Barclays to Buy Lehman U.S. Units for $1.75 Billion

By Ben Livesey and Yalman Onaran

Sept. 17 (Bloomberg) -- Barclays Plc, the U.K.'s third- biggest bank, will acquire the North American investment-banking business of bankrupt Lehman Brothers Holdings Inc. for $1.75 billion, two days after abandoning plans to buy the entire firm.

The London-based bank is paying $250 million in cash for the Lehman businesses and $1.5 billion for the securities firm's New York headquarters and two data centers, it said in a statement on its Web site today. The operations employ about 10,000 people, almost two-fifths of Lehman's total.

Barclays President Robert Diamond seized on what he called a ``once in a lifetime opportunity'' to buy a business that ranks seventh in advising on U.S. mergers. The price is on par with the market value of Sanders Morris Harris Group Inc., a Houston, Texas-based brokerage with 617 workers, and is less than a third of the value of KBW Inc., a New York-based firm that employs 529.

``While this could be a positive development for the long run, given the current market conditions, we are skeptical that the market is going to reward any deal,'' Derek Chambers, a London-based analyst at Standard & Poor's Equity Research Ltd., said in a note to investors.

Lehman is selling off pieces of itself that weren't included when the holding company filed the biggest Chapter 11 bankruptcy in history. Diamond said last month he wants the bank to take market share from Wall Street firms weakened by the credit crunch and break into the ``top tier'' of U.S. securities firms.

M&A Rankings

The purchase includes the equities and fixed-income sales, trading and research businesses, commodities and foreign exchange, merger advisory and prime brokerage units, Barclays said.

Lehman slipped to seventh in advising on mergers and acquisitions involving U.S. companies this year from fifth in 2007, according to data compiled by Bloomberg. Barclays ranks 35th in that market.

Barclays fell 2.5 percent to 308 pence in London yesterday, valuing the bank at 25.1 billion pounds ($45 billion). That decline was smaller than the 3.9 percent drop in the eight-member FTSE 350 Banks Index.

Lehman is in discussions to sell its investment-management unit to private-equity bidders Bain Capital LLC and Hellman & Friedman LLC, according to people familiar with the negotiations. The firm is also proceeding with an auction announced last week as part of Chief Executive Officer Richard Fuld's failed plan to save the 158-year-old firm.

No Guarantees

Diamond was in New York last weekend as Lehman met with Wall Street executives to discuss a rescue plan. Lehman needed a bailout after Korea Development Bank pulled out of a plan to provide new capital and Lehman shares lost most of their value.

Barclays declined to bid for all of Lehman after three days of emergency negotiations involving the U.S. Treasury and Federal Reserve, Barclays spokesman Leigh Bruce said Sept. 14. Barclays couldn't get guarantees from the government to mitigate what it called Lehman's ``open-ended'' trading obligations.

Bank of America Corp. also walked away from a possible Lehman acquisition over the weekend.

``Clearly Barclays's negotiating position is strong, which suggests a value-creating deal,'' said JPMorgan Cazenove Ltd. analysts in an e-mail note to clients before the deal was announced. ``Investors will want reassurance on the impact on Barclays's capital,'' said the analysts, who rate Barclays ``neutral.''

Tier 1

Barclays's so-called core equity Tier 1 capital ratio, a closely followed measure of a bank's ability to absorb losses and writedowns, rose to about 5.8 percent from 5.1 percent after it raised 4.5 billion pounds in a share sale in June. Barclays's ratio lags behind U.K. peers including HBOS Plc and Royal Bank of Scotland Group Plc.

CEO John Varley, 52, said in June that Barclays would use half the proceeds for growth, including acquisitions. Barclays sold shares to sovereign funds in Qatar, Singapore and China.

Barclays Capital, the bank's London-based securities arm, has 16,000 employees and contributes about 16 percent of Barclays's earnings, down from 39 percent a year ago. First-half pretax profit slumped 69 percent to 524 million pounds after the unit wrote down 2.8 billion pounds of subprime and Alt-A mortgages and other assets damaged by the credit turmoil.

Barclays's highest priority is to sell or liquidate troubled assets, Diamond said Aug. 7.

Lehman ranked No. 7 in global equity underwriting this year, according to data compiled by Bloomberg. Barclays, which wasn't listed among the top 25 on the list, could also use Lehman to increase its share of bond underwriting in the U.S. and add mergers and acquisitions advice worldwide.

To contact the reporters on this story: Ben Livesey in London at blivesey@bloomberg.net; Yalman Onaran in New York at yonaran@bloomberg.net.