INVESTORS IGNORE STOCK DILUTION

NEW YORK (AP) -- Shares of Lehman Brothers Holdings Inc. rose sharply Tuesday and helped rally broader markets, as the investment bank raised $4 billion in new capital to shore up its liquidity position.
It was $1 billion more than Lehman had said it planned to raise just Monday night; Lehman said the offering was oversubscribed.
Lehman (LEH, Fortune 500) shares rose $6.70, or 17.8%, to close at $44.34, as investors brushed off the dilution from the new shares, which will reduce their ownership stake in the company.
Lehman's efforts are aimed at reassuring investors that the company has enough cash to handle any market demands, unlike competitor Bear Stearns Cos. In March, Bear Stearns faced liquidity problems that led it to near-bankruptcy and forced its sale to JPMorgan Chase & Co. for about $10 per share.
Analysts were mixed about the size and timing of Lehman's preferred stock offering.
"It seems evident that Lehman is being pushed hard by the markets to prove its balance sheet is safe," Punk, Ziegel & Co. analyst Richard Bove wrote in a research note. "By raising additional capital and liquefying the balance sheet, the company hopes to put these fears to rest."
Bove expects the stock offering to raise enough cash to help reduce fears and push the stock higher.
But unlike Bove, Sandler, O'Neill & Partners LP analyst Jeff Harte said Lehman's raising of capital might be a red flag, as he questioned the timing of the offer.
"Management's willingness to raise a large amount of capital after the recent dramatic share price declines implies a more pressing capital need," Harte wrote in a research note. Shares of Lehman declined 42% during the first three months of the year.
Fitch Ratings affirmed its investment-grade "AA-" issuer default ratings for Lehman in the wake of the stock offering, but placed a negative outlook on the bank. The outlook represents Fitch's view that the bank could face earnings pressure because of continued weakness in the capital and mortgage markets.
Lehman was not the only bank to announce its capital raising intentions Tuesday. Swiss bank UBS said it plans to seek $15.1 billion in new cash as it looks to improve its capital position. UBS said it lost $12.1 billion during the first quarter, including a $19 billion write-down tied to deterioration in the mortgage markets.
Lehman will raise the money through the issuance of convertible preferred stock. The preferred stock will carry a dividend rate of 7.25%. Holders of the preferred stock, which is priced at $1,000 per share, will have the option of converting them at any time to 20.0509 shares of Lehman's common stock.
The conversion represents a price of about $49.87 per share of common stock. The deal will dilute the bank's current stock by about 80 million shares, or 14% of current common stock outstanding, Buckingham Research Group analyst James Mitchell said