

However, I wonder what the valuation for this deal was.  If it was anything like the Microsoft deal, whereby the 51% purchased represented a much heftier price (but lower out of pocket expense) than Bain & Hellman were willing to pay, I wonder if in fact Lehman can sell a minority interest in an asset manager at some massively appreciated value in any reasonable period of time.  I suppose that assumes client attrition remains low and that markets cooperate.

Only time will tell if this was the best thing for Lehman’s creditors, in the meantime though, it certainly leaves you skin crawling to think that a bunch of ex-Lehman execs were able to co-opt the Bain Hellman deal.  I would wonder how client’s might feel if they are dually Neuberger Berman client’s but also a part of a Lehman creditor class?

Sources:
Microsoft invests $240 million in Facebook
Associated Press, October 24, 2007
http://www.msnbc.msn.com/id/21458486/

Neuberger Berman Management, Lehman to Purchase Investment
Jason Kelly and Jonathan Keehner, Bloomberg.com, December 4, 2008
http://www.bloomberg.com/apps/news?pid=20601103&sid=aXZnNdTGlz.g&refer=us

Wheeling and Dealing

Today’s Wall Street Journal is reporting an attempt by the Carlyle Group to thwart the Neuberger Berman deal reached with Bain and Hellman & Friedman. 

The vultures swooping in sounds more like a coup against the Lehman pedigreed management in Joe Amato and Allison Deans, but it could be a sign that the price is just too darn low.  Is this another case of money being siphened out to managers by way of the $400 earmarks to retain partners?  Although instead of at the expense of shareholders this may be viewed as at the expense of debtholders.  This will probably get more juicy before all is said and done, as debtholders are a lot more protective of their cash than equity holders are.

At the very least, Judge James Peck, is going to have to hear the proposal tomorrow, and if there is a better offer for LBHI’s estate, he will need to consider it.  Either way, it’s not going to bring comfort to Neuberger clients.  And in time, with  enought client attrition, the final purchase price may prove to have been too high. 

Private-equity firm Carlyle Group has teamed up with former Neuberger Berman chief executive officer Jeffrey Lane to make a rival bid for Neuberger, the crown jewel of Lehman Brothers Holdings Inc.’s asset-management unit.

Late last month, Bain Capital LLC and Hellman & Friedman LLC’s announced an acquisition of Neuberger and other Lehman money-management assets for $2.15 billion. The price paid by Bain and Hellman — about half the firms’ initial bids — was a steep discount to the amount Neuberger would have sold for prior to Lehman’s collapse.

Carlyle and Mr. Lane filed an objection in bankruptcy court Tuesday that the price paid for Neuberger is too low and violates Lehman’s obligation to maximize the value of its asset sales to pay off its creditors.

Source:
Carlyle, Lane to Launch Bid for Neuberger
Peter Lattman, Jeffrey McCracken, Wall Street Journal, October 15, 2008
http://online.wsj.com/article/SB122403403197135037.html?mod=googlenews_wsj