Lehman Unit Lives On

President George W. Bush may be out of a job in January, but his second cousin, George Herbert Walker, will be taking a new one.

Walker, 39, ran Lehman Brothers Holdings’ investment management division for nearly two years before the storied institution filed for bankruptcy in September. During a December 3 auction, the court-approved managers of Lehman, busy selling assets to pay creditors, selected Walker's proposal to spin off most of the money management arm into a new company, called Neuberger Investment Management, and give its senior executives a 51 percent equity stake. Approved by Judge James Peck of the United States Bankruptcy Court for the Southern District of New York at a public hearing on December 22, the deal gives the remaining 49 percent of common stock to Lehman, which will, as part of the bankruptcy workout, turn the shares over to creditors. Walker, the former head of Alternative Investment Strategies at Goldman Sachs Asset Management, and his management team agreed to remain with Neuberger for an undisclosed number of years.

Walker will become CEO of Neuberger, which borrows its name from a money management firm with private high-net-worth clients that Lehman bought in 2003. The value of the management bid was not disclosed, though sources close to the deal estimate it at $1.25 billion, citing court documents. At the December auction Lehman rejected a late-September bid of $2.15 billion by private equity investors Hellman & Friedman and Bain Capital that would have allowed the two firms to back away if the Standard & Poor’s 500 index dropped below 902 points, which it did on November 11. (It ended the year at 903.)

Since collapsing in the largest corporate bankruptcy in U.S. history, Lehman is making an effort to pay off debts of more than $613 billion. Neuberger will issue $875 million in nonconvertible preferred, paying 4 percent for the first year, 7 percent for the second year and 10 percent thereafter. The coupon rate falls should the S&P 500 drop below certain levels. Management will hold 7 percent of the preferred, with 93 percent going to Lehman to distribute to creditors.

Giving ownership stakes to Neuberger managers, who oversee $160 billion in equity, fixed income, hedge funds and private equity assets, should motivate them to improve performance, says Walker. Donald Putnam, managing partner of Grail Partners, a firm that advises asset managers on mergers, agrees that the deal’s new ownership structure will ultimately be good for creditors. "That’s how investing runs best, when management owns a significant interest in the business."