Friday, August 22, 2008

Can KDB Buy Lehman?

Reports about Korea Development Bank taking over Lehman Brothers has caused optimism to return to the financial sector.  Reuters initially reported that the bank was "open" to an acquisition.  Both Lehman and KDB declined to comment on the story so investors assumed there was a nugget of truth to the rumors.  What I have yet to see so far is any discussion on whether KDB actually can afford to buy Lehman Brothers.  I took a quick look at KDB's balance sheet and noted that at December 2007, KDB only had 146 trillion Korean won in assets and 21 trillion Korean won in shareholder's equity.  With the Korean won trading at 1,062 to the dollar, this translates into roughly $146 billion in assets and $21 billion in shareholder's equity.  And it plans to pile Lehman's $639 billion in assets and $613 billion in liabilities onto its balance sheet?  And then go private?  It seems incredibly unlikely to me.
Analyst Richard Bove made a very bold call yesterday claiming that Lehman was ripe for a hostile takeover.  Sure it is.  Given Lehman's recent frantic attempts to strike a deal with anything that moves to sell whatever it can get a bid for, I am hard pressed to believe that Lehman is cheap.  If anything, given how spreads on MBS and CMBS have continued to widen back to levels not seen since March, Lehman's assets continue to deteriorate which means more writedowns, more losses, and a need for more capital.  The only financial institution in a position to do a hostile takeover of Lehman is the Fed, and they have their hands tied with Fannie and Freddie...      

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