Shall We Dance?

How New York investment bank Lehman Brothers got its feet bruised dancing with Japanese Net giant Softbank.

The firm had its toes mercilessly stepped on when it led the Internet to the dance floor, and nowhere more so than in its Tokyo and other Asian offices. In response, the bank reportedly froze all e-commerce activity in Asia. Laments one Tokyo-based employee: "There's no more e-commerce. I go to work every morning, but have nothing to do."

True, Lehman is by no means alone in its current flatfootedness. Several other first- and second-bracket global investment banks have been nothing short of humiliated by their tango with the Net. Lehman Brothers, though, is suffering from not just a Net hangover, but a Softbank one as well.

Softbank president and CEO Masayoshi Son fell victim to a case of dance fever. He decided to turn a software distribution business into a New Economy holding company rivaling the British Empire. His frenzied army of deal-makers made some good picks -- Yahoo, E*Trade -- but overall, Softbank amassed a portfolio of some 600 Net companies whose potential dwindled alarmingly in the bear market.

The architects of Lehman's e-commerce initiatives were first turned on to Softbank by the firm's own Japanese equity research. The firm was arguably Softbank's most aggressive booster during the salad days of the second half of fiscal 1999. Some at Lehman fretted over the aggressive support of a New Economy star whose clay feet would crumble, but Lehman's e-com gurus kept dancing.

In January 2000, Lehman Brothers one-upped Goldman Sachs and JP Morgan Chase when it joined hands with Softbank Finance to launch E-Bond Securities, Japan's first proprietary trading system for government, municipal, and corporate bonds. The investment bank issued an ambitious target price for Softbank the following month while E-Bond was applying for permission to begin operations.

Softbank's price has since plummeted by 92 percent amid concerns over inconsistent investment strategy, questionable accounting practices, and an overall lack of transparency. E-Bond was liquidated at the end of May, and Lehman Brothers and Softbank Finance will reportedly book combined losses of about $9.85 million.

Despite the leverage of Lehman and Softbank, the three largest domestic brokerage firms declined to invest in E-Bond, or to support the exchange as a market maker. Low liquidity and mounting operating costs quickly took their toll. A Tokyo management consultant notes: "If you had to do an autopsy, use Softbank for what they are, but don't expect any operational advantage in Japan."

One can still hear disingenuous whispers of "too early to market" and similar platitudes echoing through the halls of Lehman Brothers, but a fundamental shift in Net-related investment strategy is unfolding. Some of the original architects of the firm's Asian New Economy push are still in Asia, but have shifted to different business units. Others, to spare their political backsides, have returned to the Street. "E-Bond makes you realize that it is really difficult to do these kind of deals," muses one VC.

But the freeze on Lehman's investments in Japanese Net-related businesses will not last forever. According to sources close to the firm, a new guard -- including a former member of E-Bond and a senior exec who is "more of a banker" -- is coming in. They will move away from partnerships with other VCs and private equity funds that -- like the case of Lehman's pairing with Softbank -- can easily end in discord. Will the new dons be any better? Let's just hope they brought their dancing shoes.