DLJ to be bought out?
Buying Strength: DLJ a Tempting Target
By Dan Colarusso
Associate Editor
8/29/00 7:11 PM ET
If Donaldson Lufkin & Jenrette (DLJ:NYSE - news) does strike a deal to be acquired, its new owner will get a firm that has spread itself into many of Wall Street's most lucrative businesses.
The takeover action on Wall Street recently has been focused on firms with lots of brokers catering to retail investors, namely UBS' (UBS:NYSE ADR - news) July agreement to acquire PaineWebber (PWJ:NYSE - news).
But DLJ, which is reportedly in talks to be acquired, has become a force in several areas. It's the seventh-largest U.S. investment bank, one of the largest trade execution and clearing firms and the seventh-largest online brokerage. It also has about 500 brokers servicing wealthy individual investors. What it lacks, however, is a huge asset-management business that generates a steady stream of fee revenue to offset the more cyclical investment banking and trading businesses.
Still, DLJ's majority shareholder, AXA Financial (AXF:NYSE ADR - news) of France, is reportedly soliciting bids for the firm and getting a strong response. AXA, the world's largest insurance company, owns about 70% of DLJ.
DLJ and AXA didn't return calls seeking comments.
It's unclear what a buyer would pay for DLJ, though CNBC reported it would fetch $90 a share. UBS is paying about 18 times PaineWebber's estimated earnings this year. Trading at $86.50, up 31%, or $20.94, Tuesday, DLJ already is near that level, so there may be limited upside potential from here.
"Typically, you see stronger firms buying somewhat weaker ones, but in the case of DLJ, it's a strong firm that's getting acquired," says one Wall Street veteran.
"DLJ has chosen its business spots extremely well, and then executed its plans well," says money manager Michael Holland, who doesn't hold shares of DLJ in his Holland Balanced fund. "You tend to think that when DLJ decides to partner up with someone -- knowing its history -- the firm will do something smart."
Among the rumored suitors are Credit Suisse First Boston and Lehman Brothers (LEH:NYSE - news). Credit Suisse First Boston and Lehman declined to comment.
CS First Boston ranks fourth among U.S. equity underwriters, according to CommScan Equidesk, but an acquisition of DLJ would make it bigger and more diverse. It's best known for its technology investment-banking franchise, a unit which, under the guidance of Frank Quattrone, has become a Silicon Valley force.
CS First Boston and many other investment-banking firms also are on the hunt to add low-cost distribution to individual investors to their mixes. The combination of DLJ unit DLJDirect's (DIR:NYSE - news) online business and DLJ's boutique brokerage, which caters to wealthy individuals, could be a pipeline through which an investment bank could pump valuable initial public offering business.
Meanwhile, the specter of DLJ being acquired is likely to add even more fuel to the sector's M&A bonfire. Lehman and Bear Stearns (BSC:NYSE - news) have been among the most talked-about targets.
Both firms are similar in makeup to DLJ, although with a market cap of $17 billion Lehman is considerably larger. DLJ's market cap is about $12 billion, while Bear's is just under $7 billion. The stocks have run up considerably. Lehman shares have risen about 60% since May 1, while Bear's stock has popped about 40% since then. With Tuesday's performance, DLJ shares have almost doubled in that period.
Not everyone's sold. Goldman Sachs brokerage analyst Richard Strauss warned in a report last week that investors should "avoid the takeout trap -- which in this category typically is a dud."
Well, maybe not this time.
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