Financial Analysis of Lehman Brother Research Paper
- Length: 10 pages
- Sources: 10
- Subject: Business
- Type: Research Paper
- Paper: #52231514
Excerpt from Research Paper :
Financial Analysis of Lehman Brother
The history has been full of financial collapses and financial scandals and one of the biggest financial collapses that a company has ever seen was that of Lehman brother. The collapse of a firm as huge as Lehman Brother and a firm which has such great experience of over a hundred years lead the world into a shock. It created doubts in the minds of people regarding the condition of other financial institutions. The history of Lehman Brother is rich which is further discussed.
The history of Lehman Brother dates back to 1844, when a boy named Henry who was a 23-year-old son of a cattle merchant who immigrated to the United States from Germany and he settled in Alabama State of the United States where he opened dry goods store. In 1847, when Henry Lehman's elder brother arrived to Alabama, the firm expanded to "H. Lehman and Bro." Within just a further period of 3 years time, when the younger brother named Mayer Lehman arrived in 1850, the name of the firm changed to "Lehman Brothers" and this how Lehman Brothers was founded in 1850. (Bebchuck & Cohan, 2010)
The continuously moved towards expansion by opening its branch in New York City in 1858 where all the commission houses and factors were based. Within a further period of 6 years, that was in 1862 the firm started facing difficulties due to civil war and in order to sustain, the firm associated themselves with a cotton merchant named John Durr. After the civil war, when the situation came back to normal the firm finally moved its head quarters to New York City where tin 1870's, the firm assisted in the foundation of the New York Cotton Exchange. And along with the establishment of the cotton exchange, Emanuel Lehman was entitled to sit on the Board of Governors of the exchange will 1884. This was the time when firm started to deal in financial and other emerging markets by dealing in rail road bonds and finally entering the financial advisory business. (Blake, 2000)
After entering the financial advisory business, the firm evidenced a rapid growth in its emerging markets business where it became a member of the Coffee Exchange in 1883 and the New York Stock Exchange in 1887. It was not far away when in 1899, the firm finally decided to underwrite its first public offer which was the preferred and common stock of the International Steam Pump Company.
Even though the firm underwrote its first public offer in 1899 but the company was not fully involved in the underwriting business up till 1906 when the firm evidenced a real shift in its business from being a commodity house to a house of issue. In 1906, the firm associated itself with Goldman Sachs and underwrote the offering the General Cigar Co. (Cetorelli & Mandel, 2012)
The company started to gain ground rapidly in its business of issuing house and in the following 20 years after its association with Goldman Sachs, the firm was involved in the issue of more than one hundred new issues and most of the new issued it made were in partnership with the Goldman Sachs. One of the major issues that the firm made in these 20 years were of F.W. Woolworth, May Department Stores, Gimbel Brothers, R.H.Macy, Studebaker Corp., B.F.Goodrich and Endicott Johnson Group.
In 1925, one of the firm's partners, Philip Lehman resigned and his place was taken over by his son Robert Bobbie, who was now the head of the firm also. Immediately after Robert Bobbie took over as the head of the firm, the company evidenced the capital crisis of the Great Depression and tried to move its focus from the equity markets to the venture capital till the final recovery of the equities market.
The firm continued with its expansion in the underwriting business and during the 1930's and 1950's, it underwrote the IPO's of DuMont who the first television manufacturer followed by the underwriting of Halliburton, Kerr-McKee and Digital Equipment Corp. (Dwyer, 2009)
As the firm's operations started to spread on a wider scale, some non-family members also became partner in the Lehman Brother such as John M.Hancock in 1924 followed by Monrae C.Gutman and Paul Mazur in 1927.(Fitz Patrick & Johnson, 2011)
Following the death of Robert Lehman in 1969, the firm started to face financial difficulties and until this time none of the member of the Lehman family was leading the company operations. In 1973, the Chairman and Chief Executive of the Bell & Howell Corporation named Pete Peterson were given the charge to save the firm. The taking over the affairs of the firm by Pete Peterson lead to the most rapid growth of the firm in its entire history which was mainly evidenced by mergers with other firms. In 1973, the firm acquired Abraham & Co. followed by the acquisition of Kuhn, Loeb & Co in order to form Lehman Brothers, Kuhn, Loeb Inc. Following the firms two recent mergers with Abraham & Co. And Kuhn, Loeb & Co, the firm became the country's fourth largest Investment Bank. Under the leadership of Pete Peterson, the firm moved from high operating losses towards five consecutive years of record-breaking profits and which contributed to the company's returns on its equity which by the time became one of the highest in the investment banking industry. (Kiernan, 2009)
In 1983, after the rising profits of the firm, hostilities within the firm started and Peterson introduced Lewis Gluckson as his Co-CEO to counter the difficulties being faced. Gluckson's management style increased tensions along with a market downturn which lead to a power struggle between Peterson and Gluckson and the result of which came to be seen as Gluckson being the sole CEO of the firm.
The company was suffering due to internal conflicts and struggles and it was not long awaited when in 1984, Gluskson was forced to sell the firm Shearson for $360 million. After the firm was sold to Shearson, it came to be known as Shearson Lehman. In 1988, another merger was evidenced with E.F.Hutton & Co. And the firm came to be known as Shearson Lehman Hutton Inc.
In 1993, another major structural change occurred in the governance of the firm when during the tenure of Harvey Golub, the new CEO; American Express which previously had a major holding in the firm began to sell its banking and brokerage business. American Express continued to divest by further selling its Asset management and brokerage operations and Lehman Brother Kuhn Loeb was now turned into Lehman Brothers Holdings through an IPO (Initial Public Offering).
The firm's merger and demergers continued up to the next decade in 2001, the firm acquired O. Cowen & Co. which was a private client services business and made a reentry into the asset management business which it was forced to leave back in 1989. The made heavy investments in order to make further acquisitions with a $2 billion fund under asset management, the firm acquired two more major business groups which were The Cross Roads Group and Neuberger Berman. There were no major structural changes until 2007 and the firm performed exceptionally which was also further evidenced by the "Economic Boom" in the country in 2005. In 2007, the firm was able to generate net revenue of approximately $3.1 billion and around $800 million in pre-tax income which included all the revenues and profits from asset management business, private equity business and private client services business.
The Credit Crunch
The firm which has remained one of the leading investment banks along with the highest profits in the banking industry in the country and a firm that was involved in heavy restructuring through a cycle of continuous mergers and acquisitions now became the victim of the financial crisis which started in the late 2007.
As the firm performed well during the most of the financial year 2007, the firm's stock price reached a record of $86.18 which evidenced a market capitalization of $60 billion. By the end of February 2007, the U.S. housing market started to plunge rapidly with defaults in account of sub-prime mortgages at a seven-year high. On March 14, 2007, Lehman Brothers witnessed the biggest one day-drop in their stock price on concerns of the record breaking defaulting figures in the housing market. On the other hand, Lehman Brothers posted record breaking profits for the fiscal year quarter ended 2007 which they helped raising confidence in the firm along with a declaration in a press conference by the CFO of Lehman Brothers who announced that the firm has well contained any risks that have arisen from the defaults in the housing market and Lehman's profitability would be remain unaffected and the firm would continue to perform well.
In August 2007, the firm faced another huge turmoil as two of its hedge funds failed which caused its stock price to fall at a rapid rate. The…