Filed by Lehman Brothers Holdings Inc.
Pursuant to Rule 425 under the Securities Act of 1933
Subject Company: Neuberger Berman Inc.
Commission File No. 001-15361
Date: September 9, 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 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 filed a Registration
Statement on Form S-4, which contains a proxy statement/prospectus, with the
Securities and Exchange Commission ("SEC") on August 15, 2003. The
Registration Statement may be amended from time to time. Stockholders of
Neuberger Berman are urged to read the Registration Statement and proxy
statement/prospectus contained within it and any other relevant materials
filed by Neuberger Berman or Lehman Brothers with the SEC because they
contain, or will contain, important information about Neuberger Berman, Lehman
Brothers and the transaction. Neuberger Berman stockholders may obtain a free
copy of the Registration Statement and proxy statement/prospectus and other
documents filed by Lehman Brothers and Neuberger Berman with the SEC at the
SEC's Internet site (http://www.sec.gov/). Copies of these documents also can
be obtained, without charge, from Lehman Brothers, Investor Relations, 745
Seventh Avenue, New York, New York 10019 (212-526-3267) or 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.
* * *
The following is the transcript of a presentation made by Lehman Brothers on
September 8, 2003 at a conference for the financial services industry:
MARK CONSTANCE: Good afternoon. For those of you who don't know me, I'm Mark
Constance. I cover Brokers and Asset Managers for Lehman,
which, among many unusual circumstances, that puts you in
covering not only your own business but also that of your
clients. One of them is being put in the position like I
find myself right now, of introducing my boss, or I guess my
boss' boss' boss' boss, whatever it is. And if you really
think about that, that's, you know, pretty much clearly
defining a downside only event, so I will keep my remarks
very limited here. For those of you who haven't seen Brad
speak before or had a chance to read his bio in the
conference materials, Brad Jack is Lehman's COO and a member
of our Executive Committee. I hope I got that straight or
I'm in trouble, I guess. But have had some great personal
interactions with Brad over these four plus years, I guess,
that I've now been at Lehman Brothers, and I think in
retrospect, it's very telling to describe the first
interaction, which was shortly after I came here, one of the
first people in senior management that I met. At the time,
Brad was heading Investment Banking for Lehman and the
interesting part of the story, I think, is that what Brad
and I discussed had little if anything to do with investment
banking, if Elliot Spitzer happens to be listening. It was a
refreshingly positive, energetic discussion of Brad's vision
for the business, the potential that he saw in the
franchise, and how much he valued individual contributions
in growing the franchise. And it was really an energizing
discussion for me, as someone coming to Lehman after
spending eight years at Merrill, and I hope that you walk
away from today's lunch presentation with a similar
reaction. Brad.
BRADLEY JACK: First off, thank you for coming today. This is our first time
after the summer months to have a conference that follows
after Labor Day, and we are very excited about this slot in
the time of year that we got, and so we intend to hang on to
it, and appreciate all of your attendance. We recognize this
is a very busy time of year, and to have this turnout. And
for those that are in the overflow room, I thank you for
listening to the lunch presentation. I am the speaker for
the home team, as Mark pointed out, but I'm also going to
comment about the industry for a significant period of the
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presentation. As Mark referenced, we are in the blackout
period or the quiet period, excuse me, and so I thought all
the lawyers would be sitting here, ready to stop me from
commenting on anything that might cause issues with that.
But I think the firm is very anxious not only to talk about
Lehman Brothers but to talk about the industry overall. So
obviously I'll have no comments on the third quarter, but
obviously up through the second quarter and looking forward,
there are some things that we will talk about specifically
related to Lehman Brothers. But this presentation is
slightly different. As the only speaker for the investment
banks, we have looked at a lot of the information and done a
lot of analytical work, which is in your packet, and I'd ask
you to take that with you, and if there's any followup you
want to do about some of the numbers in there, would love to
have those conversations. I've met some of you but not all
of you. But we really did spend a lot of time on the front
half of this presentation, kind of looking at the industry
overall. And I'd like to begin there because, in short, we
believe the investment banks have performed incredibly well
through a very difficult cycle. It's one of my favorite
things to do, to think back to the end of 2000, the
beginning of 2001, and kind of put these events that have
happened since then on paper and think about where this
industry would be if you started talking about some very
tragic things like 9/11, corporate governance, the
accounting issues, the Iraq war, etc. And I want to kind of
take you through the trough and look at the last recession
and go through a series of slides. There's more information
on the slide that I'm going to speak to, but it's a pretty
compelling story about the valuation of the industry
overall, and then I'd like to put Lehman in context,
relative to our peers. But if you just start with revenues,
revenues still correlate closely to the macro economy, but
importantly, just to start this presentation, is to look at
how much bigger the industry is. It's five times larger than
the last recession but does correlate closely with the
economy. The magnitude of peak to trough decline was
similar, although the charts look different in terms of
percentage decline. You can see 32% versus 31%. But the
duration of this bear market has been much longer, 13
quarters versus 6 quarters. But the important takeaway here
is just to think about the scale of this industry and
therefore how do you think about the consistency of earnings
and where do the earnings come from. If you look at the
volatility, importantly in terms of delivering to the bottom
line, notice the huge swing in earnings on the chart to the
left, which shows the last recessionary period versus the
stability of earnings in the more recent cycle, and this was
some of the information that really got us started on this
presentation. There's a lot of reasons for it: Better
diversity of revenues this time, both geographically and by
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business; expense in capital management. But it's really
risk management that I think made the bigger difference. So
this very long and difficult period for the capital markets
has been challenging. If you really think about it, we've
posted incredibly stable earnings over the cycle or over
really the period of the trough. And if you think about what
happened in the last recession, you know there was just way
too much concentration and risk in those portfolios, and
then a lack of liquidity that overlaid that. And I was at
Shearson Lehman, one of the predecessors, we were very much
a part of that, and experienced both a concentration,
whether it was in high yield bridge loans, real estate. Many
of you may never experience the limited partnership scenario
or cycle. But the losses were massive, and there was not
nearly the liquidities that these firms have today. And so,
left to right, I think it's a very different story, although
I think this recession has been significantly more
challenging. If you look at margins, because the industry
has diversified and because we've become much better at
managing risk, capital, and expenses, we've produced very
strong and very stable pretax margins throughout the current
cycle. In addition to risk, the industry has become much
better this time around at managing expenses, primarily
component being compensation. And though at Lehman we didn't
have to go through such a significant shift in terms of our
employees, it's a sign of better management that the
business leaders bit the bullet and reduced capacity much
more quickly during this downturn than last time around, and
that was a big contributor to the preservations of margins.
It's not a pleasant topic, but it's a reality that the
industry got very large in the late `90s, that the business
couldn't support it, and that the primary focus of most of
the firms was to preserve the margins, and they acted,
although some of you, in conversations that I had, felt it
was too slow in coming. If you look at the chart to the
right, margins were upheld at levels very different than the
last recession, and again, much more consistency than in the
prior period. Another key element, and I said it earlier, is
capital and liquidity management. And while the investment
banks aren't necessarily leveraged institutions, we've kept
net leverage at reasonable levels through this downturn. You
can see a recent rise in leverage, and that's primarily due
to the current business mix. There's been a lot of talk
about proprietary trading. But some of this increase in
leverage is due to the concentration around the fixed income
asset classes, and they're bigger, and their use of the
balance sheet. But even so, net leverage across the
industries is significantly lower than it was in the last
recession. So you've had pretty strong preservations of
margins. Revenues are five times greater than they were.
Leverage has been kept down, even though it has been
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tempting to go towards the proprietary model. We pride
ourselves in customer flow, and we don't think the industry
is migrating that way, although some competitors have begun
to use their proprietary balance sheet more aggressively.
But again, all of these point to, in a difficult market, a
much different level of discipline and management. Last time
around nobody reported VAR. That was 12 years ago. But in
comparison, what we did was we took VAR outstanding for the
industry and then just overlaid it to tangible net equity.
And you can see that although there's been an uptick
recently, relative to the amount of exposure--and many of
you look at VAR, and we all know its weaknesses and its
strengths, but it is one measure--it's been fairly
consistent with the growth in equity, in terms of types of
risks or the exposures firms have to their balance sheet.
Finally, the very biggest difference, I think, this time
around, versus last time around, something that we talk more
about in terms of how much we have on the balance sheet in
terms of loans or risks or derivative positions, but you
think about it, we've gotten much better at managing risk,
and we have different tools than the last time around. First
off, the ability to distribute risk more broadly. You can
look at the slide on the left which looks at credit
derivatives and the CDO marketplace, and just look at the
just outstanding amounts of risk or, importantly for us, the
tools that we need to offload some of the risk, and the
credit derivatives market is obviously an important part of
that. Secondly, relative to the loan market, which I've
spent much time with you on or with many of you, trying to
explain the management of that within the firm, you can look
at how much more liquid the secondary market is for trading
[unintelligible]. It's a big business now. It's a different
business. We see the commercial banks following this model.
But the ability to distribute risk--importantly, risks
around less liquid assets is much greater than it was last
time around, and that's allowed us to be able to service our
clients, do the things our clients need, but also not to
cause too much concentration on the balance sheet, coming
back to what I said earlier. In the early `90s, that's what
really hurt. When the market turned down, the concentration
exposure and the inability to distribute the risk was very
high. Here you have different tools, bigger balance sheets,
and importantly, I think the ability to act quickly in terms
of not--as Dave Goldfarb, our CFO often says, "we are in the
moving business, not the storage business." These are key
tools to how we do that. That adds up to better returns for
shareholders. And I think this is the key for all of you in
the room, when I meet with you, the concern is long term,
our ROE. And this is just an incredible slide. I think it
shows the volatility in the big swings in the early `90s,
and you can see how consistent all these are in this
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past cycle. Importantly, I don't think any of us would have
guessed, given the series of events, that the ROE for the
industry across this cycle would hold up as well as it has.
It's a combination of all the things that I've just touched
on, but those series of graphs really speak to this final
end result. Obviously, there's questions as to still the
geopolitical risk and some of the issues around it, some of
the investigations going on within the industry, but broadly
our ability to manage our capital more efficiently, keep
expenses under control, use compensation as a method to
preserve margins, manage risk differently--all of those
things have led to much higher ROEs, and it's why--I can do
it in the Lehman part of the presentation or now--we think
the industry overall deserves a different valuation. We
think that one of the things that became much clearer in
this is how stable and how important the customer franchise
is and how consistent that part of our earnings mix is,
relative to, I think, the strongly held belief that
investment banking and asset management in other areas, less
users of capital obviously, deserve the higher PE. If you
just take a look at how much more business (and we'll come
to these slides) comes out of our fixed income and equities
business, our sales and trading business, and how much we
are able to preserve that through the downturn I think
speaks volumes to the size and the scale of the industry and
our ability to repeat. If you look back even over a longer
period of time, and we went to the SIA database here and
looked at the entire universe of New York Stock Exchange
member firms, and it shows our industry has been a growth
sector for a very long time, across several full economic
cycles. It helps us demonstrate, while the downturn in our
industry has been significant, the recoveries that have
typically unfolded over a two-year period have been
significant as well. The fact that the industry has grown
its equity and capital base and sustained its margins and
return to shareholders during this current cycle, when we
suffered the biggest peak to trough revenue erosion since
1970, that should tell you how well or how differently the
firms are managed today. And one of the questions that may
come up after is what's our expectation coming out of this
period. And we basically look at about a 20% trough to what
we're calling not peak but really recovery. And we're pretty
excited about looking forward, and you'll hear some comments
about that, going forward. So the backdrop, I think, speaks
to how strong the industry has performed in a very, very
difficult time. What has that meant in terms of changes?
Some of it's cyclical obviously, but some of it's secular,
so I want to talk a few minutes about that. On the banking
side, the changes have been painful. Volumes in M&A and
equity origination declined sharply. Staffing and investment
banking followed. And there's been a constant shift of
6
resources around industries, geographies, and products.
Importantly, the Global Research Settlement has changed the
business in ways that honestly are still evolving. But
what's cyclical about the changes? I think we recognize that
staffing can be done in a very different way. Technology
provides a lot of the information that our clients need. And
therefore, I think, as an industry overall, junior staffing
levels within the business, that became a significant drag
on our margins and a very big part of the numbers in the
growth in investment banking, have been scaled back, and I
think are permanently scaled back. We see it in our clients'
ability to use technology. We see it in the growth of
corporate development staffs and at the people that we talk
to every day, and certainly internally, with the number of
the tools that we've added. I think broadly the view is that
you won't see that kind of heavy growth going forward.
Importantly, equity and fixed income have become much more
closely aligned. Merrill Lynch announced a reorganization of
some of their origination businesses last week. We have put
equity and debt together. That follows some of what Morgan
Stanley's done. Why? It's how we solve [unintelligible]
problems. We can talk about that more. But it also
rationalizes the cost of the origination business, and we
think those things are permanent, as well as the cost of
research as a percentage of what origination "costs"
[unintelligible]. So, we think those aren't cyclical; we
think they're secular; and we think they'll help maintain
and improve margins as the business returns. Equities
probably suffered the most and itself had the most
challenging period in its 60 years. As it's begun to emerge,
there are long term changes. You guys are equally aware of
them. C pools and margins are shrinking, primarily due to
the impact of electronic trading. Venues, hedge funds are in
every increasing component of secondary activity. And equity
research, as I've commented, has been changed substantially.
While margins continue to compress, and we see that as a
challenge, we believe other changes in the equity business,
most notably the use of technology within our firm or within
the industry in helping reduce costs of trading as well as
using information more effectively, we think, as the market
rebounds here, will help us offset margin compression. We've
done a lot, as an industry, to manage head count within the
equities business. Technology's very helpful there. But we
think, like the fixed income business went through, in the
mid and late `90s, the equities business is experiencing
today. What we saw on the fixed income side is, as we became
more efficient, used technology, but really rationalized
business, first through joint ventures and then combining
different business entities on the fixed income side, we're
starting to see that in equities. It's helping to improve
margins. And as the markets
7
return, we think using technology both for ourselves,
reducing our costs, and for our clients, we can continue to
grow top line revenue there. As I said, the fixed income
markets have undergone tremendous change, both cyclical and
secular. The cyclical side has been the boom in issuance of
bonds. It's been strong and prolonged. What we think is
secular is the amount of assets now managed on the fixed
income side. It's a 17.3 trillion-dollar market. It's grown
enormously over this period of time, and we think this is
more permanent. A lot of you in [unintelligible] and in the
past have talked to me about the change or the shift from
fixed income back to equities. We think how clients think
about investing. You are obviously well aware of it. But we
hear it, that fixed income will be different types of assets
that they can purchase, how they can purchase the assets,
and certainly the performance on the fixed income side we
think has created a much greater permanence in terms of
those assets. We see it specifically on the high net worth
side, how much more individual [unintelligible] of fixed
income product. We still think there's growth in this area.
We feel like the way we package these securities and offer
them to the market still has a lot of potential. But we see
it as much more permanent. So we're not looking for a
significant shift in which fixed income assets decline
dramatically in order for funds to flow back into equities.
We think that this has been a much more mature and
significant shift in its permanence into the fixed income
market. The other side is lagging equities, but starting the
electronic area is becoming more important. In certain
areas, like treasuries and munis, we begin to create more
efficiencies on that side internally with electronic trading
with our clients. The high net worth space--and we'll talk a
little bit about Neuberger Berman when we get to Lehman--but
here we see a very compelling story. The graphs on the left
really speak to--or the chart on the left really speaks to
the size of the market--7.3 million households worldwide,
individuals, families, with significant concentration of
wealth. We think that's a big market. We think it's
underserved, not in terms of the calling but in terms of the
quality of the products. A couple of things that have
changed for us here. We see the long term trend, probably
the most compelling trend, relative to, whether we're
talking about fixed income, investment banking, or equities,
this market has growth rates. It's been more sustained, even
in this downturn. And we think it will continue to grow at a
very predictable rate, certainly in the US, as the baby boom
generation--we don't think that's in the next five years,
but certainly over the 20 years. And then in Europe and
Asia, we see significant opportunity. It obviously sells to
why we purchased or are hoping to close Neuberger Berman,
and we can talk more about that a little bit
8
later. Finally geographically, Europe and Asia. Here I would
point more to cyclical issues than secular. We think that
the Europe market has a little higher beta than the US
market, so the downturns were more severe. If you just look
at some of these numbers. The DAX's down 73. The CAC's down
61-62%. These were huge declines. We see that as more a
reflection of the immaturity of those markets. We're
anticipating pretty significant rebounds in those markets.
But importantly, longer term, we think the [unintelligible]
mediation of banks and other financial institutions with
demand going into the capital markets, whether it's on the
fixed income side or the equity side. Big steps happen in
'04. I was a financial institution banker for a while. Lee
wants to forget that. But in that time what we saw was is
how much--still 85% of the debt is held within banks.
Obviously, with the capital changes that will happen in '04
around the [unintelligible] Accord, as well as the loss of
sovereign status for many of these institutions, we see a
big flow of products going into the fixed income markets. We
see a lot of mergers because of that on the strategic side.
But we think Europe still is less mature than the US market.
There's a lot more opportunity. And that what happened 2001
was a reflection of a market without enough depth and
breadth. So we look for the rebound to be even stronger than
in the US, and we see significant opportunity. Asia--a lot
of restructuring still to do. I know you guys have heard
these numbers too often. But you see it day in and day out,
the types of business we're doing--Japan, Korea, Taiwan, and
China, just huge portfolio restructuring opportunities,
cross-holdings like in Europe. But the restructuring and the
opportunity to build out their financial institutions
foundation, particularly in China, is a huge opportunity for
our industry. We don't think you should put too much capital
or labor people there at this point in time. But as the
markets get more stable, there's real organic
[unintelligible] there, in countries even outside of China.
There's opportunities, there's demand within their home
markets. And we see excellent opportunities there. So less
secular, more cyclical, but offering significant upside. I
think we're all a little bit more sober about the margins in
Europe and Asia, about the manpower that we can put there
and earn a reasonable rate of return. So again, I don't see
numbers of people going up dramatically in the near term,
but I see opportunities there for us to use our structuring
capabilities and the ability to use our strategic advice to
create real margin for us. Finally, changes regulatorily. I
had this page vetted with our lawyers. I think it's just
interesting because it talks about structure versus
[unintelligible] value of the product that we're offering.
There's very simple things in here, but I wanted you to get
a flavor. Many of you asked what's different? There's four,
five, or
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six points here about what goes on at these firms today and
how we interact with research. But I'm going to step back
for one second and tell you we strongly believe in the value
that we have in our research department. We believe that for
you we haven't seen any lessening of demand for the product,
and certainly with hedge funds it's increased. One of the
things that we have to take into account is how much demand
hedge funds put on our research capability. It's even more
aggressive than some of the more established or mutual fund
companies. The second thing is, and this is important as you
think about Lehman Brothers, financial sponsors have been
the biggest player in the market today strategically, and
importantly, they've grown like the street, four, five times
in the last decade. They own so many portfolio companies.
Very different than the last recession. But they are a big
user of that research as well and value our ability to cover
those portfolio companies.
So information for the firm, for you as clients, for our
investment banking clients, we still see research as a
critical component, but life is changed, the wall is real,
and this is how we function with it. But we don't see the
value of that in terms of what we do for the people we work
with every day changing so dramatically. We think a lot of
the change around the pricing of that product, the pricing
of individuals within that, a more rationalization of
sectors and industry has taken place. So moving back, we
think the industry's performed incredibly well and really
ask you to look at the first four or five charts. I don't
say that other industries can't make some of this case, but
I don't think, given how (inaudible) the economic and macro
events so a lot of other industries can stand up here and
talk about these kind of margins, the consistency of the
ROE, the preservation of capital -- I'm not talking about
mergers now, I'm talking about risk -- and the performance
that we've had, and be able to deliver the kind of bottom
line that we have. Secondly, we have had some secular
change. It is going to mean the business is done differently
and there are different opportunities, but we all know as an
industry together, we have always been able to change and
find the way in which we can best provide value to our
clients and our customers. So I want to talk about
opportunities going forward, and I'll go through a little
bit the same kind of exercise. In short we're incredibly
excited about what's in front of us. We think GDP growth
around the globe will be 2-1/2% next year, and we think
within the U.S. it's about 3-1/2% for '04. That provides a
great backdrop for where we can perform, and I correlated it
back to the macro in terms of the overall performance of the
industry. But we see, in each sector, significant
opportunities. Investment banking we see huge need
10
for developed economies to raise equity and to reduce excess
capacity through asset sales and spin-offs. The question I
get a lot is about M&A. It's not the big combinations we're
looking for. Companies are trying to rationalize. You've
said a lot to them. They want to get their businesses back
into a growth mode. They want to get rid of things that
don't make sense long-term, and so there's a lot of that
discussion going on and a lot of it is around raising equity
to prepare for better markets. In investment banking there's
two ways we can think about it. One is just to look at M&A
fees as relative to world market capitalization. So we gave
you two slides, questions that we get asked a lot. How do
you look at M&A? How do you think about the backlog and
whether the markets are returning? These are two slides that
you can just look at longer-term to understand how close we
correlated M&As to market capitalization in terms of fees.
One of the big things we realized and why we restructured
quickly was that as capitalization falls so go the fees, and
the return of that is also what we think will drive margin
opportunity for us. It's pretty correlated. As well as the
number of deals completed in correlation with GDP. So two
charts that we think speak to just the trend in M&As, but
the most important chart on the next page really is what we
look at. And this is just taking the ratio of completed to
announced, and when announced gets ahead of completed
transactions then we start to see the backlog building. And
so one of the things you guys can take a lot of comfort in,
but use it as a tool going forward, is you can see that in
the, you know, in the boom period in '98 to 2000, how much
more backlog we had. And then often we got up and talked to
you about '01 and '02 as just being the runoff of previous
backlog. And it's just the beginning of this year and
through the second quarter that we've seen the backlog start
to build, and that's a great sign for our business. And this
is something that I think speaks to how we're thinking about
the market in '04 and '05. It still - the product that'll
come back probably last relative to equity is income
origination. But we think we've seen the turn there.
Relative to equity origination, I've been trying to make
this argument. I can see some people in the room that have
heard it and probably heard it too much. But relative to the
leverage and where rating agencies are - if I can get this
slide turned, please. Thank you. If you look at equity
origination and you just look at the leverage in the
marketplace over the corresponding years, and then the ratio
of downgrades to upgrades and the credit watch situation.
This is our argument. Many companies need to de-lever and
need to raise equity. And you've seen the start of that
really relative to the convert market. Those that can do it,
those that can afford the debt or the dividend on their
equity have been able to issue converts. We've seen that
wave. I think a lot of you
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understood that a lot of that was a debt surrogate trying to
get equity credit. But we're pretty bullish on where we see
the equity origination opportunity in '04 and '05. I know
these are statistics but we speak to our clients every day.
We have these conversations. Given the rating agency's bent,
and it's not changing even though we see the macro picture
changing. None of these guys want to be on credit watch, and
certainly they want to de-lever in order to improve their
rating. And so this is the back - this is the supporting
evidence we have around the equity calendar. One of the
things that your - that's a change in our business is given
the shelf and how aggressive our clients are in using the
shelf versus filing their deals - the file backlog for
equities is becoming like the fixed income file backlog.
It's not a good indicator for you. It's going to be harder
for you to judge how things are going. If you just took what
happened in the first two quarters of this year and looked
at the file backlog, I'll bet 10 to 15% of those deals were
in the file backlog before they came to the market. And so
part of what will have to be the mode going forward is, the
same way we talk about fixed income, it's trends, it's
fundamental, and it's what we're hearing from our clients
because the use of the universal shelf is becoming greater
and greater on the equity side. So we think these are the
fundamental reasons, but we also see that people are getting
more bullish and they want to improve their leverage ratios
as they look forward to a better market and the opportunity
to be more inquisitive. Fixed income origination - the
question I get most often right now, you know, what's going
to happen on the origination side? I want to make two
points. First off we're looking at a record year this year
in originations. Many of you I talked to in '02 said it
couldn't happen in '03. Obviously rates have stayed low.
We've gotten no uncertain sense. But if you think about it
two things are going on. One is people are responding, but
if you look forward to '04 the deficits are coming and
obviously the treasury will be a big borrow - we saw the
speech last night. But sovereigns around the world, states
and municipalities, they need to borrow money. They will be
in the market. The other side is credit spreads are coming
in and a lot of issuers issue swap to floating, and then as
their credit spreads improve they're going to want to fix
out. And so, yes, the coupons are very low right now but
that doesn't mean the companies won't want to issue in '04
and 05. They have pre-funded to some degree, but remember, a
lot of these guys pre-funded when their spreads were 200 and
300 over treasury. They're coming in. We're still bullish on
credit spread. So we think that'll hold up origination over
the course of '04. We do see a decline but we don't believe
that - if you guys thought '02 was a great year, we see it
in that range. Secondly, relative to fixed
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income, origination is important and it provides flow and it
provides knowledge, and opportunity. But relative to the
fees that we earn in fixed income it's about 10%. It is not
the driver of the business day-to-day. And you've met Bart
McDade, our head of fixed income, you know that the variety
of asset classes we had, it is important. But when we look
at issuance declining by 10% given the size of the market,
and we look at the opportunities on the sovereign side as
deficits return to the marketplace, we still see enormous
opportunities. I want to switch now to just equity capital
markets, sales and trading, and fixed income capital markets
for a minute. On the equity side volumes and valuations are
improving. Equity fund flows have been positive since the
end of the war in Iraq, and we see several positive
structural changes. The growth of hedge fund universe -
these are the biggest users. They - if you wanted an analogy
think about sponsors and how they use investment banks
across M&A and all the products. Hedge funds are maturing.
They're using more and more product. And they're - they tend
to be higher margin players than others in the equity sales
and trading business today. They represent 3% of global
equity assets, but it counts for 30% of the trading
opportunity. We think that there's long-term positives for
our business across the trading side, but also the increased
use of technology, which, as I said, reduces the cost per
trade is positive. We think that people - one of the things
that equities didn't go through - when the bull market
started in the 90s, fixed income had to rationalize its
business model, become more efficient, and be able to have
more leverage on the up side. We're seeing that in the
equity business. We know there's pressure. But as we
rationalize people, the amount of bodies that we have in the
business, the use of technology, and some of these newer
asset classes or investors, whether it's hedge funds or
their use of things like prime brokerage. We know it's more
competitive but we see upside in the business overall. Fixed
income - I think this is very compelling. We sat down with
the head of fixed income and his business team and went, so,
where do you see growth? Where do you see growth in '04 and
'05? These are all the categories. High yield and leverage
loans. We still with credit spreads coming in a bigger
calendar next year than this year in high yield. Interest
rate derivatives much more popular and growing. Commercial
mortgage back, securities maybe more so outside the U.S.
Non-U.S. residential supply. This is the market in Europe.
Less so in Asia but in Europe that we're just scratching the
surface of asset-backed securitization, both as a tool for
M&A and as a tool in Asia and Europe, foreign exchange for -
we see, given the changes with the euro and the yen, we
still the market being able to grow. CDOs, CLOs, again
market with huge growth opportunities and
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credit derivatives. So we tried to say don't think about it
as, you know, just a business plan or budgeting, but really
where do you see growth for the industry? We have our own
priorities. Things like foreign exchange we think we can get
much better at. But as an industry we think these markets
can grow and so we're much less concerned about the shift as
it comes between fixed income and equity. This is a slide I
wanted to spend just a minute on because I think it really
speaks to what environment we would say we're going into.
And inflation is probably more important to the equities
market than necessarily just interest rates. And this was
something we went back and tried to look at over a
significant period of time. And I think we said since 1954,
what do the recoveries look like? When has it been in the
most attractive environment? And I shaded CPI being between
2 and 4%, the return of the S&P, and what happened in the
bond market. So you can kind of see that inflation obviously
hurts markets most both fit in - both fixed income and
equities. But if you said even take the model of 0 to 2%,
which wouldn't be good necessarily. You can see a 14% and a
4-1/2%. But if I said I think we're entering a sweeter spot
than that. Maybe inflation is on the lower side towards 2%.
But if you think about those two markets being able to give
the kinds of returns to investors, I think we could see
significant interest in terms of these asset classes and the
ability to generate returns for our shareholders. One the
high net worth side, in terms of the allocation, I talked
about the growth and the product mix. Two things have
happened there. More asset classes and you could see the
break down there between FID, cash, equities, real estate,
alternative investments. We see alternative investments
growing. But importantly for us we are newer to the game, we
did make the Neuberger acquisition. Importantly for us it's
no longer a one-service provider market. More and more of
these families or individuals are using two, three, four
different service providers and using different types of
assets. And that's an opportunity we see. Yes, it's a new
brand for us, but we think it's leveraging and consistent
with what we're doing on the institution side. These people
sit on boards, they make decisions around companies, they
buy and sell assets, they are important for our brand, for
our banking business, and the opportunity to put new and
different structures from FID and equities into these
clients. And so two things. Different asset classes and more
service providers. Finally Europe and Asia, just to look at
different opportunities here. We touched on some of this. In
Europe it's kind of the opportunity to continue the
privatization and consolidation that was taking place.
Equitization of Europe. You've heard a lot about that. It's
still much smaller than the U.S. market. That probably takes
more time than any of us anticipated
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in the late 90s. But certainly we see that opportunity. And
the fixed income markets are much less mature than the U.S.
For our business alone it's a big growth opportunity, but
overall we see more asset classes, bigger asset classes,
like securitization, et cetera. And in Asia, again a
restructuring opportunity with the growth of interlaying
markets in northern Asia being substantial. So backed up,
we're bullish on the growth in our industry. We think that
one of the things that -- just to underscore again -- the
growth trends has been at or above 10% for almost 30 years.
I think that's a pretty telling story. We don't think that
given the opportunities geographical and within certain
products, that it should be less than that. And certainly
from trough to recovery we've seen 20% plus. And asset did
see decline in the duration of it. We think it's a great
opportunity for you to look at this industry. I promise I'm
going to spend a few minutes on Lehman Brothers and then
turn it over to questions. Lehman Brothers. What's our
strategy? You guys have heard it. It's really cross cycle
success. And I sat with many of you '99 and 2000 with a lot
of questions about what are you guys going to do in the
downturn? How are you guys going to survive the downturn? If
all of you were honest you asked either one of us or me how
are you guys going to make it through the downturn? It's
interesting that in the last year the question is now how
you guys going to make it through the upturn? But if you
look cross cycle we did things that you guys said we
couldn't do. We built market share in a down market. It was
starting in an up market. We re-allocated resources, we were
very efficient in terms of how we used our capital, and so
if you look at it we really - in both a very aggressive
growth period, '98 to 2000, when you very much liked the
change at Lehman. And now, '01, '02, '03, first half of '03,
I think we've demonstrated above peer performance in two
extreme markets. And so I hope that, as you look forward,
you give us the benefit of the doubt that we're in a very
different position coming out of this trough than we were in
'90 and '91, and certainly competitively we're in a very
different position than we were even five years ago. Revenue
diversification we think's the strength. Capital markets
account for 60% of the revenues and banking and high net
worth. If you think about it, a shift in those mixes doesn't
really change the bottom line. You know, some of us would
make the argument that equities actually has some higher
margin products than fixed income. But the reality is if you
look over time it's going to be between 60 and 65% of the
market. Banking's going to represent the rest, and the
growth and high net worth, as I talked about earlier, again
we see the businesses improving - banking, equities, high
net worth. But the reality is that we have a diverse
revenues base. Because we've done well in fixed income,
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the return of Lehman Brothers as a good fixed income shop
has started again. I ran investment banking. You're going to
hurt my career unless you guys talk more about the fact that
we have diversified. We have a very strong banking division.
We have a very strong equities division. We'll talk more
about that. But we are diversified and we've performed in
both extreme up and down markets. How have we done that?
First off growing market share. I mean these are significant
differences in the last three years, in the last five years
in terms of our position in the marketplace. Lending you
told us would knock us out of our spot in fixed income.
We're the number three underwriter of investment grade debt
through good and bad times now. The credit cycle's probably
run its course. We didn't get knocked out of that spot.
We're number five in fixed income from a market share
standpoint globally. But if you just look across every
product we've gained market share. We're consistent, we're
focused, we're targeted. We cover a specific universe of
clients and we think we deliver the firm to them. If you
look at an important fact relative to this issue of
proprietary trading -- and this is differentiating between
our peer group and us -- we have grown ourselves credits or
the customer flow franchise even with the contraction in
both fixed income and equity markets. This represents the
combined sales credits for both mark - for both of our
positions and it's grown, in fact, since Q1 '99 through the
first half of this year. We are doing more with more
customers than we ever have before, and we'll see it in some
of the statistics very quickly in a minute. If you look at
equities this is the difference. We're about an 8 to 9%
player in the equity markets. We were 4% at the beginning of
this downturn. We've consolidated, we've stayed focused. I
won't go through the different awards and recognition that
we've gotten from you. We appreciate this business. It's
important to us. And you see the difference in our place in
the market. If you look at fixed income - this is what I
love. These are big businesses. There are 12 different
franchises in fixed income. And that's what spells, you
know, why we're not as concerned about this shift and the
view of our clients relative to equities or fixed income.
There may be some shifting within FID. Obviously things like
high yield performs better than investment grades in credit
hiking cycles. But we see the muni business - many got out
of it. We love the business. It's a much smaller group of
competitors. Mortgages, you know, some of the changes that
could come out of Fannie and Freddie in terms of their
arbitrage portfolio versus what they do for the housing
market could put a lot more supply into the market. There
are great opportunities within the business for Lehman
Brothers. We're not on the map in fixed income, in
commodities. We have places we can grow and grow
significantly. We probably
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make released on the street and foreign exchange. We're
trying to build that business. If we just got to be a player
in the business it could add 3 to $500 million in terms of
revenue for us over the next 12 to 24 months. Client
services - this is an area I talked about. It's about 10% of
our P&L. We have 350 PCS calling officers. They have the
highest debt in terms of margins for financial consultants.
But marry that with Neuberger Berman in terms of sales force
and we think that we drive a lot more high margin assets
under management. So what does this mean? We consistently
deliver more revenue to our bottom line than our peers do,
and this is due to continued focus on calling, using our
core competencies. One of the things that was also said was
you guys go into these five-year charts. You started off so
well with '92 and '95. Of course you look good. But now
these charts go back starting '98, '99, when we were in a
very different position than in '94 and we're still
outperforming our peer group -- and I can't stress enough --
in an industry that has performed very well. So look at the
returns, look what we've been able to do over that five-year
period. Solid performance, you can look at the financials
here. It's seen a lot but return on common equity first half
of '03, 16%. The trend is positive. We believe we represent
the unique value within our industry. Second quarter there's
just some more breakout in terms of our capital markets,
performance, investment banking. All of these areas have
been in a growth mode and as we look at '04 and '05 we're
very optimistic. Finally, the most important slide, the
five-year CAGR. Again, first in our industry, 9.7%, peer
group 7.1, S&P 8.2, and the S&P 500, S&P financial 8.2, S&P
500, 5.1. So within our industry and then our industry as a
whole, outperforming across cycles. I'm going to stop here
because I'm realizing I'm running out of time and I want to
take some questions. And this is going to get too long for
you guys. So why don't I open it up for some question and
see if we can get to what you're concerned about. Yes, sir?
In the back. If you shout I think this room's big enough.
MALE VOICE 2: (Off-mic).
BRADLEY JACK: I think two things have changed that would make this a
different cycle. One is just that the scale of M&A is, I
think, not going to return to the levels that it did in '99
and 2000. And I trust the success of some of these mergers.
I just think, you know, the $100 billion plus deal's
probably not what we're forecasting. So relative to what M&A
looks like over the next five years I don't think it'll be,
quote, the leading product in terms of how you see margin
and brand or benefit in investment banking. The second is I
think the equity business is permanently changed. You know?
I don't think
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commissions are going to come back as robustly. I think it
has to be more efficient. We have to rationalize the
industry more, become better, you know, provider of services
in a better and more efficient way. So as much as I think
there's the cyclical aspect coming back, I think there's
more to do on the equity side that'll make it different and,
quote, maybe not as robust as it was the last time around.
Yes, sir?
MALE VOICE 3: (Off-mic).
BRADLEY JACK: Okay, the question is just ramifications of the Spitzer's
investigation in mutual funds and then have we talked to
Neuberger about their situation. We have talked to
Neuberger, excuse me, they've assured us that that's not
going to be an issue for them. That's going to be important
that we are absolutely confident of that before the closing.
But given their assurances we're comfortable. I think,
again, you know, this has been just a tough, tough period
for the financial services industry over all. I think this
is a new chapter. You know, my comments would be that I
think investors are worn down by this news. It's only going
to tarnish what is already an industry that's been under
significant scrutiny and there's been some reasons for that.
I guess gut I don't feel this is as - this is going to be as
long lasting or as painful as what happened around the
investment banking model of research and equities. I think
this is a small, small percentage of what happens in your
industry. It's going to get corrected. Those people are
going to pay who did it. But if you think about testing an
overall model like they did when they looked at the
investment bank versus issues that are very, very specific
and not - maybe it's widespread but it's certainly not on
the scale, given how big your industry is what it does every
day. So, you know, I found it incredibly unfortunate but I
don't believe that it's going to slow in any way the return.
I think investors want to make money and I think that's
healthy, and I think, like all of us, they see opportunities
as the economies improve and they're going to want to put
their money to work. So I don't ultimately see it slowing
down what's happened over the last 24 months. But again it's
an unfortunate chapter for all of us. Yes, sir?
MALE VOICE 4: How about market share and competitive success? You know, if
you looked across the competitive landscape, everybody's got
really smart people, everybody's got ample financial
resources, sophisticated technology, global operations. With
that kind of level of playing field what do you think are
the real drivers of competitive success?
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BRADLEY JACK: Well, it's a great point because I don't think it's just
products and people. It's culture. I mean people can have
different cultures but your ability to work together
internally to solve -- whether it's an investing client or a
banking client's problem -- come from what is your culture?
What is demanded of you by senior management? How does that
actually play out day-to-day? So I mean part of it is that
our competitors hurt themselves, and part of it is that in
the last 15 years Lehman has really established a culture of
how you're supposed to work together. What it means. One of
the things I was saying earlier about why doesn't everybody
succeed in the financial sponsors business? It's because
they need five products and they need not for them to tell
you how to put together that package but for you to figure
out a way for them to win in an auction. And that's what
(unintelligible) high yield guys have to be able to tell the
loan guys I need you to do this to your pricing. And the
loan guys (unintelligible) tell the convert guys this is how
much convert to be used because I need this kind of cap
structure. If you can do that internally and people feel
like they're working for one outcome, you can be incredibly
successful. But that doesn't happen because you can do that
naturally. Everything's focused on the P&L and it really has
to be, you know, done in a way that the culture drives
people to do that. Equity ownership was the start for us,
but now people believe that if Lehman does better, they will
do better. They don't have to have their business be the
sole contributor. You know, these fixed income - the fixed
income franchise today could walk around, as you hear at
other firms, and kind of say, you know, we're the - you
don't hear that at Lehman Brothers. These guys know that
it'll transition back to equities and banking and vice
versa. Our ability to distribute compensation through the
whole organization, keep it together, to keep it consistent,
has been a part of our success. That other firms have to pay
all of the goods to one division one year, all of the goods
to another division. Most senior people at Lehman Brothers,
the top 150, have such a significant investment in their
equities that what they care about is the firm winning. And
that has gotten to be our culture. Not just an economic
reason or something we say at the top. And honestly you're
right. Most people in this industry are very capable, very
smart, but they can't pull it together. And I think the fact
that we've done seven out of the ten largest sponsors deals
in the last 18 months. That's not magic. That's our ability
to come together and deliver. And one of the things I wanted
to say later in the presentation is we do tailor. We are
creative. I know other guys are but they can't get to the
point of sale because there's too much internal issues. Some
of it's from consolidation, some of it's, you know, with the
change the companies have had about the capital markets and
investment banking businesses. Some of our
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competitors who run like a bull have chopped out so much of
the infrastructure that morale was way down. It's not - to
your point, it's not just us shooting out ahead of the pack.
It's - in our industry it's always been that our competitors
tend to stumble as much as we differentiate. But it's been
consistency and our culture that have really allowed us to
make this thing happen over a long period of time. If you
talk internally, most people feel like we're about 60% of
the way there. We got another ten years of investment and
efforts to try to make this franchise as strong as it can
be. Brand is still over decades. That's our feeling. Let's
take another question. Yes, sir.
MALE VOICE 5: (Off-mic).
BRADLEY JACK: Okay, questions about Neuberger Berman and just, you know,
how do we look at costs, revenue growth, synergy. I'm
looking for my partner here, Shawn Butler. Can I go with
this one? No. I've got to wait on that. I'm sorry. That's
the only one you got there? All right. I'm going to stop
because guys are starting to fade out. Thank you very much.
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