The numbers that prove Lehman was deal of the century for Barclays


Helen Avery
Published on:

The collapse of Lehman Brothers was the best thing to happen to Barclays. Euromoney investigates.

It has been five years since Lehman Brothers went bankrupt and five years since Barclays picked up the US business for just $250 million. It was a steal, and one that has changed the trajectory of the domestically heavy retail bank and DCM house to that of a global financial institution. There are few happy stories to be had from the financial crisis, but Barclays, at present, seems to be one.

Before the acquisition, Barclays was not a top-10 player among the global investment banks. Now, according to Dealogic, it ranks seventh in terms of net revenues and has a 5% market share; Lehman Brothers ranked ninth in 2007.

The acquisition transformed Barclays into the global investment bank that Bob Diamond, then-CEO of investment banking and investment management, had dreamed about.

Up until 2007, the bank had been heavily focused domestically on retail and commercial banking, and investment banking was centred around debt advisory.

In earnings reports, John Varley, group CEO until 2011, would mention the focus on international expansion, but the tipping point never seemed to come. Diamond, in his interview with Euromoney in 2009, referred to the timing of Lehman’s demise and consequent sale as “serendipity”.

“Ultimately, no one can really succeed in global advisory without equities and M&A,” he said. “You can build an M&A capability, and we had started to do that pre-acquisition, but you cannot have a global cash equities business without a big US presence.

“That is not something you can build organically.”

The opportunity to acquire Lehman Brothers’ US business gave Barclays the global push the firm had sought.

Barclays ranks seventh globally in M&A; it was outside the top 10 in 2007, and Lehman Brothers ranked ninth. In ECM, Barclays ranks eighth globally – again it was not a top-10 player pre-acquisition; Lehman Brothers ranked ninth. And in DCM, Barclays ranked 10th globally in 2007 and now it ranks seventh; Lehman Brothers was sixth in 2007.

It was fortunate timing. The financial industry collapse that began with Lehman’s bankruptcy made the fate of many banks uncertain – Citi, RBS, UBS, Bank of America and Merrill Lynch – and while naysayers said such a large acquisition would handicap Barclays for some time, it nonetheless showed Barclays to be in a healthier position than its peers and allowed the firm to increase momentum among clients globally.

For all the talk of cultural disharmony on the floor – blues versus greens; Barclays versus Lehman – under the leadership of former employees Diamond and Jerry del Missier, who oversaw the integration before becoming group COO, the merging of two sides of the Atlantic has had the desired results.

In the US, Barclays is now the brand it craved to be. It is the only European bank to rank in the top-five investment banks in the US league tables – where it ranks fifth, narrowly beating Citi year-to-date). And in US DCM, ECM and M&A it beats all its European counterparts to rank sixth or seventh below the US stalwarts.

The US is now a much bigger contributor to the group – both regionally and from the boost it has given to the global investment banking franchise. Barclays Capital contributed under a third to the group’s 2007 income; now it contributes almost 50%.

The US contributed £2.2 billion to the total £23 billion in income in 2007 – about 50% less than Barclays’ African business contribution. At the end of 2012, the Americas – the firm does not split out the US – contributed £7.6 billion to the firm’s £29 billion in adjusted income.

The US is now viewed as something of the golden child among the group. Group CEO Antony Jenkins intimated in April that the firm is banking on the US, as income from Europe in the wake of the credit crisis has fallen off. Income from Europe was about 50% more than the US in 2007. Now the Americas contributes double that of Europe to income.

In particular, Jenkins pointed to the success of the equities and prime brokerage business in the US. In its interim report in July, the bank’s reported income from equities and prime services to be £1.5 billion – almost £600 million more than at the end of 2012, and up £300 million on the previous year.

It buffered the decrease in FICC income and once more underscored that the Lehman’s addition continues to pay off.

However, the question is whether Barclays can keep the momentum going in the US?

Pessimists point out that non-domestic players never succeed in maintaining a top-five position for long. The bank is not without its challenges. While the Lehman acquisition might have been a positive venture, much of the goings on at Barclays around that era were far less palatable – and the legacy of those decisions continues to beat upon Barclays’ reputation.

There is the case of interest-rate rigging, and then the enlightening news that Barclays had paid exorbitant fees to secure an investment from Middle East sovereign investors during the crisis – and then the exorbitant fees it paid for a report to look into those exorbitant fees...

It is a bumbling PR nightmare in the UK for Barclays, which has so far not tainted its US reputation – although it is starting to weigh on its financials as the fines build up.

However, PR aside, it is the financial challenge that will be most important for Barclays to overcome. In the coming weeks the bank is planning a £5.8 billion rights issue to plug a capital shortfall identified by the Bank of England.

At the same time it is facing an unclear future regarding how foreign banking operations of European investment banks in the US will be treated, which might result in Barclays having a large capital shortfall in its broker-dealer unit.

The Lehman acquisition is by far the best thing to happen to Barclays during the past five – and arguably more – years. And this year the business has returned to its roots with the promotion of former Lehman banker Skip McGee to head up Barclays in the Americas.

Let’s hope he can keep the momentum going.

US league tables
Revenue ($m)
Revenue ($m)
US IB (M&A + ECM + DCM + Loans) Rankings
Q1-4 20072013 YTD
1Goldman Sachs3,6259.91JPMorgan2,89011.8
3Citi2,9908.23Goldman Sachs1,8857.7
4Morgan Stanley2,7097.44Morgan Stanley1,7107.0
5Merrill Lynch2,6907.45Barclays1,6916.9
6Bank of America2,2626.26Citi1,6906.9
7Lehman Brothers2,1375.97Credit Suisse1,4455.9
8Credit Suisse2,0255.68Wells Fargo 1,3885.7
9UBS1,7794.99Deutsche Bank1,2595.1
US M&A Rankings
Q1-4 20072013 YTD
1Goldman Sachs1,84715.01Goldman Sachs59511.6
2Morgan Stanley1,28010.42BAML4418.6
4Citi8066.64Morgan Stanley3426.7
5Merrill Lynch7846.45Citi3136.1
6Lehman Brothers7556.16Barclays3116.1
7Credit Suisse6875.67Credit Suisse2344.6
9Bank of America4653.89Evercore Partners1853.6
US ECM Rankings
Q1-4 20072013 YTD
2JPMorgan6438.82Goldman Sachs5289.8
3Goldman Sachs6268.63BAML5279.8
4Merrill Lynch6108.34Morgan Stanley4788.9
5Morgan Stanley5687.85Citi4338.1
7Lehman Brothers4486.17Credit Suisse3165.9
8Credit Suisse4366.08Deutsche Bank2785.2
9Deutsche Bank3755.19Wells Fargo 2344.4
US DCM Rankings
Q1-4 20072013 YTD
3Merrill Lynch9259.83Wells Fargo 5287.9
4Lehman Brothers7247.64Citi5227.8
5Goldman Sachs7197.65Morgan Stanley5157.7
6Bank of America6997.46Goldman Sachs4526.7
7Morgan Stanley6767.17Barclays4406.6
8Wachovia5015.38Deutsche Bank3865.8
9Deutsche Bank4344.69Credit Suisse3445.1
12Barclays2012.110RBC Capital Markets2173.2
Global rankings
Global IB (M&A + ECM + DCM + Loans) Rankings
Q1-4 20072013 YTD
2Goldman Sachs6,0006.92Bank of America Merrill Lynch3,6717.4
3Citi5,7976.73Goldman Sachs3,2276.5
4Morgan Stanley5,1315.94Morgan Stanley2,9826.1
6Merrill Lynch4,9575.76Deutsche Bank2,5935.3
7Credit Suisse4,4485.27Barclays2,4425.0
8Deutsche Bank4,3675.18Credit Suisse2,4354.9
9Lehman Brothers3,2633.89Wells Fargo Securities1,4653.0
13Barclays 1,4421.710UBS1,4252.9
Source: Dealogic