Filed by Lehman Brothers Holdings Inc.
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12 under the Securities Exchange Act
of 1934
Subject Company: Neuberger Berman Inc.
Commission File No. 001-15361
Date: July 23, 2003
The attached document contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not limited to, (i) statements about the benefits
of the acquisition of Neuberger Berman by Lehman Brothers, including financial
and operating results, synergy benefits and any accretion to reported earnings
that may be realized from the acquisition; Lehman Brothers' and Neuberger
Berman's plans, objectives, expectations and intentions and other statements
contained in this presentation that are not historical facts; and (ii) other
statements identified by words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" or words of similar meaning. These
forward-looking statements are based upon management's current beliefs or
expectations and are inherently subject to significant business, economic and
competitive uncertainties and contingencies and third-party approvals, many of
which are beyond our control. The following factors, among others, could cause
actual results to differ materially from the those described in the
forward-looking statements: (1) whether the stockholders of Neuberger Berman
approve the proposed transaction; (2) the satisfaction of the other conditions
specified in the merger agreement, including without limitation the receipt of
required governmental and other third-party approvals of the proposed
transaction; (3) the ability to successfully combine the businesses of Lehman
Brothers and Neuberger Berman; (4) the realization of revenue and cost synergy
benefits from the proposed transaction; (5) operating costs, customer loss and
business disruption following the merger, including adverse effects on
relationships with employees; (6) changes in the stock market and interest
rate environment that affect revenues; and (7) competition. Lehman Brothers
and Neuberger Berman do not undertake any obligation to update any
forward-looking statement to reflect circumstances or events that occur after
the date such forward-looking statement is made.
The attached document shall not constitute an offer of any securities for
sale. The proposed transaction will be submitted to Neuberger Berman's
stockholders for their consideration. Lehman Brothers and Neuberger Berman
will file a registration statement, a proxy statement/prospectus and other
relevant documents concerning the proposed transaction with the SEC.
Stockholders of Neuberger Berman are urged to read the registration statement
and the proxy statement/prospectus and any other relevant documents filed with
the SEC when they become available, as well as any amendments or supplements
to those documents, because they will contain important information.
Stockholders of Lehman Brothers can obtain more information about the proposed
transaction by reviewing the Form 8-K filed by Lehman Brothers in connection
with the announcement of the transaction, and any other relevant documents
filed with the SEC when they become available.
You will be able to obtain a free copy of the proxy statement/prospectus, as
well as other filings containing information about Lehman Brothers and
Neuberger Berman, at the SEC's Internet site (http://www.sec.gov). Copies of
the proxy statement/prospectus and the SEC filings that will be incorporated
by reference in the proxy statement/prospectus can be obtained, without
charge, by directing a request to Lehman Brothers, Investor Relations, 745
Seventh Avenue, New York, New York 10019
(212-526-3267) or to Neuberger Berman, Corporate Communications, 605 Third
Avenue, New York, New York 10158 (212-476-8125).
Lehman Brothers, Neuberger Berman and their respective directors and executive
officers may be deemed to be participants in the solicitation of proxies from
the stockholders of Neuberger Berman in connection with the proposed
transaction. Information about the directors and executive officers of Lehman
Brothers is set forth in the proxy statement on Schedule 14A, dated February
28, 2003, for Lehman Brothers' 2003 annual meeting of stockholders.
Information about directors and executive officers of Neuberger Berman and
their ownership of Neuberger Berman common stock is set forth in the proxy
statement on Schedule 14A, dated April 16, 2003, for Neuberger Berman's 2003
annual meeting of stockholders. Additional information regarding participants
in the proxy solicitation may be obtained by reading the proxy
statement/prospectus regarding the proposed transaction when it becomes
available.
* * *
The following is a transcript of a conference call held on July 22, 2003 in
connection with the announcement of Lehman Brothers' proposed acquisition of
Neuberger Berman.
* * *
Transcript of Conference Call Discussing
Lehman Brothers Holdings Inc.'s Acquisition of Neuberger Berman Inc.
July 22, 2003
9:30 a.m. EDT
Coordinator: Good morning, and welcome to the conference call regarding
Lehman Brothers' combination with Neuberger Berman. Your lines
have been placed in a listen-only mode until the
question-and-answer segment. This call is being recorded. If
you have any objections, you may disconnect at this time. I
would now like to turn the call over to the Director of
Investor Relations, Ms. Shaun Butler. Thank you, you may begin.
S. Butler: Thank you all for joining us this morning. It's important to
note this presentation contains forward-looking statements
about the proposed transaction and the firm. These statements
are not guarantees of future
2
results. They only represent the firm's expectations, estimates
and projections regarding future events. These forward-looking
statements are based upon management's current beliefs or
expectations and are inherently subject to significant
business, economic and competitive uncertainties, and
contingencies and third-party approvals, many of which are
beyond our control.
For more information concerning the risks and other factors that
could affect the transaction and the firm, read the
registration statement and the proxy statement/prospectus and
any other relevant documents filed with the SEC when they
become available, as well as any amendments or supplements to
these documents. You will be able to obtain a free copy of the
proxy statement/prospectus as well as other filings containing
information about Lehman Brothers and Neuberger Berman at the
SEC's Internet site, www.sec.gov. Let me now turn the remarks
over to Richard Fuld.
R. Fuld: Thanks, Shaun. First off, good morning to all of you. I want to
thank you for joining us. We're very excited to announce the
combination of Lehman Brothers and Neuberger Berman.
Neuberger's world-class capabilities will significantly and
profitably expand our scale in the high-margin, private wealth
management and mutual fund and institutional
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asset management businesses, building on the proven success of
our client services segment.
For this morning's discussion of this transaction, I'm pleased
to be joined by Jeff Lane, President and CEO of Neuberger;
Bobby Matza, Executive VP and Chief Operating Officer of
Neuberger; and from Lehman, Dave Goldfarb, our CFO; and Ted
Janulis, Head of our Client Services business, Wealth and Asset
Management Division.
Before we go to questions though, we plan to cover three topics
today. First, I will review the strategic rationale behind the
Neuberger business combination; next, Jeff Lane will provide an
overview of Neuberger's business and financial metrics; then
third, Dave Goldfarb will outline the financial implications of
this transaction for Lehman Brothers and the business benefits
that we expect to derive from this combination.
Let me begin by outlining the basics of this transaction. As of
yesterday, July 21st, 2003, we signed a definitive agreement to
purchase Neuberger for an aggregate net consideration of $2.625
billion. That number includes the assumption of Neuberger's
debt, net of excess cash on hand. As of yesterday's close, the
acquisition consideration will consist of approximately 77% of
Lehman stock, with the remaining 23% in cash. Since the
transaction requires the approval of Neuberger shareholders as
well as certain
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governmental and other approvals, our expectation is to close
the acquisition in our fiscal fourth quarter.
I'm sure that Jeff is going to reiterate these points, but
operationally it's important to note that Neuberger's brand
will remain intact, as will its approach to investment
management.
Organizationally, Neuberger will become part of our Wealth and
Asset Management Division, and both Jeff Lane and Bobby Matza
will be assuming senior positions within the combined firm.
Jeff will become a Vice Chairman of Lehman, a member of the
Office of the Chairman, Chairman of our Wealth and Asset
Management business, and Chairman of Neuberger.
Bobby will join the firm's management committee and assume the
role of President, as well as remaining as the Chief Operating
Officer of Neuberger. We're pleased to be working with both
Jeff and Bob, and given their broad-based experience within the
financial service industry, we feel that they can both make a
significant contribution to the combined company.
As many of you are very much aware, Lehman has continued to
implement its overall strategic plan, which has focused on
growing shareholder value by building a set of businesses that
allows the firm to
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achieve strong cross-cycle performance and financial metrics at
the top of its peer group.
In general, we have directed our resources to businesses that
generate growth, high and sustainable margins, and more
annuitized revenue streams. Our strategic objectives have
entailed a multiyear build-out in each of our major segments:
investment banking, capital markets, and client services, which
includes our wealth and asset management activities.
Over the past five years we have achieved our targets of
revenue and earnings growth and diversification through a 50%
expansion in our employee headcount. Today, virtually all of
that growth has been organic; however, at the same time, we've
stated our intention to pursue acquisitions that would
accelerate our growth and scale to enhance shareholder value.
We believe this combination with Neuberger meets this overall
strategic objective. Neuberger is one of the largest and most
respected independent high-net-worth managers, with an
excellent track record of delivering value and performance for
its clients. When the current Neuberger footprint is combined
with our existing Wealth and Asset Management
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group, Lehman Brothers will emerge as one of the leading
providers of services to that highly desirable marketplace.
The high-net-worth business is characterized by favorable
demographics, a growing demand for services, annuitized
revenues, and consistently high and sustained margins; and the
size and the breadth of Neuberger's business platform is scarce
in today's marketplace and very difficult to build.
Neuberger also brings us expanding capabilities in the
institutional market and provides us with new opportunities in
the area of overall mutual funds and alternative investment
management, as Jeff will detail in his remarks. The combination
of these two well-established brands will result in a wealth
and asset management entity with over $100 billion of assets
under management, of which more than 40% will represent
higher-margin equity assets.
This total reflects the fact that Neuberger's assets under
management have grown to a record high of $63.7 billion as of
June 30th, of which $24 billion are assets managed for
high-net-worth clients, and $39.7 billion represent the mutual
fund, wrap, institutional separate account, and alternative
investment businesses. Overall, the combination will result in
close to a doubling of our wealth and asset management unit
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from a revenue perspective, with the addition of these very
attractive, high-margin and high-return businesses.
It also raises the percentage of our revenues from our client
services segment to over 21% on a pro forma basis, and that's
versus 13% currently, enhancing this segment's revenues by over
75%. It brings our scale in these businesses to a whole new
level and enhances our capabilities for significant incremental
product distribution opportunities.
In addition to the direct benefits, which Neuberger brings to
our high-net-worth and asset management operations, we believe
that Neuberger also significantly enhances our firm's overall
strategic positioning. The combination improves our revenue
diversification, and it furthers our objective of deriving a
higher proportion of our revenues from fee-based activities.
Neuberger's assets under management have proven to be very
stable, even in this difficult market environment, and its
revenue base reliable. This combination should reduce our
overall revenue volatility and improve the quality of our
earnings and further enhance our cross-cycle performance.
8
Dave Goldfarb will address the specific financial implications
of this transaction, but we clearly believe that Neuberger's
business model is extremely attractive from a financial
perspective.
I've already commented on the inherent stability of the fee
revenue stream throughout the current downturn. Neuberger's
business is neither capital- nor liquidity-intensive, and they
operate with a low fixed base that provides significant
operating leverage and higher margins and ROEs cross-cycle.
The market has historically recognized these favorable
operating characteristics by granting asset managers, and
particularly those with a high-net-worth focus, a premium
multiple, and we expect this business to attract an expanded
P/E with the combined entity.
Finally, from a timing perspective, we believe that now is an
opportune time for a transaction such as this one. Currently,
the valuation gap between our firm and the asset managers is at
its narrowest level in the nine years since we've been public,
and asset managers as a whole, and Neuberger in particular,
have begun to see positive net flows and have actually resumed
their growth.
9
In considering any acquisition our starting point has always
been culture. We believe that the fit with Neuberger is
extremely strong for a number of reasons. Neuberger was a
partnership until three and a half years ago, and it has
focused on a close-knit team, team-oriented culture with
significant employee ownership, much like Lehman Brothers.
Again, like Lehman, Neuberger is extremely focused on creating
value for their clients. Their senior management team has
significant public company and financial service experience,
and the limited overlap or redundancies in our business
platforms, along with the close proximity of our operating
headquarters, should ultimately ease the integration process.
The business is all about people; consequently, we've been
extremely thoughtful about retention. In addition to our
discussions with Neuberger's executive management team, we've
also met with a large number of Neuberger's other key
employees, and we believe that they are very enthusiastic about
this combination.
As part of the overall transaction, the 32 active Neuberger
Berman partners, who actually lead most of the wealth
management teams, will convert their Neuberger stock, including
approximately 941 million in shares subject to transfer
restrictions, into Lehman Brothers' stock and cash, on the same
basis as the public shareholders. All of Lehman
10
Brothers' stock received in exchange for these restricted
shares will continue to be subject to similar transfer
restrictions.
We've also established a $120 million retention pool for key
employees, which will be paid in Lehman Brothers' stock with a
five-year vesting period.
Finally, a number of Neuberger's other key employees are also
subject to non-solicitation agreements, and we're entering into
a number of additional agreements with employees who do not
currently have such agreements in place.
In summary, we regard Neuberger as an ideal partner in all
aspects: strategically, financially, and culturally. This
combination allows us to move our franchise forward by
achieving scale and diversification in businesses that we've
targeted for growth. We also share a commonality of purpose, as
client-focused organizations that we believe will serve the
combined entity extremely well.
Let me now turn the remarks over to Jeff Lane, Neuberger's CEO,
to provide you with his perspective as to why this transaction
is so strategically compelling for Neuberger, and to give you a
view and an overview of Neuberger's franchise.
11
J. Lane: Thanks, Dick. It's nice to be back. We've already exchanged
hats, so we are well on our way. Let me tell you why I'm
excited about this transaction and, at the end, we will be
happy to address any questions that any of you have.
As many of you know, my leadership team and I are very familiar
with the Lehman people. As clients and their shareholders of
Lehman, we have forged an extremely strong relationship over
the years. Bob Matza, our Chief Operating Officer, was CFO of
Lehman Brothers and a member of the operating committee. Jack
Rifkin, our CIO, was head of equities, and also a member of
Lehman Brothers' operating committee; and I worked with Dick
Fuld from 1984 through 1989 as President and Chief Operating
Officer of Shearson Lehman Brothers.
Neuberger has a long history - 64 years - of highly successful
private wealth and asset management, and I am proud to say that
we have weathered the difficult three-year investment
environment with our strength intact, and are now in a position
to renew our growth.
In announcing today's transaction, we are choosing the best
possible partner in Lehman Brothers, after reviewing four
important criteria, including, first, a complementary strategic
fit that strengthens our platform
12
and allows us to grow our business better and faster; second, a
strong cultural bond between the organizations; third, a fair
price for our shareholders to reflect the value we have
created; and fourth, a relatively low level of execution risk
allows us both to preserve and further enhance the value of the
franchise.
In our assessment, this combination with Lehman achieves all of
these criteria, and it represents a compelling strategic
opportunity for both firms.
The partnership we are announcing today allows us to pursue our
strategic growth objectives in a far more expeditious fashion
by providing additional financial heft, coupled with broader
product and geographic experience. We have identified a number
of opportunities to offer Lehman's derivatives, private equity,
alternative and other asset management products to our current
client base, while we were also looking for incremental
distribution for Neuberger's products through Lehman's private
client group, institutional sales and investment banking
platforms.
Lastly, given the geographic scope of Lehman's franchise, this
combination provides us with direct access to an international
client base for the first time. I think, as most of you are
aware, Neuberger currently is only a domestic company.
13
Consequently, in this combination, we expect to see a number of
product development opportunities, distribution benefits and
synergies, as well as limited integration issues, since
Neuberger is a pure add-on to Lehman's existing businesses.
For our clients, this means a broader array of products and
investment opportunities with minimal disruption, and these are
also very appealing attributes to our shareholders, including
our employees, who represent a significant proportional
ownership interest.
Now let me give you a quick overview of our firm, and then a
more detailed description of each of our business units.
Founded in 1939 as a New York-based investment advisor and
wealth manager, Neuberger had approximately $63.7 billion -
which is a record, by the way - in assets under management as
of June 30th. The firm was privately held until an initial
public offering in October of 1999, and we have grown to a
total of approximately 1250 employees.
We have long provided a diversity of investment styles and
products to our clients, all with the primary objectives of
wealth preservation and earning a reasonable rate of return.
This strategy has worked well. In the face of huge declines in
equity markets in recent years, our assets under
14
management have proven to be relatively sticky, while our
revenues and earnings have been extremely stable across the
cycle.
One of the most important elements in this success is the
strength of our culture, engendered by a high proportion of
employee ownership, as is the case with Lehman Brothers. With
over 60% of Neuberger's stock held by our current employees and
former principals, everyone at Neuberger is motivated to
protect and enhance shareholder value. We are truly all
partners. It also comes from the broad perspective of our
portfolio managers, who have an average of over 20 years of
experience.
Neuberger maintains a highly profitable business model. Our
revenues have outpaced the broader market indices and our
margins remain among the highest, relative to other asset
management franchises. In 2002 we generated $603 million in net
revenues, down only 2% from the record net revenue level the
public company posted in 2000. Our pretax income in 2002
totaled $208 million, for a pretax profit margin of 34%. We are
a very profitable company.
We remain focused on achieving meaningful long-term growth. To
this end, we have maintained strong relative investment
performance through a challenging environment. We have
sustained positive net cash flows, and
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we have continued to expand and diversify our investment style
and product mix.
Our businesses incorporate three major segments: private asset
management, which we call PAM; mutual fund and institutional;
and professional security services, or PSS. The private asset
management business manages approximately $24 billion in assets
for high-net-worth clients throughout the United States, and it
represents the cornerstone of Neuberger's wealth management
services.
PAM's portfolio management teams and sales force currently
serve over 17,000 accounts, representing over 6,400 households,
with an average relationship size of $3.7 million. Many of
these client relationships are multi-generational in nature. We
provide our clients with a full array of services, including
personalized money management, trust, advisory, and
wealth-planning services.
PAM generates revenues primarily on a fee-based model, which
produces a highly sustainable source of income. This business
accounted for 50% of Neuberger's total revenues and more than
two thirds of our pretax income in 2002, so it's, by far, our
most profitable business segment.
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The mutual fund and institutional business, which manages over
$39.7 billion in assets as of June 30, generated 37% of
Neuberger's revenues in 2002. We currently manage $20.2 billion
in 29 open-ended mutual funds, 16 sub-advised funds, and six
closed-end mutual funds.
The institutional component of the business manages $12.3
billion in institutional separate accounts and alternative
investment products, while the wrap business as of June 30 was
$7.2 billion and growing rapidly. In 2002 we continued to grow
this business unit through a combination of small strategic
acquisitions, lift-outs, and the introduction of a closed-end
fund and alternative investment business.
Our third segment, professional securities services, offers
prime brokerage and corresponding clearing, securities lending
and other custodial services. In 2002 PSS accounted for about
14% of our total revenues. Our business model and our
consistent approach to client service have produced an
unusually stable asset management platform, even in the
exceedingly difficult capital markets environment of the past
few years. We have now reached an all-time high in assets under
management, and the mix of those assets has remained relatively
consistent as well.
Despite difficult market conditions, our net asset flows have
remained positive. This reflects several factors, but in
particular the growth of our
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sales force, new product offerings, new distribution channels,
and of course performance, where our equity total returns in
PAM have exceeded the S&P benchmark over the current year,
one-year, two-year, three-year, five-year and ten-year
measurement periods; and while we have significantly improved
our performance relative to our portfolio benchmarks in the
mutual fund and institutional segment as a result of a number
of recent portfolio management changes.
Before I turn the presentation over to Dave, let me emphasize
that we are extremely enthusiastic about this partnership. We
feel very strongly that the vast array of products offered by
Lehman Brothers will provide meaningful opportunities for our
clients, and we know that our preeminent private wealth and
asset management platform will be an important contributor to
the future growth of the combined firm.
As leaders of Neuberger, Bob Matza and I are looking forward to
being a part of this dynamic organization, which Lehman
Brothers obviously is, and in order to maximize the benefits of
this combination, we've been extremely thoughtful around the
retention of our employees and clients.
Our confidence in this transaction is shown by the fact that
our senior management and active founding partners will be
exchanging their Neuberger shares primarily for restricted
shares of Lehman Brothers. We
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are convinced that this business combination builds the
strongest possible foundation for the future success of
Neuberger Berman's clients and shareholders.
We know the Lehman Brothers leadership team well, and we know
they will be an outstanding business partner. I am honored to
be a part of this newly combined management team, and look
forward to delivering strong combined performance in the
future.
Now let me turn the remarks over to Dave. Dave?
D.Goldfarb: Thanks, Jeff, and welcome back on board. Before I review the
terms of the transaction, let me first put the transaction in
the context of the strategic and financial criteria that we
have all discussed many times in the past.
As you know, while to date we have largely chosen to grow
organically, we have also looked at a number of acquisition
alternatives that would create additional scale in our primary
businesses, or that are in complementary asset classes that we
understand. In evaluating acquisition opportunities, we have
established a strict set of criteria.
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Strategically, we look to enhance our rate of overall growth;
continue to diversify our revenue base; and expand our
fee-based and high-margin activities. Financially, acquisitions
must, among other things, exceed our costs of equity capital;
be breakeven from an EPS perspective by year two; and overall,
be shareholder-value accretive. Lastly, we look to minimize any
execution risk in the transactions we consider.
We believe the transaction we are announcing with Neuberger is
certainly consistent with all of these criteria. As Dick has
already noted, we will be acquiring 100% of Neuberger for
approximately $2.625 billion in net aggregate consideration,
based on yesterday's close, which reflects a price of $41.48
per share, plus $42 million for in-the-money options, less $255
million in excess cash as of June 30, 2003. This consideration
excludes $1.6 million in unvested restricted shares in employee
compensation plans, as those represent contingent shares based
on future service requirements.
This consideration will consist of $9.49 in cash per share,
plus a specified number of Lehman Brothers' shares. Lehman
Brothers will be paying a price of $41.48 per share, based on
yesterday's close. So long as Lehman Brothers' shares' price
during a ten-day averaging period prior to closing is equal to
or below $66.51, the exchange ratio will remain fixed at .496.
20
If Lehman's share price during the averaging period is greater
than $66.51, but not more than $73, the exchange ratio will
vary, so that the total consideration will equal $42.50 per
share. At prices above $73, the exchange ratio mechanics vary
within several trading ranges, with a minimum exchange ratio of
.411. Additional information concerning the exchange ratio
mechanics and other terms of the transaction are described in
the 8-K we filed this morning.
The total amount of cash that will be paid in the transaction
amounts to approximately $650 million. The transaction price
per share implies a 20.5% premium to Neuberger's share price as
of June 24th, the day before reports of our merger discussions
appeared in the financial press.
The transaction value amounts to 12.7 times the trailing four
quarters EBITDA, based on average assets under management of
$57.3 billion across these four quarters. This 12.7 times
multiple is approximately 6% below the 13.5 times average
EBITDA multiple for recent comparable high-net-worth asset
management transactions.
Moreover, Neuberger Berman's assets under management have
increased substantially in the last quarter, from $56.3 billion
as of March 31st to in excess of $63.7 billion as of June 30th,
2003. On a go-forward basis, Neuberger fees will obviously be
based on that higher $63.7 asset base. If
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their asset base continues at these levels, the run rate EBITDA
multiple for the transaction will be significantly lower than
comparable transactions at closing. So from a timing
perspective, we are announcing this transaction at what appears
to be an ideal time, given the convergence in the relative
multiples for the two companies, and the fact that Neuberger's
assets under management have grown some 13% this quarter by
virtue of net inflows and market appreciation.
Given Neuberger's asset mix, this transaction further leverages
the combined entity to improvement in the equity markets. We
expect the internal rate of return on this transaction to be
well in excess of our cost of equity capital; consequently,
this transaction should be accretive to shareholder value.
From an EPS perspective, we expect the transaction to be
slightly dilutive in 2004 and approximately breakeven by 2005,
after taking into account what we believe to be conservative
amounts of synergies and transaction-related expenses.
Furthermore, we believe that the market should recognize the
high-quality nature of Neuberger's earnings through an expanded
P/E multiple that would contribute to increased shareholder
value.
As Jeff briefly noted, we have already identified a number of
opportunities
22
to enhance revenues or reduce costs between the two firms, and
have used conservative assumptions in our pro forma analysis.
In terms of revenue synergies, we expect that access to
Neuberger's products among Lehman Brothers' high-net-worth,
institutional, and investment banking client base will generate
healthy growth in incremental assets into Neuberger's money
management products and businesses; and as Jeff also mentioned,
our international network of clients will provide Neuberger
with access to international distribution capabilities for the
first time.
We also expect Neuberger to serve as a new distribution channel
for our alternative investment products and fixed-income
investment products. Additionally, we see further opportunities
in providing Neuberger's high-net-worth clients with a broad
array of capital market products, as well as structured product
and hedging capabilities.
Similarly, we are projecting cost savings related to
combination and conversion efficiencies in areas such as
clearance and settlement, and information technology
infrastructure.
Beyond those operational synergies, we expect to achieve
additional savings through consolidation and rationalization of
our combined vendor
23
relationships, and through the elimination of expenses incurred
by Neuberger in relation to it being a public company.
In total, we believe a conservative estimate of the
contribution of these revenues and cost synergies to the
combined entities' pretax income in 2005 is approximately $100
million, with approximately 60% of these synergies driven by
revenues, and we expect these synergies to scale up during
2004, and to achieve approximately half of these synergies by
2004.
From a balance sheet perspective, we expect that our net
leverage and tangible adjusted net leverage will not increase
from where we ended the last quarter. From a credit quality
perspective, the transaction has been well received by the
rating agencies.
Those are the details, but this acquisition is really about
bringing our franchise to the next level by seizing this unique
opportunity to enhance our competitive position. It represents
a significant build-out of our high-net-worth and asset
management platform.
As we have noted, on a pro forma basis, high-end services
segment jumps to 21% of our total 2002 revenues, and the
combination adds approximately 10% to our overall revenue base.
The transaction should
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increase our pretax income and the overall quality of our
earnings by expanding the proportion of our net income that is
derived from annuitized, non-capital-intensive sources. We also
expect to derive the benefits of increased diversification and
lower earnings volatility, as Dick mentioned.
Finally, given the high valuation assigned to this business and
the larger proportion it represents to our overall franchise,
we believe the combination serves to enhance shareholder value.
In summary, the Neuberger combination is consistent with our
strategic and financial objectives and meets all of our
acquisition criteria. It also enhances our competitive position
in these highly desirable businesses and positions our firm for
additional growth and revenue diversification, which should
further improve our cross-cycle performance.
I will now turn it back over to Dick for some concluding
remarks.
R. Fuld: We'll go to questions in a minute, but let me just conclude.
We're very excited about this combination. It represents a very
important step in achieving the critical mass on the fourth leg
of our business, client services, particularly in the wealth
and asset management area.
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This acquisition is consistent with the strategic objectives
that we've discussed in the past. It's about diversification;
it's about business synergies, financial metrics, and also, at
the end, value creation for all of our shareholders. It
broadens our platform and it brings additional scale and
stability to the franchise, and that's with the addition of the
large and highly regarded high-net-worth business. It brings a
scalable mutual fund business, and it broadens our asset
management capabilities to complement what we already have in
place.
Let me just say personally, I very much look forward to working
with Neuberger's people. As Jeff has said, I've known a lot of
them for a long time. In the years ahead of us, our plan is to
achieve the growth and productivity targets that we all share
in this combined enterprise. So thank you for this part. Let's
open up for questions and communicate that to our operators.
Coordinator: Thank you. One moment, please. Our first question comes from
Henry McVey. Sir, you may ask your question.
H. McVey: I just had a couple questions. One was on the purchase price of
$2.625 billion. That excludes both the restricted stock, and
then you didn't give a value of the 1.6 million, the options.
What's the value on that?
26
D.Goldfarb: Henry, it's Dave. Approximately $68 million.
H.McVey: Okay. Then, just two other questions. One was on the IRR. This
may be too simplistic, but if you took $144 million of
Neuberger in earnings and you divided that by the purchase
price, that's like a 5.5% return on invested capital, so I'm
trying to justify that with what we think is a higher
cost-to-equity for you guys.
Second, can you just give us detail on the clearing plans and
the brokerage that Neuberger had?
D. Goldfarb: Yes, Henry, I'll take the first part of that. IRR, if you take
in the combined earnings of Neuberger and if you add into the
synergies that we discussed, you actually get an IRR of
approximately 14%. So we can go through the details, if you
want, in a follow-up conversation, but again, a way to think
about Neuberger's earnings is to look at IBES estimates, and if
you factor in some of the synergies, which we said would reach
the $100 million pretax by 2005, you'll be able to do
consistent arithmetic.
Bob, do you want to talk a little bit about the clearing
business?
27
B. Matza: The clearing business is a small business for us, but a good
business. We think there are synergies in the prime brokerage
side, with the capabilities that Lehman brings to the table. We
hope, over time, to bring some of those products and services
to our clients; and initially, for those clients on Neuberger's
platform, there won't be any changes. Over time we hope to
enhance the revenue stream that comes from those clients, as
they take advantage of the services and capabilities that
Lehman can also provide.
H. McVey: The research product at Neuberger will still stay intact?
B. Matza: Correct.
H. McVey: Okay, thanks.
Coordinator: Our next question comes from Daniel Goldberg.
D. Goldberg: Good morning, and congratulations. A couple of questions. First
of all, could you just talk a little bit about - I believe
there's a $40 million breakup value or termination value; and
then also, what other regulatory approvals are necessary, and
really what your thoughts are in terms of getting those
approvals?
28
D. Goldfarb: In the agreement, there is a breakup fee of $95 million, as
you'll see in the 8-K that is filed. As far as the approval
process, the reason why we do think this won't close until the
fourth quarter, we have a number of hurdles, which are
Hart-Scott-Rodino; we have to go to various states; and we also
have to get approvals from the NASD, New York Stock Exchange,
Office of the Control of Currency, and also the State of
Delaware banking authorities, as it relates to all the
different entities. So it's a process which probably will take
us through to our fourth quarter.
D. Goldberg: In terms of your plans for the mutual fund business, I know I'm
making the assumption that the main reason for the deal is more
the private asset management business of Neuberger, but can you
just give us a little bit more color or detail on what your
plans are in terms of expanding the mutual fund business at
Lehman?
T. Janulis: This is Ted Janulis responding to that one. It's right to say
that the PAM group is very exciting to us, for a number of
reasons. But as we covered, Jeff covered in his remarks, the
asset management business has a much larger footprint than what
we have currently, historically at Lehman Brothers. So the
mutual fund business, the separate account business, the wrap
business, are all businesses that we're excited about and look
forward to growing.
29
D. Goldberg: Then, finally, in terms of Neuberger's, I guess about 1250
employees, any ideas in terms of the number of potential
reductions as it relates to the $100 million of cost saves that
you mentioned?
D. Goldfarb: That's not really what the transaction is about. With the
combined entities of Neuberger and Lehman Brothers, there will
be a de minimus amount of job eliminations. The synergies are
going to come from two places. One is going to be revenues, as
we mentioned, which will be around 60% of the synergies.
Between the vast array of products Neuberger has and the
distribution into our global institutional and high-net-worth
client base, it represents great opportunities. Doing the
vice-versa trade as well, taking our array of capital market
products and putting it into the Neuberger distribution; adding
that to our international client base certainly gives us
significant upside in synergies. We very conservatively
estimated that.
On the core side, as I mentioned, it's mostly about getting
your infrastructure integration, as you would expect. We also
have an ability, as a combined firm, to leverage some of our
vendor relationships in a pretty economic way; and we also will
be, as you would in any combination of two public companies, we
will be mitigating the cost of
30
having just one public company versus two. That's really what
the synergies are all about.
D. Goldberg: Thanks a lot, and congratulations.
Coordinator: Our next question comes from Ken Worthington.
K.Worthington: Good morning. Are there going to be any changes to the way
Neuberger's PAM business internalizes commissions, or the way
or amount Neuberger's mutual fund business pays the Street?
J. Lane: Jeff Lane. The answer is no.
K.Worthington: Great. My other questions were asked. Thank you.
Coordinator: Our next question comes from Richard Strauss.
R. Strauss: Thank you, good morning. I just wanted to know, is there going
to be - is there any conflict in the sense that, I believe it
was either Smith Barney or Merrill, was feeding a meaningful
portion of Neuberger's wrap business, and would that now be an
issue in any way, given that Lehman now owns this entity?
31
J. Lane: Hello, Richard, how are you? This is Jeff. We don't believe
that there is a problem. There's an awful lot of precedent -
Wall Street has become a very funny place, as you well know,
and we all compete, and we all sell each other's products. As
long as we maintain high-quality products, we would expect to
see distribution remain unchanged.
R. Strauss: It looks like a substantial portion of profitability came from
New York for Neuberger. Dave, am I right in thinking the tax
rate, which is now about 28% for Lehman, goes maybe to 30 or
even slightly north of that, about 30%?
D. Goldfarb: There will be a slight increase in the overall tax rate; and
the overall pretax as a relative piece of Lehman is still
relatively small. But there will be some effect on it.
R. Strauss: Then finally, for Dick, just in terms of the timing of this
deal - fixed income has been so great for so long - you
commented about diversifying your earnings. Maybe you just,
because we're halfway through this next period, if you could
just give us a sense as to what your view is of bonds right now
and how we're doing up to this point, especially given that
rates have been backing up for the last couple weeks, few
weeks.
32
R. Fuld: As usual, Richard, that's always a loaded question. I could
probably spend the rest of the day talking about that. This
trade was more about our view of what we thought the upside
was, clearly for the asset-gathering side. This is clearly a
trade that I've talked about for a number of years, and I think
that we were wonderfully patient in that, to find the best
possible partner. This was not about our view of timing around
the different business segments, whether it be fixed income or
equities.
Having said that though, I think all of us are very much aware,
in the fixed income businesses, that there would be pressure on
rates, specifically as the economy picked up, and specifically
to fund the deficit today that's a lot larger than it has been
in years prior, especially those years where it was a surplus.
Having said all that, this is not a transaction that was timed
to counterbalance or offset any views we had around fixed
income, which continues to be a wonderfully strong business for
us. I don't think you can ever plan these transactions thinking
about trying to diversify a business stream specifically around
a specific segment that may have volatility.
This was about a wonderful sense of timing, where our two
organizations came together and we're going to look to grow
that combination over
33
time. I would also look for the fixed income business to
continue to be a strong contributor.
R. Strauss: Great. Thank you.
Coordinator: Our next question comes from Michael Freudenstein.
M.Freudenstein:Good morning. Just a quick question for Jeff. I understand the
strategic synergies and rationale on the part of Lehman
Brothers, and as for Neuberger as well, but given the recovery
in the markets of late, in terms of trying to get the best
price for shareholders, why was this the right time for
Neuberger to sell?
J. Lane: I think when you make these kinds of strategic decisions, you
don't make it for the next quarter or the quarter after, or the
quarter after that. One of the things that I've always told
you, Michael, is that there are three criteria for Neuberger
not being an independent company. One was strategic; one was
culture; and one was price; and the last one was price.
The strategic and cultural fits between our companies was so
compelling that, speaking for myself only, I am willing to own
Lehman paper, because I think over time Lehman and Neuberger
together are much
34
stronger than these two companies separately; so this is a
long-term strategic decision that I find exciting and
compelling.
M.Freudenstein:Not to sound too much like a word detective here, but the
headline of the press release is that you are announcing a
strategic combination. It seems like Lehman is buying 100% of
Neuberger Berman, so I'm just wondering if there are some
technical factors around your choice of that language, with
respect to retention.
J. Lane: No.
M.Freudenstein:The last question would just be, could you tell us what the
goodwill is going to be?
D. Goldfarb: Yes. The significant portion, as you would expect in a
high-net-worth asset management firm, of the consideration will
go into goodwill and intangibles; and of the goodwill and
intangibles, we would expect probably around 20% represents
other intangibles, things like client lists, which will
obviously come in through our P&L, probably over around a
15-year period. So it's fair to assume a significant portion of
the purchase price would be goodwill and other intangibles.
M.Freudenstein:Thank you.
35
Coordinator: Our final question comes from Glenn Schorr.
G. Schorr: Thanks very much. Just two parts. One is just little tidbits on
retention. I just want to make sure; you mentioned the $120
million is over five years. Could we assume that as 20% a year,
or is there some acceleration on performance?
D. Goldfarb: You could assume it's 20% a year.
G. Schorr: Got it. In the $941 million in Neuberger stock that gets
transferred over for the partners, is that currently free to
trade, or are there vesting schedules based on that right now?
J. Lane: There are very substantial vesting schedules that basically
carry over from when we went from a partnership to a public
company. We should not confuse two terms: one is vesting and
one is sale. All of the stock is vested. What we have is sales
restrictions, and the sales restrictions that we had before, we
expect will continue, which is essentially 10% of the founders'
stock that they had when we went public.
D. Goldfarb: Which extends to approximately 2009, as well as the same
individuals also have non-solicit, non-competes. So we feel
very, very comfortable around
36
the retention around the senior people and the senior producers
at Neuberger.
G. Schorr: That helps a lot. The last piece - this might be a real
technical one - is some asset management franchises that are
owned by a broker-dealer or a bank can't own their own stock.
Last I checked, Neuberger was the 11th-largest holder of
Lehman. Has there been any thought towards family ownership?
J. Lane: I think the way it works is that we can own it if we previously
owned it; and I think that over time, on the mutual fund side
of the business, there would probably be an orderly
liquidation. We can't buy any more. On the high-net-worth side,
we will not be able to charge a fee of owning Lehman stock and
so it goes below the line, but I think you're dealing with de
minimis issues.
G. Schorr: Yes. Appreciate it. Thanks very much.
R. Fuld: I believe that finishes up what we had planned for you. Thank
you for listening and thank you for the questions. All of them,
as usual, were insightful and thoughtful. Now we have a lot of
work to do to put these two firms together, so thank you. Take
care. [End of Transcript.]