Fri Sep 12, 2008 5:57am EDT
By Jamie McGeever
LONDON (Reuters) - Expectations that a deal will emerge to save Lehman Brothers mounted on Friday after its plunging share price prompted intensive talks with U.S. officials about rescue options.
Lehman's Frankfurt-listed stock jumped 15 percent to 3.76 euros as talk swirled that the bank could put out a statement around 6 a.m. EDT. Lehman declined to comment.
Bank of America Corp (BofA) is seen as the most likely savior for the 158-year-old firm, according to various reports and analysts. BofA declined to comment.
"I believe that Bank of America will win the auction for Lehman Brothers. There is a natural fit between the two companies," Richard Bove, analyst at Ladenburg Thalmann, said in a note.
Lehman and U.S. officials were in discussions about a number of options, including a complete sale, sources with direct knowledge of the talks said late on Thursday. One of the sources said the firm was resisting government intervention.
The Treasury and Federal Reserve were engaged in the talks, which could be completed this weekend, a second source said.
European banks Barclays and HSBC have also been linked with Lehman, but executives at both have distanced themselves from such a move in past weeks and they are seen as unlikely to make a move.
Also reflecting concerns that integrating Lehman would be a disruptive deal for any bank, Goldman Sachs, another potential rescuer, is not pursuing a takeover, sources said on Thursday.
Lehman's shares fell 42 percent to $4.22 on Thursday in New York, cutting its market value to under $3 billion. The shares traded as low as $3.20 in after-hours trading.
But its shares rallied in European trading and optimism a deal could be struck also lifted the broader European bank index and Asian bank shares, dealers said. The DJ Stoxx European bank index was up 1.7 percent.
Lehman Chief Executive Dick Fuld, long resistant to ceding independence, has been trying to sell just a part rather than all the company, sources familiar with the situation said.
But investors have given a thumbs-down to revival plans unveiled on Wednesday, saying they lacked real progress. It prompted fears clients and trading partners might take their business to more stable firms.
Its troubles have shown how confidence remains key for investment banks.
"The ups and downs that followed the Bear Stearns bailout should be still fresh in the mind of investors and the economic backdrop has deteriorated since," Deutsche Bank analysts said in a report on Friday.
They said a takeover of Lehman could spark a relief rally, but warned of a worsening global economic picture.
Bear Stearns was taken over by JPMorgan in a government-backed bailout in March, triggering brief optimism that the credit crisis may ease.
Lehman, founded in 1850 by three German immigrants who traded cotton, has found itself in the eye of the credit crunch after writing down the value of billions of dollars in assets in the last year, largely on complex mortgage-backed securities.
It wrote down $5.6 billion for the third quarter, dragging it to a record quarterly loss of $3.9 billion.
It has failed to attract outside investors, however, unlike rivals such as Citigroup, Merrill Lynch and UBS.
This week's selloff gathered pace after talks broke down to sell a stake to state-run Korea Development Bank. The head of KDB said on Friday that talks remained on hold.
Lehman's survival may hinge on the sale of a 55 percent stake in Neuberger Berman, its asset management business, and prospects on that deal could also come to a head on Friday.
Buyout firms in the running to bid for the investment management assets are Kohlberg Kravis Roberts, Hellman & Friedman, Bain Capital and Clayton, Dubilier & Rice, sources said, adding Lehman had set a Friday deadline for offers.
(Writing by Steve Slater, Lincoln Feast and Ian Geoghegan; Editing by Jason Neely)