Lehman failure, Bank of America/Merrill Lynch buyout shake Wall Street again

Lehman Brothers goes into bankruptcy, Bank of America buys Merrill Lynch

Wall Street shook once again as Lehman Brothers announced it’s headed into bankruptcy and Bank of America said it’s buying Merrill Lynch for about $50 billion in a stock-swap deal. There’s fallout for employees and implication for IT investment on Wall Street.

Wall Street will never be the same again as Lehman Brothers heads into bankruptcy Monday and Bank of America says it would buy Merrill Lynch & Co., another troubled financial firm.

While JPMorganChase stepped in to acquire Bear Stearns when it collapsed just a few months ago, analysts say they hold out little hope for a similar rescue for Lehman.  

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“I do not expect a buyer to step in to rescue the holding company,” says Robert Iati, partner at the TABB Group, a research firm that closely monitors both the business and technology aspects of the major financial-services firms.

Iati notes that Lehman does have businesses, such as the asset-management business of Neuberger Berman and Townsend Analytics, operator of the Realtick execution management system, that are likely to be acquired in the near term. But, he adds, “Lehman has thousands of technology professionals that are likely to find it difficult to find jobs commensurate with the roles they left behind at Lehman because now and for the foreseeable future, there are fewer and fewer brokerage jobs out there and competition for those jobs is more intense than ever seen before.” (See Hottest tech merger & acquisition deals of 2008)

Lehman declined comment Monday on the bankruptcy and its impact on employees, but evidence of the fallout came in various ways as cameras covered employees with their belongings streaming out of Lehman locations in New York and elsewhere around the world.

Some, such as Lehman colleagues Vijay Jayant and James Ratcliffe, who had both been analysts on the Lehman Brothers Cable and Satellite Communications Team, Monday sent off farewell e-mail addressed to clients, friends and colleagues. “It’s been a great pleasure working with you over the last five years,” they state in the e-mail. Ratcliffe declined to comment further and Jayant could not be reached.

Wall Street firms are big investors in IT and telecommunications, on which they heavily depend to compete in interconnected systems for ultra-fast electronic trading.

Lehman is no different. According to its recent SEC filing for the nine months that ended Aug. 31, Lehman Brothers spent $921 million on technology and communications in 2008, up from $834 million the same period in 2007. Lehman was well respected and its CTO, Hari Gopalkrisnan, has earned plaudits for technology innovation.

TABB group’s Robert Iati said Lehman was well known for its fixed-income trading systems, but notes there are fewer bond trading operations, making the prospect for employment “challenging at best” for those that have specialized in this type of operation.

As to how Lehman, which is entering bankruptcy, might pay for its debts incurred in technology or otherwise, Iati says the legal application of bankruptcy law will make this clear eventually.

The outlook for Merrill Lynch, which is to be acquired by Bank of America for about $50 billion, seems brighter.

“There is clearly identifiable synergy between Merrill and Bank of America, which should manifest itself in IT, as well as other business areas,” Iati says. “Their businesses are quite complementary, which should minimize the redundancies between their technology.”

He notes that Merrill Lynch has perhaps the largest IT budget of all the investment banks, spending nearly $4 billion annually on technology for the past few years. An SEC filing from July, the latest available, shows Merrill Lynch budgeted $1.12 billion for communications and technology for the six months that ended June 27, up from $961 million for the same period the year before.

The Merrill Lynch technology budget has been spread across all regions of the world and on both the retail and investment banking business segments, Iati points out. Since Bank of America is focused more on core commercial banking in the United States, he says, it can be expected that technology spending for the investment sector of their business could decline as much as 30% to 40% in the next 12 months.

Iati surmises it’s likely that there will be reductions of staff and systems at Merrill Lynch if only because of the kind of redundancies that almost always occur in large mergers. But Merrill Lynch’s core networks, designed for low-latency trading, are likely to be kept up well so that the combined entity of the two firms can succeed, he notes.

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