For Lehman, Fidelity proves a match

When Lehman Brothers Holdings Inc. announced last June that it was entering a joint venture with Fidelity Investments, the reaction on Wall Street was muted.

After all, a similar alliance the Boston mutual fund giant had forged with Salomon Brothers in 1997 had been a dud.

Yet seven months after the new alliance was announced, Lehman officials are crediting the link with Fidelity for the huge equity underwriting gains being achieved by the New York securities firm.

In fact, the Lehman-Fidelity partnership has been so successful that observers now wonder whether it might blossom into another blockbuster Wall Street merger.

“If anything, we underestimated how much of an impact the partnership would have for us,” says John White, the Lehman managing director in charge of the Fidelity relationship.

lopsided deal?

The Fidelity deal gives Lehman access to retail investors for the first time since it was spun off from American Express in 1994.

In an accord signed last June, Lehman agreed to make a portion of its initial public offerings and other stock and bond deals available to the 6.5 million customers of Fidelity Brokerage Services, the firm’s discount arm.

The deal also gives Fidelity investors access to Lehman’s highly regarded stock research.

At first glance, the terms of the deal seem lopsided in favor of Fidelity. The mutual fund company is not providing Lehman with any tangible service other than an occasional mention in print and television advertising for Fidelity’s Power-Street online trading service.

The mere access to Fidelity customers — particularly the three million who trade on-line — has greatly enhanced Lehman’s standing among companies considering IPOs.

This is particularly so among technology and Internet firms, a group responsible for 70% of last year’s IPOs and one whose biggest boosters tend to be online traders.

“It’s clear that having the Fidelity distribution outlet has enabled Lehman to attract more Net-type investment banking clients,” says Raphael Soifer, a securities industry analyst with Brown Brothers Harriman & Co. in New York. “These companies want online, retail shareholders, because oftentimes they’re willing to pay higher prices for their stocks.”

After underwriting no IPOs during the entire fourth quarter of 1998, Lehman handled more of them during the fourth quarter of 1999 than all but three other Wall Street firms, according to Thomson Financial Securities Data.

Lehman was the lead investment bank on 13 deals totaling $1.56 billion, a strong showing that contributed to a 306% increase in its fourth-quarter earnings.

Certainly, the Fidelity alliance is not the only reason Lehman has been getting more IPO business.

The firm has been expanding its equity division since 1997, most recently hiring a team of health care bankers and analysts from Bear Stearns & Co.

Though Lehman’s transformation from bond house to full-service investment bank is virtually complete, many of the technology companies Lehman took public late last year say the Fidelity alliance was an important factor in their decision to hire Lehman as lead manager.

Powerful distribution

“If they had not been able to deliver Fidelity, co-managers like Merrill Lynch would have had a stronger economic interest in our deal,” says Mark Hirschhorn, chief financial officer for Deltathree.com Inc., a New York company Lehman took public in November.

According to an internal Lehman memorandum, interest from Fidelity investors in Lehman IPOs has been so keen that in some cases orders from Fidelity exceeded the total amount of stock being sold.

Such high demand can be a major selling point with corporate clients because it may allow Lehman to set higher offering prices and thus raise more cash for issuers.

To help drive this point home, Fidelity executives have been accompanying Lehman investment bankers to pitch meetings with prospective IPO clients.

“We think we are one of the most powerful distribution channels in the world,” says Tracey Curvey, executive vice president of Fidelity Online Brokerage. “We have relationships with 15 million consumers, and that’s the power that Lehman wants to unleash for these issuers.”

The more IPO business Lehman wins, the more IPO shares Fidelity can offer its best brokerage clients. This is important because access to IPOs has become a crucial selling point for customers with $500,000 or more in investible assets.

“We cannot be in this business without access to IPOs,” says Ms. Curvey.

Both Ms. Curvey and Lehman’s Mr. White say one reason the Lehman-Fidelity partnership has worked well is that the individuals involved all get along.

This mutual adoration has only stoked speculation that the alliance could be a first step toward Fidelity acquiring Lehman Brothers or perhaps taking an equity stake in the investment bank.

“I’m not saying it’s definitely going to happen, but with the breakdown of Glass-Steagall, you are going to see a rash of takeover activity,” says Mark Boyar, president of Boyar Asset Management New York. “Lehman is a target, and Fidelity is a possible suitor.”