The Wily (And Profitable) Ways Of Neuberger Berman

Perhaps the most extraordinary thing about the sale of Neuberger Berman to its own executives is that it is a kind of managment buyunder with no actual cash trading hands. After the private equity bidders, reportedly including Bain Capital and Heller & Friedman, showed signs of balking at paying billions for the firm, the brokers at Neuberger were able to strike a deal to buy back a company they’ve twice sold (once to the public and once to Lehman) for hundreds of millions of dollars.

Heidi Moore at Deal Journal explains the amazing history of Neuberger Berman deals:

It is yet another testament to the ability of Neuberger management to buy low and sell high–particularly when it comes to their own firm. Throughout, Neuberger’s executives have used the same argument to win their point: the firm’s success depends on its employees, and if the employees are unhappy they will walk out of the door. And while it couldn’t have been easy to convince creditors to forgo a cash payment in a recession, Neuberger’s managers have done it again.

Since 1999, Neuberger executives have sold their firm twice at high valuations. The first time was the 1999 initial public offering that generated $50 million for the firm’s principals and two payments, of $134 million and $150 million for its employees. Then, in 2003, Neuberger managers sold the firm for $2.6 billion to Lehman. Each time they received rich personal payouts and turned many of their employees into millionaires. This year, Neuberger executives pushed Lehman to sell the fund manager so that the “crown jewel” business would get a rich price once separated from its troubled parent.

In the new deal, the executives will take 51% of Neuberger and creditors agreed to sit tight in expectation of a payoff through Neuberger’s future earnings. Creditors will own 93% of a separate preferred stock issue currently valued at $875 million, which they expect to sell later when market conditions improve, according to this article by our WSJ colleagues Peter Lattman and Diya Gullapali.

The management takeover of Neuberger isn’t just proof that the group knows how to get a good price. It also is a testament to their salesmanship and market-defying ability to snatch victory out of the jaws of defeat. As of Wednesday, the Neuberger auction was in dire straits. The deadline had been extended twice and several private-equity firms, including Carlyle Group, had backed out. Private-equity firms Bain Capital and Hellman & Friedman had abandoned an agreed-upon $2.15 billion offer for Neuberger, signed in September.

The failed auction could have been a humbling, or even humiliating, outcome for Neuberger’s leaders. Instead, they got a bargain.