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Lehman Formula

The Lehman Formula, developed by Lehman Brothers in the 1980s, is an investment banking commission structure that is used to determine the commission an investment bank should receive for arranging client transactions. Large investment banks often assist companies with raising capital, often through an initial public offering (IPO), a merger or acquisition, or through a spinoff. Instead of charging flat fees for each transaction, the Lehman Formula structures investment banking fees on a percentage of the dollar amount of the transaction. This is done by applying a set of tiered commission rates, which depend on the size of the transaction, the activity of the issuer, and the market conditions.

The purpose of the Lehman Formula is to make the commission process easier to understand and consistent, regardless of the size of the transaction or the market conditions. This structure helps to ensure that investment banks will receive appropriate compensation for the services they provide to clients. According to the Lehman Formula, a large transaction of $100 million or more would carry a lower commission rate than a smaller transaction of $20 million. The commission rate is also adjusted based on the type of transaction and whether the issuer is a first-time issuer of stock.

The Lehman Formula is still widely used today by large investment banks and can be adjusted to fit a wide range of services and fees. Some banks adjust their own commission structure to fall in line with the Lehman Formula. This helps the banks to remain competitive with other banks that are using the same structure. Depending on the size and complexity of the transaction, other commission structures may also be used. In some cases, an investment bank may include other fees such as legal fees, road show costs, and other expenses in the fee structure to better reflect the cost of completing the transaction.

The Lehman Formula has become an industry standard in investment banking commissions due to its flexibility and ease of use. Without it, determining the appropriate commission fee for each transaction would be a much more complicated and lengthy process. It allows banks to quickly and easily calculate the fee they should receive for arranging a client transaction. This makes the process smoother for investment banks and their clients, helping to ensure that both parties are satisfied with the outcome of the transaction.

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