Lehman Brothers CEO Dick Fuld is not giving up on the independent investment bank model despite predictions by pundits that brokerages will have to look for commercial bank partners to tide over future crises and sustain growth.

“I believe in the model. I believe the value of what we have created in the past for shareholders can be created again,” Fuld said on a conference call after Lehman’s quarterly results.

Lehman posted a quarterly loss of $2.8 billion, matching its forecast, after recording massive trading and hedging losses.

Experts say stand-alone U.S. investment banks such as Lehman are likely going to have to find commercial bank partners to get access to a stable source of funds. That will help them deal with future shocks and to sustain growth even if regulators restrict leverage.

Fuld did keep the door open to potential suitors, saying if someone came up with an offer that made sense, “I clearly have the obligation to take that to the board.”

“If the model changes, so that … banks are the only way to go, then that is a model that has to be considered,” Fuld said. “But today, the power of this franchise, we can very much go it alone and be very strong.”

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Buyers brave enough to go after the big deals amid the onslaught of the credit crisis this year have had to deal with an extra headache - a hit to their stock price after the announcement, a new study shows.The shares of acquirers in the top 20 U.S. deals have seen an average decline of 5.5 percent since the announcement of the transactions, according to a Lab Thomson report this week.  

The Lab Thomson study, which was conducted by Michael Thompson and Richard Peterson of Thomson Reuters, looked at deals including such takeover announcements as NRG’s bid for Calpine, Hewlett-Packard eyeing Electronic Data Systems and CME’s planned buy of NYMEX Holdings.

The study shows bidders in seven of the top 10 deals have seen their share price fall after the announcement. Five, including Delta, CME and Bank of America, have seen double-digit percentage declines.

Deals in real estate and financials sector have generally resulted in lower share prices, the study shows.

But buyers in some sectors have done better than the others.

Bidders in the energy sector, such as NRG Energy, Smith International and Grey Wolf, have seen share prices move higher, the study shows. They also account for the bulk of the nine bidders whose shares have actually outperformed the S&P 500 index since the date of the announcement.

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Bank of America can keep saying yes to Countrywide, but the skeptics just won’t go away.

Last night over dinner with Oppenheimer & Co analyst Meredith Whitney, BofA chief Kenneth Lewis said the bank will go ahead with the roughly $3.1 billion purchase of the giant money-losing mortgage lender and that it still makes sense for it to do so.

Lewis said the bank’s planned acquisition remains attractively priced, even if write-downs at Countrywide exceed expectations, Whitney wrote in a research note.

On Wednesday, Lewis reaffirmed his commitment to the acquisition at a Wall Street Journal conference, saying it was an important strategic move.

Lewis said he remains undeterred even as many consumer advocates, lawyers and politicians have criticized the merger and Countrywide’s lending practices. 

Countrywide shareholders are scheduled to vote on the merger on June 25, and Bank of America, which agreed to buy Countrywide in January, has said it expects a third-quarter closing. 

As the closing date nears and Bank of America repeatedly re-assures investors, the arbitrage spread on the deal has significantly tightened. The spread, the difference between the offered takeover price and the target company’s current trading price, was more than 40 percent on May 8.  

But Countrywide shares were trading at $4.72 on Wednesday afternoon, which is still more than 10 percent below the all-stock transaction price of about $5.30 per share.

Some analysts have estimated that the bank could face more than $10 billion of losses tied to Countrywide’s portfolio. And last month Bank of America said in a regulatory filing that it might not assume all Countrywide debt.

The skeptics here could be worried about the huge downside to the bet that a deal will indeed go through. If BofA walked away, Countrywide’s shares would plummet, meaning the potential risk of betting the merger will go through is high even if the chance of its falling apart now is low.

(Reporting by Paritosh Bansal and Dan Wilchins)

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The days of the eye-popping LBO may be over, but buyout shops are still raising eye-popping amounts of cash.

So far in 2008, private equity firms have raised nearly $100 billion, according to Thomson Reuters data. Buyout-focused funds have raised $65.1 billion, while others that are not focused on buyouts, such as real estate and energy funds, have raised $34 billion. In all $99.2 billion has been raised from 134 funds, Thomson Reuters data shows.

But overall acquisitions by financial sponsors are down 78 percent and global issuance of leveraged syndicated loans is down 68 percent, compared with the same period last year.

So where is the money going?

Minority stakes for one. Financial sponsors have spent $12 billion  so far this year on building up minority stakes in listed companies, up 86 percent from the same period in 2007, according to the data.

Financial services companies, which have been hit hard by the credit crunch and looking to raise funds, have attracted a lot of that cash. The volume of convertible offerings by financial issuers hit an all-time high in May with nearly $20 billion in new issues, according to the data.

The top 10 minority stake acquisitions so far this year include TPG’s $2 billion investment in Washington Mutual, KKR’s $1.25 billion in Legg Mason and WL Ross’ $750 million in Assured Guaranty.

But that still leaves a lot of unused funds with private equity firms, and they are hunting for places to deploy that money. 

“There is so much in the pipeline right now that we expect the back half of 2008 to be more active than the first half of last year,” according to Robert Profusek, chair of Jones Day’s M&A practice.

Profusek expects the activity to be higher in terms of the number of transactions, though, and not necessarily in the dollar amount, as Clear Channel-like mega buyouts may not happen.

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When dealmakers putting together the terms of Bear Stearns’ fire sale to rival JPMorgan Chase reworked the merger agreement, they not only increased the offer price but also made changes to make sure the transaction would survive scrutiny in Delaware courts, according to a Paul Hastings analysis.

JPMorgan initially agreed to buy Bear Stearns for $2 a share as the investment bank verged on collapse amid concern that the company did not have enough capital to keep going. The offer was later raised to $10 a share.

Predictably, the fire sale has led to unhappy investors who have filed lawsuits in New York and Delaware courts. The Delaware court has put the case before it on hold because of the New York action.

In a client note, “Revisiting the Bear Stearns/JP Morgan Transaction: An Analysis of Deal Protections and Fiduciary Duties” released Wednesday, the Paul Hastings lawyers wrote they expect the New York court to apply Delaware legal principles.

The plaintiffs in the New York case accuse Bear’s board of directors of violating its fiduciary duties to shareholders in agreeing to the JPMorgan deal, saying the terms are unfair and precluded any other bidders from emerging.

But thanks to the changes, the deal is likely to survive the challenges, according to the Paul Hastings note.

“It appears that the parties revised or deleted the deal protection measures in the March 24th amendment to give them a better chance of surviving scrutiny by the Delaware courts,” the Paul Hastings lawyers wrote.

For instance, the parties removed the so-called Renegotiation Covenant, which had the effect of precluding any topping bid, according to the note.

“The Delaware courts would likely take a hard stance against such a provision since it effectively precludes superior proposals,” the lawyers said.

Another example. They removed the ambiguity related to the so-called “Force the Vote Provision,” requiring Bear’s board to submit the deal to stockholders for approval even if it changed its recommendation on the deal.

The provision is now explicitly subject to the “fiduciary out,” which allows the board to change its recommendation in light of a superior proposal. But the amended agreement also weakened the “fiduciary out” by restricting when it can be used, according to the note.

It seems, then, the dealmakers had one eye on the clock, one on the prize – and one on Delaware courts.

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As the global credit crunch threatens to tip some U.S. banks over the edge, potential acquirers are looking into how regulators have dealt with any bank failures in the past, according to a recent memo from the law firm of Wachtell, Lipton, Rosen & Katz.

“There appears to be a widespread perception of meaningful risk of an acceleration in financial institution failures,” the firm’s lawyers wrote in a memo. “At the moment, it is difficult to predict the extent to which we will see bank failures in the near-term.”

Still, any failures could present buying opportunities after the regulators have moved in and sorted through the mess.

The Federal Deposit Insurance Corp, which insures deposits at more than 8,000 U.S. banks and thrifts and oversees the soundness of the institutions, has in the past held auctions of failed institutions, the lawyers said.

Sometimes to encourage buyers, the agency has also entered into loss-sharing agreements, where the FDIC “agrees to bear much of the further credit loss associated with the failed bank’s assets.”

However, the law firm said the crisis this time around is somewhat different from those in the past. Private equity, hedge funds and sovereign wealth funds have stepped up with cash for financial institutions looking to raise money. Recent examples: private equity firms were part of capital raises by Washington Mutual and National City.

And regulators are taking notice.

“This can be expected to translate into a more receptive regulatory climate for private investments into banks and thrifts,” the lawyers wrote.

If you are a bank, gobbling up other banks can do wonders to your stock – once an industrywide crisis recedes.

Sandler O’Neill analysts say in a research note they looked at bank stocks from the time of the last major recession and how shares did after touching bottom in roughly October 1990.

Contrary to conventional wisdom that takeovers often end up dragging on valuations, acquisitive banks’  median stock price rose by 214 percent three years later and as much as 290 percent five years later, “far outdistancing the performance of the broader bank group,” writes Mark Fitzgibbon, Sandler O’Neill’s director of research.

Among the reasons why the buyers did well: they were generally companies that had excess capital and less severe credit issues, had bold executives and were proactive. “They were able to buy good franchises cheap and fix them up,” according to the note.

The banks in the list included Union Planters Corp, which did 20 deals and saw its stock price rise 283 percent over the three year period. Bank One Corp, which also did 20 deals, saw its stock soar 161 percent over the same period, according to the note.  FleetBoston Financial Corp, which did one deal in that period, saw its stock price rise 239 percent, the note said.

Sandler O’Neill, a boutique investment bank that focuses on financials, goes a step further with a list of the “new breed of regional consolidators” that could be active acquirers, and if history is any any indication, do well when the current credit crisis is over. Among the banks that feature in that 21-name list are Wells Fargo, US Bancorp, BB&T Corp, SunTrust Banks and Regions Financial Corp.

Of course eating doesn’t mean you won’t be eaten at some point. Neither Union Planters (now part of Regions Financial), Bank One (taken over by JPMorgan Chase), or FleetBoston (Bank of America), has survived as an independent entity.

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A Bear Stearns-like meltdown in January?

That’s what the star banker who advised the fallen Wall Street bank on its sale to rival JPMorgan says would have happened if the much reviled sovereign wealth funds had not stepped in with so much cash last year.

“Imagine where we would have been in our financial system, if in November, in December, in January, sovereign wealth funds hadn’t been there?” said Gary Parr, deputy chairman of Lazard. “We would have been hit with a Bear Stearns type situation three months earlier.”

Sovereign wealth funds have reduced their level of investments significantly due to the confluence of factors, including a backlash by shareholders of companies in which they invested and a pushback by government, Parr said at The Deal’s Fifth Annual Private Capital Symposium.

Investments by sovereign wealth funds fell to about $13 billion in the first quarter, down from $44 billion in the fourth quarter of last year, Parr said. The funds, which had more than $2.8 trillion in 2007, are growing fast.

Parr declined to go into details of what happened around the fire sale of Bear Stearns earlier this year, citing litigation around it.

“In the span of two days … money market funds decided, ‘I don’t want to hold this name anymore,’” Parr said. “None of us have ever seen anything like this.”

“There was a run on the bank,” Parr said. “It was quite extraordinary.”

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The market is dealing its own brand of justice on Wall Street for the follies and excesses that led to the credit crunch and individuals who took part in it are paying the price, says veteran dealmaker Kenneth Moelis.

“There is a full-on depression in financial services,” Moelis said at The Deal’s Fifth Annual Private Capital Symposium in Manhattan.

“People measure pain differently, but losing your job is no fun from any position you are at,” Moelis said. “Financially people are getting hurt.”

The chief executive of Moelis & Co said he was “not a big fan of the rush to regulate,” and the market was holding deal advisers accountable.

“If you think you got bad advice … it is up to the users of bad advice to discipline appropriately,” he said. “There is a lash-back on the big financial conglomerates.”

Moelis also said relationships in the business were not what they used to be when he started out.

“People say, ‘the relationships are ending.’ I have the question, ‘did the relationships ever begin?’”  Moelis said, when asked if aborted LBOs would sour partnerships between advisers and private equity companies. “I think that personal trust did go away.”

When the times get tough, some people hedge their bets. Others buy hedge funds.

Alternative investment firms have become attractive to buyers looking to navigate the challenges thrown their way by the worldwide credit crunch.

Jefferies Putnam Lovell said sales of alternative investment firms account for a record 40 percent of deals in the global investment management business so far this year.

Through April, 29 of the 73 deals announced involved alternative investment firms, it said. Hedge funds lead the way. The total includes 20 transactions of hedge fund and fund of hedge fund managers. 

This compares with 66 deals in the same period last year, of which 15, or 23 percent, involved alternative investment firms.

Jefferies Putnam Lovell Managing Director Aaron Dorr said they expect the trend to continue.

“We expect record demand for alternative asset managers to continue throughout 2008, motivated by buyers’ search for absolute returns and innovative products in challenging capital markets,” Dorr said.

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