Lehman Brothers was not the largest LBO lender of 2005. The New York-based financial firm was not even in the top five in terms of market share or volume of capital used in buyout deals. However, what made Buyouts Lehman Large Lender of the Year was that it increased its market share significantly and managed to move up a spot in Thomson’s M&A league tables from eighth to seventh during a year when financing LBOs was perhaps more competitive than ever.
For Lehman, the award is a confirmation of a company-wide policy of teamwork that allows it to play an important role in buyout deals without having the same capital resources as its larger competitors. “We intend to be the investment bank nipping at the heels of the Goliath commercial banks out there,” says Michael Konigsberg, managing director and 20-year Lehman Brothers veteran.
Buyout firms that have worked with Lehman on deals over the past year credit the bank’s success to a combination of aggressiveness, deep understanding of the private equity market and a commitment to deliver on providing creative financing structures.
Lehman Brothers had only 2.5% of the market share in 2004, but increased its play to 4.2% of the market in 2005, a 68% jump. Of the top 10 lenders of 2005 only Citigroup and Goldman Sachs joined Lehman in increasing their market share.
Perhaps Lehman’s greatest accomplishment last year was lending on the Hertz deal, which had a large debt component. Lehman Brothers joined Deutsche Bank as well as Merrill Lynch, JP Morgan and Goldman Sachs in the $15 billion buyout of Hertz Corp. The deal, which is also Buyouts’ Mega Deal of the Year (see related article, page 61), is the second largest buyout in history (behind Kohlberg Kravis Roberts & Co. 1989 buyout of RJR Nabisco for $31 billion ).
Lead investor Clayton Dubilier & Rice (CD&R) joined co-sponsors the Carlyle Group and Merrill Lynch Global Private Equity to buy the Park Ridge, N.J.-based car rental giant from the Ford Motor Co. (NYSE: F). The winning bidders beat out a competing bid by a group that included Bain Capital Partners, the Blackstone Group, the Texas Pacific Group and Thomas H. Lee Partners.
Greg Ledford, a managing director with The Carlyle Group who was the firm’s point man on the transaction, credits Lehman Brothers with coming up with the financing package that allowed the deal to go through.
He says that Lehman’s mastery of asset-backed securities (ABS) was essential for putting together the winning Hertz bid. “We believe one of the reasons we were able to win the transaction was the capital structure and a big part of that was [the ABS financing that Lehman put together]. We were able to set up a deal with very favorable principle that helped distinguish us from other bidders,” says Ledford.
Ledford says that using ABS financing in the Hertz transaction for the Hertz fleet was appropriate, even though ABS financing for buyout deals is rare. The ABS financing worked for the Hertz buyout because it lends itself to deals that involve large amounts of liquid assets, in this case Hertz’s fleet of cars.
Konigsberg also says that Lehman Brothers was able to come up with a unique financing structure for the Hertz deal because all of its financing products are under one umbrella.
“We’ve broken down all the walls that you might see in other places,” says Konigsberg. “Breaking down these walls has allowed us to bring every discipline together to serve the client’s needs.” Hertz serves as an example of this ability. The team brought its bank and its bond product together with the asset-backed products for the car fleet. The deal also featured derivatives specialists as well. “It’s every discipline all working as one team,” Konigsberg adds.
Lehman Brothers also worked with The Carlyle Group on its $1.65 billion acquisition of Verizon Hawaii from Verizon Communications (NYSE: VZ). The deal included Verizon’s Hawaii-based local telephone operations, print directory, long distance service and Internet service provider assets.
Additionally, when Silver Lake Partners and Kohlberg Kravis Roberts & Co. (KKR) bought out the semiconductor business of Agilent Technologies (now Avago Technologies), Lehman was front and center in leading the financing. Insiders familiar with the buyers’ side of the bid say that Lehman’s combination of financial strength coupled with a deep understanding of the credit in the industry was essential, particularly at a time when credit markets became difficult to navigate, as complex financing deals require great attention to regulatory detail.
Silver Lake was impressed. And later last year Lehman Brothers began work on taking Serena (NASDAQ: SRNA), a Silver Lake portfolio company, private.
Lehman Managing Director Robert Krugel says that the firm’s focus on finding the optimal solution for its clients makes it agnostic as to the ultimate product it uses on a given deal and that the premium Lehman Brothers places on intellectual capital and creativity goes a lot farther than having a larger amount of capital.
“We knew that there were very high quality assets generating significant amounts of cash flow, but it didn’t fit in any historical box. We put different product areas together,” he says, “which lends itself to employing the greatest degree of innovation and creativity.”