Lehman Brothers Financial SA (LEHNQ)

[DJN]

Like a voice from the grave, none other than Lehman Brothers re-emerged from bankruptcy last week. After 1,368 days in Chapter 11, the company, of course, is a shell of its former self. Once the world's fourth-largest investment bank, with 25,000 employees, it now has fewer than 450 people sweeping up the remains. Its shares fetch about three cents each on the Pink Sheets, the marketplace for the woeful and misbegotten.

And while Lehman is no longer operating under the auspices of a bankruptcy judge, it's hardly a viable company at this point. It still has to pay creditors billions in claims, with the first $10.5 billion distribution set for April 17. In all, creditors stand to receive about $65 billion—about 20 cents on the dollar—and Lehman will be liquidating billions worth of real estate, securities and other assets for a long time to pay them off.

But deep in all the detritus lurk the seeds of a revival, of sorts. Lehman emerged from bankruptcy holding a potentially valuable thing—$55 billion in net operating losses, or NOLs. If the postbankruptcy entity that is Lehman has any future, all the losses it accumulated while in free fall will be the reason.

That's because Lehman could use the NOLs, along with whatever cash it's got, to merge with another profitable company. The NOLs would then be used to offset the income generated by the combined company and let it operate virtually tax-free for many, many years. The only limitation under tax law is that the NOLs would be good only if Lehman strikes mergers within its own industry—but, then again, “financial services” describes so many different companies, it's not as if Lehman would be starved for choices.

“The game plan would be to strike mergers over and over again to make best use of all those NOLs,” said William Brandt, an expert in restructuring failed companies and chief executive of Development Specialists Inc. He said Lehman could use its losses to acquire smaller banks or finance companies or even something sizable, like business lender CIT Group.

Ultimately, the big payday for Lehman's current investors would come when the new, highly tax-advantaged company is finally sold or—heaven forbid—taken public all over again. Mr. Brandt said this kind of rebirth is almost surely what the company's new board has in mind, and it's much easier to do this sort of delicate work away from the glare of a bankruptcy court.

“I understand it might sound strange to a lot of people,” Mr. Brandt said. “But if you're a vulture investor, Lehman is a very interesting opportunity.”

http://www.crainsnewyork.com/article/20120311/SUB/303119973