The $1 Billion Kiss Off

It was a marriage made in hell, and American Express Co. and Lehman Brothers Inc. are ecstatic to be filing for divorce. For nine years, the two companies suffered through an excruciating partnership of convenience, marred by Machiavellian infighting and clashing corporate cultures. Worst of all, AmEx paid a huge price for its excursion on Wall Street. Since 1990 alone, it shelled out $2 billion in capital infusions to Lehman and Shearson. Add an additional $1.1 billion in losses AmEx had to absorb from the two securities firms, not to mention foregone earnings. "The whole thing was a disaster," says Perrin Long, research director at First of Michigan.

With the Jan. 24 announcement that it's spinning off Lehman, AmEx will soon be free to focus on its credit-card and financial-planning businesses. And Lehman will find out if it can flourish as a public company. As AmEx CEO Harvey Golub told analysts after the announcement: "This puppy is on its own now."

The big catch is, AmEx has to pump $1.09 billion into Lehman before it distributes Lehman's stock to shareholders as a special dividend. That's what the rating agencies insist Lehman needs to maintain its single-A rating, which is so critical to success in investment banking.

Unfortunately, Golub didn't have much choice but to kiss $1 billion goodbye and give Lehman away to AmEx shareholders. An initial public offering would be a tough sell, thanks to the brokerage's string of losses. "Historically, the news out of Shearson Lehman has not been stellar," says Richard Schmidt, managing director of Standard & Poors Corp. And without the extra capital to make it competitive, Lehman may have floundered, saddling AmEx shareholders with a turkey.

CRUSADE. The big winners are Lehman and, if the plan is successful, its shareholders. Since 1990, Lehman has been on a crusade to recapitalize itself. It successfully reignited its entrepreneurial culture and rebuilt itself. Lehman even shed more than $9 billion in illiquid assets through write-downs and reserves.

The proof of Lehman's rebirth: By 1991, it ranked No.3 in total debt and equity underwritings and kept the spot for the next two years. One analyst expects Lehman stock to trade at 14 to 15 when it is spun off in late May or June. "This has been a long process of making investments, so at the end of the day, when we go public, people will be able to see what we have created," says Lehman CEO Richard S. Fuld Jr. With this kind of alimony payment, he's off to a darned good start.

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