No. 23: Lehman

It's a lead underwriter of the first U.S. hedge-fund IPO--and has a stake in what could be the largest private-equity deal ever. The house that bonds built has come a long way.
The BusinessWeek 50

When Lehman Brothers Holdings Co. (LEH ) was spun off from American Express Inc. (AXP ) in 1994, it was little more than a bond trading operation, hobbled after a failed merger with AmEx. Back then, few would have predicted Lehman would become one of Wall Street's most prominent players. Now it has a hand in all the hottest areas of finance, from private equity to mergers, while remaining a leading innovator in bonds. This diversification helped Lehman nab the No. 23 spot on the BW50.

Lehman's rise comes under the leadership of its tough-as-nails CEO Richard S. Fuld Jr. In the era of megamergers such as those that formed Citigroup (C ) and JPMorgan Chase & Co. (JPM ), Fuld decided to go it alone, defying those who predicted Lehman would be gobbled up. Fuld continued to be dogged by doubters as he ramped up its investment banking, asset management, and other nonbond businesses, only helping to reinforce an us-against-the-world mentality at Lehman. It's this fiercely independent spirit, not unlike that of BW50 member Goldman Sachs & Co. (GS ) (No. 9), that has proved key. While bigger competitors have stumbled, lean-and-mean Lehman has quadrupled its net income, to $4 billion, since 2002.

Lehman is practically unrecognizable from its early days. Bonds are no longer the sole growth engine. On Mar. 13, Lehman bought a stake in hedge-fund leader D.E. Shaw. It's also a go-to adviser for investment banking deals, as one of two lead underwriters of Fortress Investment Group (FIG )--the first initial public offering of a hedge fund in the U.S. Recently Lehman landed another big job, helping Altria Group Inc. orchestrate the spin-off of its remaining 89% stake in Kraft Foods Inc., set for Mar. 30. In mergers and acquisitions, Lehman ranks as the No. 5 adviser, based on the value of its deals, landing 23% of deals announced worldwide so far this year, vs. 6.5% in 2001, according to Thomson Financial.

Lehman is getting in on more high-profile private equity action, as well. Case in point: It is one of four investment banks hoping to cash in on the largest private-equity deal ever as an investor in the $45 billion buyout of energy outfit TXU Corp. (TXU ).

Even its core bond business continues to evolve. At Lehman, it's no longer just about U.S. bonds but all matter of fixed- income products across the globe, including mortgage-backed securities and collateralized debt obligations. At the same time, Lehman has successfully ridden (not to mention fueled) the meteoric rise in global demand for bonds--from $16 trillion in 2000 to $33 trillion.

Yet the stock is not getting much respect. At around 76 it's up 20% since the beginning of 2006. That's better than the 13% gain posted by Standard & Poor's 500 Financials Index, but it's a far cry from the 59% jump of Goldman. One worry is that Lehman's residential mortgage business has softened along with the housing market. It's not dire, but "I'm not looking to buy," says Anton V. Schutz, a manager at Burnham Financial Services Fund (BURKX ). Lehman declined to comment, citing a quiet period before reporting earnings on Mar. 14.

Still, Lehman has a history of proving skeptics wrong. It pulled through false rumors of near-insolvency triggered by the collapse of hedge fund Long-Term Capital Management in 1998. And the terrorist attacks on September 11, 2001, which rendered its former headquarters uninhabitable, only strengthened Lehman's resolve. Once again, Fuld is preparing to silence the naysayers.

By Emily Thornton

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