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Who's Next? Bear and Lehman Boast Valuable Assets, Frothy Shares

A run-up in both stocks raises the question of who might pay these prices. A big European bank?

Updated from Sept. 12

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    As

    Chase's

    (CMB)

    deal to buy

    J.P. Morgan

    (JPM) - Get Report

    echoed through the canyons of lower Manhattan, all eyes turned to the last two independent investment banks,

    Lehman Brothers

    (LEH)

    and

    Bear Stearns

    (BSC)

    .

    Both firms have rambunctious corporate cultures and strong trading and investment banking operations, but little of the asset-management and retail-brokerage strength that banks are increasingly relying on to stabilize the more volatile parts of their businesses.

    After a Monday run-up, Lehman shares slid $1.06 to $158.94 Tuesday, and Bear Stearns eased 50 cents to $71.63. Wednesday morning Lehman and Bear were both off slightly.

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    Presence

    "Anyone lucky enough to buy Lehman would gain immediate presence in the investment banking business and a strong position in the league tables," says Michael Flanagan, an independent securities analyst with

    Financial Services Analytics

    .

    According to

    Thomson Financial Securities Data

    , Lehman ranks eighth in U.S. equity underwriting, sixth in debt underwriting, and 15th in global merger and acquisition advisory.

    At Bear Stearns, where CEO Jimmy Cayne recently said he would be open to a bid in the $120-a-share range, the league tables aren't treating the firm so well. Bear is ranked 12th in equity underwriting, 11th in debt underwriting and eighth in U.S. merger and acquisition advisory. Lehman ranks 13th in worldwide merger and acquisition.

    Frothy?
    Rallies in Lehman, Bear

    Source: BigCharts

    The X-factor may be Lehman's stock price, which has more than doubled since mid-April, spurred mostly by the rabid takeover speculation in the sector. Some Wall Street pros say if Lehman management can find a target willing to take its stock in a deal, Lehman is just as likely to be a buyer.

    Less Upside
    Tracking Chase, Morgan

    "Lehman's in a position to be a buyer -- it just needs to figure out who'll take its stock instead of cash," says one leading executive at a rival firm. "It would much rather be an acquirer."

    On the Prowl

    Conventional wisdom, however, makes the firm a more likely target simply because large European commercial banks such as

    Dresdner

    are on the prowl for a U.S. acquisition and a way into the lucrative investment banking market.

    Either Lehman or Bear would give a foreign bank an immediate presence in the U.S. market, though many see Lehman as a more desirable target, citing the way management has expanded the firm's revenue base into the equity business and successfully penetrated the European capital markets.

    Bear, though, has also seen its stock run up, posting an 83% increase since mid-April.

    In addition, says Flanagan, "They speak expense control at Lehman. Right now, Lehman doesn't have to sell, but I'm sure management is considering what is best for shareholders."

    Still, both firms are in dangerously cyclical businesses and have internal politics that could make them indigestible to a new parent company. But these days, being an investment bank is enough to win the hearts of most potential partners.