Who Dares Wins
Barclays' Diamond leads team to snare one of Wall Street's most storied investment banks
By Aleksandrs Rozens January 19, 2009
When Bob Diamond's college-age daughter suggested to her mother and father, the chief executive of Barclays Capital, that they go for a steak and a beer on a Sunday afternoon in September he jumped at the suggestion. It was a welcome diversion for Diamond, who for some five days before had led a group of senior managers at the British bank in their effort to snap up Lehman Brothers.
"I thought, 'Nothing could sound better than a steak and a beer with my two girls,'" Diamond recalls.
Diamond had just finished marathon negotiations on the 32nd floor of Lehman's Seventh Avenue headquarters to craft a deal that would have allowed the British bank to buy Lehman, but the deal had stalled. Diamond and his team were fatigued--they'd been working on an hour's sleep a day--and disheartened when it became apparent at midday on Sept. 14 that the transaction would not happen.
"When it was clear we would not get this done it was deflating. We thought it was a good deal," he says.
"Having done battle over ABN [AMRO] in the previous year we certainly didn't want to go down a path and lose again," says Rich Ricci, Barclays Capital's chief operating officer. "He never gives up. I remember him telling me 'we'll get something done,'" he says, referring to Diamond.
Then, somewhere en route to Smith & Wollensky's for his steak, Diamond's cell phone rang. "I could see who it was and I said 'Oh no, I can't take it,' but my daughter said 'Answer the phone.'"
On the other line was Bart McDade, Lehman's COO. "He said 'If Lehman went into bankruptcy would you be interested in taking the US broker dealer?'" says Diamond. "My answer was instantaneous: 'In theory, that sounds great for us.'"
The two decided that they and their deal teams would meet the following morning at 5 a.m. When Lehman Brothers filed for bankruptcy on Monday, Sept. 15, its petition sent shockwaves through the financial world.
Bob Diamond
In the days that followed, the bankruptcy team from
Weil Gotshal representing the fallen giant hustled through one of the fastest and largest court supervised sales in the history of US corporate bankruptcy. As one of Weil's partners,
Harvey Miller, warned in the first day of hearings, the sale had to be done quickly. Speaking to a packed courtroom in a Lower Manhattan bankruptcy courthouse, Miller warned that Lehman's true assets--its people--left the building every night and the value of the company was like a melting ice cube. The sale needed to be handled quickly because the bankruptcy had spooked financial markets and the storied firm's employees were sure to leave if no buyer was found. Four days later, after an arduous sale hearing, Lehman's prized asset--the US brokerage operation--was in Barclays' hands.
"I would say that in one form Barclays was a white knight, [and] in another form an avid distressed debt purchaser who exercised brilliant business judgment in buying assets for a purchase price that was much less than the original deal," says Miller, a partner at Weil Gotshal. "They acted with a great deal of business acumen in seizing [such] an opportunity. I assume much of that was the vision of Mr. Diamond and Mr. [Archibald] Cox," chairman of Barclays Americas.
"It's a hell of an opportunity, that's for sure," says Ricci.
In addition to Ricci and Cox, chairman of Barclays Americas, the team of senior managers at Barclays that came to New York included Thomas Kalaris, CEO of Barclays wealth management business, Jerry del Missier, president of Barclays Capital, and Roger Jenkins, chairman of investment banking and investment management for the Middle East.
Long-term strategy bears fruit
Snaring Lehman in bankruptcy court was a coup for Barclays and Diamond, 57, who joined the British bank in 1996 and has since been on a campaign to build the bank's presence in financial markets.
In recent years, it became apparent that he and his team had gotten a strong foothold in Europe. But in the US there was much more to be done, particularly when it came to building a presence in M&A and equity capital markets--all the more reason why the Lehman deal was such a prize for the British bank, which first opened its doors in late 17th century.
"I never contemplated that it would be possible to acquire so cheaply, effectively for the price of the building, a US bulge bracket franchise. Never mind a US bulge bracket franchise as special as Lehman Brothers," says Diamond.
As Ricci sees it, "having expanded our footprint over the last several years in Europe and Asia we really needed to do something in the United States." As Ricci and Diamond pored over the Lehman assets both realized the acquisition would propel Barclays to the top five among investment banks in a wide range of markets.
Over the decade since he started at Barclays, Diamond and his colleagues focused on building a business strong in risk management and financing. But there were some business lines that were tough to break into.
"The core franchises of the old First Boston, Morgan Stanley, Lehman Brothers, Goldman Sachs, Merrill Lynch were these people with the strong, almost oligopolistic position in the US equity market. The barrier to entry was huge," says Diamond.
But the allure to Lehman Brothers went beyond its presence in equity markets. The firm was a leader in trading credit, corporate bonds--high grade and high yields--and it was a leading player in the mergers and acquisitions advisory world.
"Probably, most importantly, it had a very deep, very entrenched, very broad client franchise in the US on the corporate side and on the institutional side. Second to none," says Diamond. "It was an unbelievable opportunity."
Plan B
The notion of buying a competitor was not exactly a new idea being batted around by Barclays executives. Diamond was quietly keeping an eye on its competitors closely for about 15 months prior to the Lehman bankruptcy, even as he routinely offered a non-committal "never say never" response to queries about the company's acquisition plans.
Things escalated after Bear Stearns was absorbed by JPMorgan in March 2008, and in May, Barclays was asked in an unofficial capacity if it was interested in Lehman.
"We had a conversation with our board in May about the potential for a distressed price on Lehman and one or two other institutions if things played out in a certain way," Diamond recalled. "Our feeling ... was there was a price that we would be interested but it would be at a distressed level." He adds that "we never picked out a spot price [for Lehman] and I think we couldn't because we had not done due diligence. But we knew it was going to be at a distressed level." Diamond would not say who the two other institutions were, but did say that Barclays did not consider buying Bear Stearns.
Hectic sale
Much of the sale process ahead of the actual bankruptcy was orchestrated by the Federal Reserve and Treasury officials. Bank of America considered Lehman, but bowed out to buy Merrill. Barclays' deal to buy Lehman was scotched because Lehman had a problematic balance sheet, namely commercial real estate and private equity holdings that would chew up a bank's regulatory capital.
"Our proposal was to buy everything out of Lehman, but leave the commercial real estate. We did not feel the valuations [of the commercial real estate] were supportable and the private equity holdings [were supportable] because of the regulatory capital," recalls Diamond.
When Diamond and the Barclays team met with McDade and other Lehman officials on Monday, broadcast media had already run clips of employees exiting Lehman's offices with boxes of personal belongings. The subtext of the images were not lost on the executives. "We knew that we had to get the bankruptcy court's approval. We knew, by then, that those things can take weeks. We had made it clear through our legal teams that ... if this is going to work it is going to have to be very quick, just for the reason that this is a deteriorating asset," recalls Diamond. "My sense is that we could not keep this going longer than Monday [Sept. 22] morning, at the latest. We were hoping to get it done during that [first] week because people had stopped doing business with Lehman. Employees didn't know if they had a job."
If Diamond and his team believed they had a moment's respite after the first marathon of talks that ended prior to Lehman's bankruptcy, they were wrong. Between Sept. 15 and 16 there was yet another series of meetings with Lehman officials and their bankruptcy counsel. The first meeting of creditors that was also aimed at addressing the sale process was set for 4 p.m. that Tuesday. But, teams of lawyers were still sorting through the documents trying to understand all the details of the asset purchase less than an hour beforehand. "It was very stressful during that day. To get all the agreements ready for that proceeding in court was scary," recalled Diamond.
The final sale hearing on Friday ended in the early hours of Saturday. The sale was approved and then came the avalanche of details that needed to be sorted out so Lehman could be open and ready on Monday morning.
Looking back on the day that he walked through the trading floors of Lehman to announce Barclays' plans to buy the firm, Diamond recalled how the air was thick with emotion. "I will never pretend to understand the pain that the Lehman employees were going through, so many of whom who had been with the firm 10, 20 or 30 years. We had to talk to the people--'come into work tomorrow.' Seeing how pleased they were, how motivated they were and how they wanted to make this work, how they certainly encouraged us to keep going was tremendous. It must have been an extraordinarily difficult summer to be part of that storied franchise."
(c) 2009 Investment Dealers' Digest and SourceMedia, Inc. All Rights Reserved.
Find out more information about people mentioned in this article from our People Database:
Robert E. Diamond, Jr.
Harvey Miller
Jerry del Missier
Roger Jenkins
