Images of Lehman Brothers employees carrying boxes containing all their office belongings have flooded television news and newspaper coverage and been the sad face of this week's financial crisis (for instance, this one in the Daily Mail). It turns out that even though Barclays is buying much of the bankrupt Lehman, times will still be tough for Lehman employees, particularly IT staff.
But it's a sweet deal for Barclays. "To the victor go the spoils," says David Easthope, senior analyst at Celent, part of Oliver Wyman. Barclays has purchased Lehman's North American investment banking and capital markets operations and supporting infrastructure, including 10,000 employees. "Lehman is in the top five or ten in a lot of categories across Wall Street, everything from U.S. and global M&A to equity and debt capital markets," Easthope points out. "This puts Barclays in a position to be a bigger competitor in the US, where it's respected but known for being a fixed income shop." Lehman's prime brokerage business is particularly valuable. "It has a lot of recurring revenue and dealing with hedge funds, even in this environment, is profitable because they trade a lot," Easthope says.
It's been reported that Barclays paid $1.45 billion just for Lehman's Manhattan headquarters and two Jersey City data centers, and that these chunks of real estate represent the bulk of the deal. Barclays will most likely undergo a U.S. data center consolidation and reap the cost savings of eliminating servers, systems and redundant backup facilities. Bob Iati at Tabb Group predicts that Lehman's 2008 IT spend of $2.5 billion will be reduced to approximately $1 billion in 2009.
This, of course is bad news for Lehman staff. "There's going to be a lot of human fallout at Lehman," says Michael Baum, co-founder of Splunk, a software company with many Wall Street customers.
However, the jobs of Lehman operations staff that deal with OTC derivatives clearing and settlement should be safe, according to Easthope. "Derivatives is an area where I don't see a lot of head count getting cut because there are so many issues now around OTC derivatives and confirms," he says. "The people who have domain expertise around derivatives will probably be valued. It's tough to find people who understand how to handle derivatives novations, confirmations and other technical areas where the Fed has come down hard on these banks and told them to do a better job."