DLJ Final

1995

DLJ

[VALUATION & CASE ANALYSIS] This paper contains the details of the valuation & analysis of the operating investment bank ‘Donaldson, Lufkin & Jenrette (DLJ)’. DLJ is planning for a repeat public offering for raising capital & that’s why 4 of the renowned investment banks are appointed as issue manager who are ought to set a offering price of the to be floated shares.

# Valuation & Detailed Analysis of “Donaldson, Lufkin & Jenrette (DLJ)” # Page | 2

A Case Report

On

“Valuation & Case analysis of Donaldson, Lufkin & Jenrette (DLJ)”

Prepared for:

Dr. M. Sadiqul Islam

Professor

Department of Finance

Dhaka University

Prepared by:

Md. Shaheenur Rahman, ID# 20063

S. M. Zubayer Hussain, ID # 20048

Md. Tanvir Hossain, ID# 20013

Md. Raihan Reza, ID# 20020

Date of Submission: August 10, 2012

Department of Finance

Dhaka University

Dhaka.


ACKNOWLEDGEMENT

It’s a matter of great contentment to be able to complete this study project in due time. Our endeavor will be considered successful if the report is of any help to anybody. At the very outset, we would like to express my heartiest gratitude to Almighty Allah for giving me the capacity to complete this task. Then I would like to place my humble gratitude to our respected course teacher Prof. Dr. M. Sadiqul Islam, Department of Finance, Dhaka University for his valuable time commitment, guidance, patience and stimulation made along throughout the total course duration.

We have put our best effort to make this report to serve its purpose; that is, to analyze & valuate the upcoming IPO offering of Donaldson, Lufkin & Jenrette (DLJ). We had to surf around the case for different issues at times & had to gather some information for the analysis from the internet as well.


Table of Contents

Declaration: iv

Acknowledgement: v

Part – 1: Preface

1.1 Origin of the Report: 6

1.2 Objectives: 6

1.3 Limitations of the research: 7

1.4 Methodology: 7

Part -2: Case analysis

2.1 Company Information: 9

2.2 Industry Analysis: 13

2.3 Details of its Operation 19

2.4 SWOT & Ratio Analysis 25

Part -3: Valuation

3.1 Problem Statement & related issues 32

3.2 Valuation 35

3.3 Recommendation 38

Part -4: Annexure

Microsoft Excel Calculations


DLJ PREFACE


1.1 Origin of the Report

The ‘Investment Banking & Managing Assets’ course gives a detailed overview on the total investment banking activity in the capital market & money market zone as well as about the different types of securities, derivatives & other financial assets of the capital & money market. We get the opportunity to work on a case problem at the end of the course for portraying our idea & knowledge of the total course that we have learnt throughout the duration of the course. At this continuation, we got “Donaldson, Lufkin & Jenrette (1995) abridged” as our case problem & we have worked on the analysis & valuation of this firm for their upcoming IPO floatation.

1.2 Objectives

The objective of this report is to –

Analyze the Case at the most detailed level

Relate the case proposition with that of our course content

Make an industry Analysis of the Investment Banking Industry in 1995.

Outline the company’s operational activities & discuss about its different business units.

Analyze its financial statements & comment about the company performance through ratio analysis.

Make valuation of the total enterprise & state the proposed stock price for the floatation of IPOs of DLJ.


Data collection from the Case

Data Compilation

Analysis & Valuation

Results & Recommendation

1.3 Limitations of the research

The information availability of our analysis was solely limited to our presented case of DLJ. In this regard, many of the required information crucial to the analysis & valuation was absent within the case. So, we had to forecast some parameters on a realistic assumption basis for preparation of the solution report. So, some of the valuation outcomes may not fully representative or coherent with the company’s information representation. We have also tried to remain as close to the context of the case as possible which we hope reflects at the outcome of the case.

1.4 Methodology

At the outset, we all started to gather a detailed knowledge about the case as well as the company “Donaldson, Lufkin & Jenrette (DLJ)” for the preparation of this report. Then, we exchanged our views & ideas about the case and came to a consensus point for working with the case. We started data mining from the case & later compiled the data in the form helpful for the analysis & valuation of the case. After that, we used Microsoft Excel 2007 to calculate the different ratios as well make the enterprise valuation of DLJ. After making all the valuations, we interpreted the results through our available knowledge & recommended some points to be taken into consideration.


DLJ CASE ANALYSIS


2.1 Company Information

Donaldson, Lufkin & Jenrette, Inc. (DLJ) grew in a single generation from its founding to become

one of the top ten U.S. investment-banking firms. DLJ also trades on its own account as a merchant

banker. A holding company, DLJ also acts as a full-service securities broker, managing assets,

clearing transactions, and providing financial research and advice as well as trust services to its

clients. In 1995 one survey ranked DLJ second among 19 firms in the quality of its research. In 1996

it was rated as the leading underwriter of high-yield bonds and fourth as lead underwriter of

domestic public issues. Although publicly traded, DLJ was 80 percent owned by The Equitable Cos.

Inc. in 1997.

William H. Donaldson and Dan W. Lufkin were former Yale and Harvard Business School classmates

who were rooming together while working on Wall Street in 1959, when they decided to go into

business for themselves as analysts researching stocks. They asked a colleague, Richard H. Jenrette-

-also a Harvard Business School classmate--to join them and raised $500,000 to $600,000 in start-

up cash and collateral, buying a seat on the New York Stock Exchange and opening a small office

with a staff of three. "There wasn't much downside risk since we were all bachelors," Jenrette later

recalled, "and we weren't earning that much, no more than $7,000 or $8,000 a year." Each brought

distinct skills to the partnership: the dynamic Lufkin excelled at recruiting clients, Donaldson was

the "deal" man, and Jenrette gravitated toward administration while also heading a small

investment-counseling unit. In 1962, however, Donaldson took over investment banking and

administration while Jenrette became head of research.

The partners sought as clients - institutional investors such as banks, mutual and pension funds,

and insurance companies, rather than the general public. They made their early reputation with

reports on small but promising growth companies for which they hoped to be repaid in brokerage

commissions. A survey of DLJ's 51 basic recommendations during 1960-63 found it beating the

Dow Jones industrial average by more than 50 percent, at least according to the firm's own

reckoning. Most of its buy recommendations were companies with new products or services. By

1964, the firm had established a corporate pension-fund department and was targeting wealthy

individual investors. It also entered investment banking by placing $10 million in debentures for

companies and setting up a merger between W.R. Grace & Co. and DuBois Chemicals.

In 1967, DLJ made the largest single transaction ever in dollar value on the New York Stock

Exchange--a $22.55-million trade of Harvey Aluminum Inc. common stock. Then, in 1970, DLJ shook

up the financial establishment by becoming the first New York Stock Exchange member to offer its

equity securities to the public, in contravention of the exchange's regulations. The firm, which

raised about $11 million in this manner, established a holding company that was exempted from

the stock exchange's restraints on member firms. Going public also allowed DLJ to acquire an

assortment of firms unrelated to its core business, such as the pollster Louis Harris & Associates,

Inc. and Meridian Investment and Development Corp., a home builder. The three partners remained

the firm's largest single stockholders.


DLJ's acquisition of the investment-counseling business formerly conducted by Moody's Investor

Service, Inc. in 1970 placed it in the primary position as investment advisor to state and local

retirement systems. When the long bull market of the 1960s suddenly came to an end, however,

revenues fell from $32.4 million in 1969 to $21.9 million in 1970, and net income sank from $7.5

million to $2.5 million. Lufkin left DLJ in 1971 (although returning briefly in 1974-75), having

amassed a fortune estimated at more than $35 million. Donaldson, who had been chairman and

chief executive officer of the company, also left in 1973. Jenrette moved up from president and

chief operating officer to succeed him.

DLJ earned $7.6 million on revenues of $46.3 million in 1972, a record it did not top until 1981.

With the Arab oil embargo of 1973, the world economy fell into deep recession accompanied by

double-digit inflation. This further depressed the stock market and ravaged the bond market which

DLJ had entered in 1973. The firm was also hurt by the end of fixed commissions in 1973 and

consequent competition from new discount brokers, and by its heavy investment in the

unprofitable Meridian real estate investment trust. In 1974 DLJ lost $11.5 million on revenues of

$60.3 million.

DLJ's stock, initially sold to the public at $15 a share, dropped to $1.75, and American Express,

which owned 25 percent of the firm, was so disappointed that it spun off its holdings to its

shareholders in the form of a stock dividend. "That was my lowest day," Jenrette later told a New

York Times reporter. "American Express made us feel like the end of the world to me. But I had my

pride on the line, and I didn't want it to be my epitaph that in the first year as chief executive, I

broke the firm."

DLJ made its way back to profitability in 1975 by stressing cost controls. Sales from the company's

own portfolio, including Louis Harris and Envirotech -a company DLJ put together itself--returned

$75 million to the firm and its partners by the end of 1976. In hindsight, the firm's wisest decision

during this period of restructuring was to back off from its announced sale of Alliance Capital

Management Corp. for $7 million. This subsidiary subsequently grew into the largest pension fund

manager on Wall Street and became the firm's chief source of income. DLJ also stepped up its

underwriting activities. By 1976 the company could offer the institutional investor a full spectrum

of investment vehicles, ranging from Treasury bills to venture capital funds.

In 1977 DLJ made two important purchases: Pershing & Co., one of the nation's largest trade

clearing and cash-and-securities-settlements operations, and Wood, Struthers & Winthrop, Inc.,

an asset-management and brokerage firm. The company's venture capital operation could boast of

having organized such successes as Geosource, a specialized oilfield-service company, and Shugart

Associates, a manufacturer of floppy disks. By the end of the decade DLJ had offices in nine U.S.

cities and in London, Paris, Zurich, and Hong Kong. Revenues reached $329.9 million in 1979, but

net income was a disappointing $3.75 million, prompting the company to bring in John K. Castle, the

head of its profit-oriented Sprout Capital Funds, as president and chief operating officer.


Under Castle's administration, DLJ achieved 21 consecutive quarters of earnings increases. The

firm's net income reached $24 million on revenues of $462.9 million in 1983. With offices in 16 U.S.

cities besides New York and in 14 countries on four continents, DLJ was the 12th largest brokerage

firm in the United States, with $338 million in capital. The Alliance subsidiary, which accounted for

40 percent of DLJ's profits, was managing $20 billion in pension fund assets. Nevertheless, the

company's earnings on equity were only about 70 percent of the industry average.

About 22 percent of DLJ's shares were being held at this time by Competrol Ltd., an investment

company controlled by Saudi Arabian investors who first bought shares in the firm in 1975.

Another 22 percent of shares were controlled by officers and directors of the company. In

November 1984 Jenrette agreed to sell the company to Equitable Life Assurance Society, the third

largest U.S. insurer, for about $460 million in cash. He left the company, but his retirement proved

short-lived as he became Equitable's chief investment officer in 1986 and its president and chief

executive officer in 1990.

In 1985 DLJ sold its unprofitable futures trading businesses to Refco Inc. The Alliance unit was

separated from DLJ by Equitable and taken public in 1988. Under Jenrette's watchful but

encouraging eye, DLJ raised its commitment to the high-yield but risky securities known as junk

bonds. During the 1980s the junk bond percentage of the firm's underwritings trailed only Drexel

Burnham Lambert Inc. The October 1987 one day stock market crash did not shake DLJ's faith in

this means of financing, even though Drexel Burnham Lambert foundered and its junk bond chief,

Michael Milken, went to jail.

DLJ also staked about one-fifth of its equity capital of $900 million on leveraged buyouts, a lucrative

but sometimes controversial means (often involving the issuing of junk bonds) of taking public

companies private that was highly popular in the 1980s. Between 1985 and 1990 DLJ executed 23

buyouts, either alone or with partners, worth $13.5 billion. In 1989 alone the firm extended $2.5

billion in 11 bridge loans (temporary loans until permanent financing could be arranged) to

troubled companies, nine of them in support of the leveraged buyouts it had helped to finance.

Much of this money was provided by Equitable. The stakes that DLJ ventured in these deals, and the

profits made from them, were immense: from the seven companies DLJ took private and then sold,

the company reaped compounded yearly gains of 140 percent. In 1989 DLJ earned about $90

million before taxes on revenues of about $950 million.

In 1990 DLJ further enhanced its junk bond activities by hiring at least 20 former Drexel investment

bankers. Pretax profits slumped but remained impressive at an estimated $50 million in 1990, the

year that junk bonds crashed. Despite suffering an embarrassing setback when it paid $5.6 million

plus interest to settle charges by the Securities and Exchange Commission that the company

illegally used customers' stock in the care of its back offices, DLJ became one of the top 10

underwriters of stocks and bonds in 1990, up from 24th in 1982.

DLJ also set revenue and earnings records in 1991, according to estimates. The company's activities

included many lucrative stock underwritings, trading in mortgage-backed securities and junk


bonds, and a thriving restructuring business which helped companies that needed to issue or

refinance junk bond debt. Among such companies were JPS Textile, MorningStar Foods, Saatchi &

Saatchi PLC, and Southland Corp. Mortgage-backed bonds were the company's leading source of

profit between 1990 and 1993.

DLJ's net revenues rose from $1.45 billion in 1992, when its pretax profit was an impressive $250

million, to $1.9 billion in 1993, when pretax profit passed $300 million. That year DLJ handled more

initial public stock offerings than any other firm except Goldman Sachs and Merrill Lynch, and

underwrote more than $8 billion worth of junk bonds, a field in which DLJ remained the

acknowledged leader. Much of the firm's income also came from taxable fixed-income offerings and

bond trading, activities in which its share had been minor only five or six years earlier. Much of

DLJ's success was attributed to the 500-odd investment bankers the company had hired from other

firms after the 1987 crash.

Principal Subsidiaries

Donaldson, Lufkin & Jenrette Securities Corp.

Principal Operating Units

- Banking Group (consisting of the Investment Banking Group, Merchant Banking Group, and

Emerging Market Group, and their subdivisions);

- Capital Markets Group (consisting of the Fixed Income, Institutional Equities, and Equity

Derivative divisions, Sprout, and their subdivisions);

- Financial Services Group (consisting of the Pershing Division, Investment Services Group, and

Asset Management Group, and their subdivisions).


2.2 Industry Analysis

CON-CURRENT INDUSTRY OVERVIEW

Introduction of New Products like SWAPs and Yankee bonds

As the governments deregulated interest rates and foreign-exchange rates, underwriters

introduced products, like swaps and Yankee bonds, to take advantage of global capital markets. In

most developed economies, deregulation and tighter monetary policies by reserve banks eventually

led to a steady decline in interest rates from the early 1980s until 1994. This environment

translated into an extended bull market, with a corresponding torrent of debt and equity issuances

from companies. Investment banks received less for their services but were more than

compensated with higher volumes of transactions and increased trading activity.

Change of Control from Individual investors to Institutional Investors

Power shifted from individual investors to institutional investors during this period. With the rise

of pension and mutual funds, institutional investors came to dominate the market. In 1980,

individuals owned 70.9 percent of all equities, and institutions owned 29.1 percent. In 1994,

individuals owned just 48.2 percent, and institutions 51.8 percent.

Change in the Scope of Operation

In search of highest margins, investment banks moved into new areas, accepting new risks. They

blurred the historical lines between financial institutions. They even moved into nonfinancial

businesses. To compete with commercial banks, investment banking firms accepted credit risk by

developing bridge loan funds and syndication departments. Investment bankers lent money to

firms on a short-term basis to facilitate pending M&A transactions. These loans, called bridge loans,

assisted acquirers in acquisitions by "bridging" the gap in financing until the companies could

replace the bridge loan with more permanent capital. Separately, loan-syndication departments in

investment banks competed with commercial banks to take commercial loans, divide them into

smaller loans, and selloff the loans to a syndicate of banks. If they properly executed the

transaction, syndicate managers could earn fees for the work, while never taking the loan onto their

balance sheet. Syndication constituted one of the commercial banks' most profitable areas.

Rise of Derivates

With the rise of derivatives, investment banks came to price and take on event risk. They insured

against risks ·that corporations desired to shed. For example, an investment bank might offer to

limit an airline's exposure to fluctuating jet fuel prices, allowing the airline to "lock in" a set price

for its fuel needs for the year. To accomplish this hedge, the bank would sell a series of forward

contracts on jet fuel prices to the airline. The bank then might sell offsetting positions to another

party who wanted exposure to jet fuel prices, or might keep the contract on its books. The

derivative market soared to become a multi trillion dollar market. As the derivatives market

expanded, investment banks tailored generic contracts to meet companies' specific needs. The


specialized use of derivatives played a large part in the development of the collateralized-mortgage

and asset-backed debt markets.

Moving into Principal Trading

With their knowledge of the markets and constant flow of information, investment banks moved

into principal trading. They used their own capital, often leveraged, to bet on the directions of the

markets. To varying degrees, firms established proprietary trading operations, with firms like

Salomon Brothers and Goldman Sachs leading the pack. Profits could be quite high if the traders

were right, but losses could be severe if their insights proved wrong. In 1994, Salomon Brothers

lost $831 million pre-tax, largely due to misguided bets on the bond market. Many critics charged

Wall Street with a conflict of interest in its principal trading because many of its clients were

making similar market bets. In effect, critics charged, the banks competed against their own clients.

Participation in Merchant Banking and Venture Capital Investments

Many investment banks participated in merchant banking and venture-capital investments. They

risked their own funds to buy all or part of other companies outside the securities industry.

Merchant-banking deals often involved mature companies and took on large amounts of debt, while

venture-capital investments tended to be in growth-stage companies. If the investment strategy

proved correct, these investments could provide huge returns to the equity capital invested;

garnering annual returns of 30 percent or greater.

Expansion in the Global Arena

In the 1970s and 1980s, investment banks flocked to Europe and Japan {IS U.S. companies

expanded abroad. The expansion required capital for equipment and for regulatory purposes. Many

foreign regulatory bodies insisted that branch offices maintain regulatory capital on site. In the

1990s, investment banks built up trading and corporate finance operations in emerging markets,

like Mexico, Brazil, Hong Kong, and India. These markets often offered lower levels of competition

from local securities firms, excellent growth and higher profits. Morgan Stanley placed great

emphasis on growing abroad, allocating roughly one-half of its capital overseas, generating 40

percent of its revenues. Even with its strong presence abroad, Morgan made an attempt to merge

with S. G. Warburg, one of the leading European investment banks, in 1995, though the merger fell

through.

Building up Asset Management Business

Many investment banks built or bought asset management businesses. Unlike other areas tied to

interest rates, these businesses provided reliable revenue streams. They earned a fee based on a

percentage of assets under management. Merrill Lynch created an asset management business that

oversaw over $170 billion of assets. Annual management fees on the assets generated

approximately $1.74 billion in revenues, roughly enough to cover the entire firm's fixed costs for a

year. In 1995, Morgan Stanley paid $350 million for Miller Anderson & Sherrerd, an asset manager,

to bulk up its business.

Volatility of Earnings

All of the changes in the industry necessitated capital- from holding more inventory for clients to

building overseas operations to merchant banking investments. With so much capital at risk,


earnings became more volatile. Profits could swing drastically with changes in underwriting

volumes or interest rates.

Expected Consolidation within the Industry

Many analysts expected further consolidation within the securities industry in the future. They

hypothesized that two factors would drive consolidation: globalization, and the long-expected

repeal of the Glass-Steagall regulations. They argued that firms needed a strong international

presence to successfully compete for large underwriting assignments and to mitigate oscillations in

U.S. interest rates.

The Glass-Steagall Act of 1933 separated investment banks and commercial banks after the Crash of

1929. Regulators assigned a portion of the blame for the crash on the conflicts of interest in the two

businesses. Commercial banks eventually earned the right to petition the Federal Reserve for

underwriting powers. By 1995, J. P. Morgan, Chase Manhattan, and Bankers Trust had successfully

requested these powers. They competed with investment banks in trading, debt underwriting, and

advisory services. They had limited success in their efforts to underwrite stock offerings. The repeal

of Glass-Steagall, which many predicted to occur by the end of the decade, would undoubtedly bring

more participants to the securities industry. More competition would put further pressure on

margins as newcomers competed for market share on price.

Many analysts expected that the European universal banks and U.S. money-center banks would be

acquirers of U.S. investment banks once the act was repealed. Conventional wisdom stated that

three firms-Goldman Sachs, Merrill Lynch, and Morgan Stanley-were sufficiently global and well

capitalized as to remain immune from being acquired. Some speculated that Lehman Brothers,

PaineWebber, and Salomon Brothers were prime merger or takeover targets.


REVENUES AND EXPENSES GROWTH TREND

Both the Revenue and expense trend in the Security industry was having a increasing trend during

1980 to 1993 as we can see from the Chart below.

From the diagram below we can see that the profit faced a decline from 1980 to 1990 as the margin

came down to as low as 1.11% in 1990. But since then it was having an upward trend as it stood on

11.93% in 1993.

0

20,000

40,000

60,000

80,000

100,000

120,000

1980 1985 1988 1989 1990 1991 1992 1993

Revenue & Expense Trends of Security Industry 1980-1993

Figures in Million US$

Total revenues

Total expenses

Linear (Total revenues)

Linear (Total expenses)

15.94%

13.05%

5.26%3.67%

1.11%

10.20% 10.06% 11.93%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

$0

$2000

$4000

$6000

$8000

$10000

$12000

$14000

1980 1985 1988 1989 1990 1991 1992 1993

Pre-Tax Profits (Figures in Million US$) & Pre-Tax Margin (%)1980-1993

Pretax profits Pretax margin


Industry (PEST) Analysis

Political Factors

The political factors were dominated by three major changes in regulation.

I. In 1974, the government enacted the Employee Retirement Income Security Act

(ERISA), requiring pension managers to follow the "prudent man" rule when making

investment decisions. Freed from investing just in bonds and blue-chip stocks,

pension managers diversified their portfolios into new markets, both domestically

and abroad. The managers were compensated according to how they performed

relative to the market. With competition, managers grew hungry for financial

products that could enhance their performance and manage unwanted risks. They

also demanded that securities firms be ready to buy or sell nearly any security to

them, requiring brokers to establish large securities inventories.

II. A year later, the government hit the brokerage industry with May Day, when fixed

brokerage commissions were eliminated. 'The new regulations dissolved the fixed

commission structure and allowed investors to negotiate commissions with their

brokers. Large institutions cut their commissions by t1p to 80 percent instantly. I

Smaller brokerages combined with each other to rationalize their businesses, meet

capital requirements, and take advantage of economies of scale in the "back office,"

the processing and record-keeping size of the business. In the new environment,

firms started to compete even more intensely with each other for clients.

III. In 1982, the SEC introduced Rule 415 which permitted "shelf registration" of

securities. Under a shelf registration, a company filed one comprehensive

registration statement to cover the issuance of a fixed amount of capital over a

stated period, but left open the types of securities to be sold and when they would

be brought to market. During that period, the company could quickly issue

securities in two days, "pulling them off the shelf," to take advantage of favorable

rates or conditions. Companies needed only to make quick updates 10 the initial

registration statement. To win their underwriting business, issuers forced

underwriters to bid more aggressively for their securities. This bidding cut the

"gross spread," the percentage underwriters earned in the issuance' process. Guy

Moszkowski, the securities industry analyst at brokerage Sanford C. Bernstein,

estimated that in 1982 underwriters earned 1.5 percent of the value of securities

underwritten. By 1993 the gross spread had shrunk to just 0.67 percent.

Economic Factors

Before the mid-1970s, investment banks served as orderly financial intermediaries; underwriting

"plain-vanilla" stocks and bonds, brokering securities for clients for a fixed fee and offering financial

advice on mergers and acquisitions when asked. Investment banks maintained close relationships

with a select group of corporations, acting as capital raiser and trusted advisor. The investment


banks required little capital of their own, quickly moving securities from corporations to investor’s,

rarely holding inventories of securities.

In this regulated environment, the function of investment banks was to bear capital market risks, in

contrast to other firms. In an underwriting, investment banks purchased clients' securities at a fixed

price, to resell later in the market at an uncertain price. Commercial banks accepted credit risk: the

uncertainty of a borrower's ability to meet contractual interest and principal payments. Insurance

companies underwrote event risk. Nonfinancial corporations accepted business risk, the

operational risks inherent in their businesses.

But the things have changed greatly as described in the con-current issues of the industry.

Social Factors

While the DLJ offering was oversubscribed by investors, some had questioned how successful DU

would be in the future. Critics wondered if DU had sufficiently diverse businesses and enough of an

international presence to compete in the ever-competitive securities industry. Others questioned if

DLJ could maintain its enviable, collegial atmosphere in the face of public scrutiny. To sustain in this

competitive industry, DLJ would have to cope up with the diversified social factors both globally

and domestically.

Technological Factors

Technology, too, played a role in shaping the new financing arena. Computers supported the

creation and pricing of more complex financial instruments, such as derivatives. In corporate

finance, bankers could test multitudes of capital structures and their effects on a company through

the use of spreadsheets. While margins eroded in the brokerage and underwriting businesses,

blossoming fields like derivatives, junk bonds,' and mergers and acquisition (M&A) services for

leveraged buyouts (LBOs) kept overall margins healthy. Innovation proved profitable for those who

could create the newest security or M&A tactic. Though temporarily lucrative for their inventors,

these innovations tended to be quickly duplicated by competitors.


2.3 Details of its operation

Inception

In 1959, when brokerage houses primarily created to individual investors, seeing that institutional investors were not adequately served, the three Harvard Business School graduates William Donaldson, Dan Lufkin, and Richard Jenrette set out with $100,000 to create an equity –research firm that would serve Institutional shareholders. Their firm prospered, offering sophisticated equity analysis to institutional investors in the hope of receiving their lucrative fixed-commission trading business. The firm decided to go public in 1970 for generating more capital, became member of New York Stock Exchange. However, NYSE prohibited members from having public shareholders> No NYSE members had ever offered shares to the public. The Business Week reported on the controversial transaction as follows:

Wall Street is, rather proudly, the home of the Big Risk and the Big Stake. Last week, three young men

staked their 10-year old, $14-milliom firm in one of the most remarkable wages in recent financial

history. If they lose, they forfeit their membership in the nation’s wealthiest club, the New York Stock

Exchange. If they win, they can increase the value of their firm tenfold, literally overnight. Win or lose,

they have already set in motion forces that in the coming decade will wrench the sinews of power in

every quarter of the U.S. securities industry.

DLJ kept in NYSE membership, and in April of 1970, DLJ offered shares of itself to the public. At the time, DLJ had just over 400 employees with revenues of $21.9 million. The market valued the company at approximately $115 million. To continuing its strategy of diversification DLJ sold itself to Equitable in 1985 for $465 million. Equitable was then a mutual life insurance company, owned by policyholders. Richard Jenrette, head of DLJ, joined Equitable as chief investment officer shortly after the merger. He became chairman in 1990. Jenrette initiated a restructuring of Equitable in response to serious problems.

Restructuring:

In the restructuring, Jenrette cut $150 million in annual cost, and sold 49 percent of Equitable to AXA, a French holding company for a group of international insurance and financial service companies. He also demutualized Equitable, raising $450 million in an initial public offering (IPO). Equitable separated DLJ’s original asset-management operations, Alliance Capital Management (“Alliance”), from DLJ. Later, Equitable sold part of Alliance to the public. In June of 1995, Alliance’s market capitalization stood at approximately $2 billion. By 1995, AXA owned approximately 60 percent of Equitable. Under Equitable, DLJ built industry and product groups as opportunity itself. DLJ’s strategy was one of the patience, keeping lean in the good times and taking chances when others saw gloom. For example, when many securities firms fired employees following Black Monday-the October 17, 1987 crash-DLJ actively hired select professionals. Similarly, after the junk-bond market collapsed


in 1990, DLJ sought out and hired a core group of junk-bond specialists from fallen market leader Drexel Burnham Lambert. DLJ’s careful strategy excelled, pushing DLJ up the industry league tables. Together, DLJ and Equitable sought a solution.

DLJ Business Groups:

The company was a leading investment and merchant bank that served institutional, corporate, government, and individual client. In terms of capital, DLJ ranked as the 11th largest securities firm. DLJ’s business included: Securities Underwriting Sales and Trading Merchant Banking Venture Capital Financial Advisory Services Investment Research Correspondent Brokerage Services & Asset Management DLJ operated through three principal Groups: the Banking Group, the Capital Market Group, and the Financial Services Group.

In 1995, DLJ employed 4,676 people, including 431 professionals in the Banking Group, 821 professionals in the Capital Market Group, and 998 professionals in the Financial Services Group.

DLJ Business Group

Banking Group

Investment Banking

Merchant Banking

Emerging Markets

Capital Markets Group:

Institutional Equities

Taxable Fixed Income

Equity Derivatives

Sprout Vevture Capital

Financial Services Group

Pershing Division

Investment Services Group

Wood, Struthers & Winthrop


The Banking Group:

The professionals in the Banking Group assisted clients in raising capital through the issuance of debt and equity securities in the public and private markets. The Investment Banking Group also provided its clients with financial advice concerning mergers and acquisitions, restructurings, and other transactions. Since 1990, the Investment Banking Group had Assisted its clients in raising over $150 billion in capital and completed over 300 M & A transactions, worth approximately &65 billion. The firm also maintained successful groups in private placements, private fund-raising (i.e. raising money for LBO fund), structured finance, and restructuring. The Merchant Banking Group invested capital directly into companies. DLJ utilized two investment funds with combined capital of $2.25 billion:

DLJ Merchant Banking Partners L.P. and DLJ Bridge Fund

In 1985, the group had invested in 46 companies with an aggregate purchase price over $18 billion. Since 1992, DLJ had placed $580 million in 20 companies and realized $610 million from seven partial or whole realizations. DLJ earned one of the highest returns among principal investors, with

annual return thought to exceed 90 percent. The bridge fund had completed 74 transactions totaling $12 billion of commitments to clients. The fund had $230 million of bridge loans outstanding as of June 30, 1995. The merchant banking activities earned money by charging a small fixed percentage for asset under management and keeping approximately 20 percent of the profits realized through the investments. The bridge operations earned money for committing to lend money and on the interest on money it lent out. DLJ then planned to form four new funds in the near future:

Mergers & Acquisitions

Restructuring and other

transaction

Private Placement, Private Fund Raising

Structured Finance &

Restructuring

DLJ Real State Fund DLJ Senior Debt Fund

DLJ investment Partners Global Retail Partners L.P.

Funds


The Emerging Markets Group was founded by DLJ in February 1995 to provide a broad array of investment banking, merchant banking, sale, and trading services to clients in Latin America and Asia. Additionally, the company agreed to invest $7 million in Pleiade Investments, a South African merchant bank. The Banking Group produced high margins with lower levels of risk in favorable environments. Most of its costs were personnel related. These costs were tied to the group’s performance through year-end bonuses; if performance fell, bonuses and cost fell. Merchant Banking offered more risk as DLJ put in its own capital with its limited partners in purchasing securities in companies.

Capital Market Group:

The Capital Market Group offered trading, research, and sales services in fixed-income and equity securities. In these markets, DLJ focused on serving its clients and had not undertaken a large amount of proprietary trading. The Institutional Equities division covered major U.S. institutions with 100 traders and salespeople. For listed equities, the company acted as principal and agent, often taking long and short positions to help clients quickly gain liquidity. Most trades were made in blocks of 10,000 shares or more. DLJ also made markets in approximately 350 securities traded on the National Association of Securities Automated Quotation System (NASDAQ). The division primarily made markets for stocks of companies that had been underwritten by Investment Banking or covered by the research department. The Taxable Fixed Income division concentrated on serving institutional investors in high-yield corporate, investment-grade corporate, U.S.-government (as a primary dealer), and mortgage backed securities. The division employed 450 professionals-including 72 traders, 137 institutional salespeople, and 52 fixed income research analysts. By the Equity Derivatives divisions, the company provided a limited number of derivative products, mostly equity and index options. Most of its products were tailored to meet a client’s specific needs, in contrast to taking on trading risk or generating large volumes of generic derivatives. The Equity Derivatives division also participated in trading and distributing convertible securities. Sprout, one of the oldest and largest venture-capital operations, resided in the Capital Markets group. Sprout managed over $1 billion in capital, focusing on investments in business services, computer graphics and peripherals, health care, leveraged transactions, office automation, retailing, and telecommunications. The professionals in Sprout worked closely with those in research and Investment Banking.


DLJ earned the moniker The House that Research Built, referring to DLJ’s founding as a research firm and continued strength in providing high quality research. To serve clients, the Capital Markets Group held large inventories of stocks and bonds. While these positions were hedged to varying extents, their values changed with changes in the overall market. Under U.S. generally accepted accounting principles (GAAP), DLJ had to continuously mark its positions to market, creating losses and gains that appeared on the income statement. It financed much of its inventory through repurchase agreements with other financial institutions. These lenders would carefully watch DLJ and its financial condition in determining the rate they charged DLJ, which in turn would impact DLJ’s overall profitability.

Financial Services Group:

The Financial Services Group (FSG) provided a broad array of services targeted to individual investors and the financial intermediaries who represented them. Approximately 1,000 professionals worked in FSG. The Pershing Division offered correspondent brokerage services, clearing transactions for over 500 U.S. brokerage firms and lending clients money for margin trades. Pershing’s clients collectively managed over 1 million accounts with assets of $100 billion. In clearing trades for others, Pershing accounted for approximately 10 percent of the daily volume on the New York Stock Exchange. Pershing’s Financial Network was the largest on-line discount broker in the United States, providing trading through several on -line services, like American On-Line (AOL), PRODIGY, and Reuters Money Network. Between 1990 and 1994, the average daily volume traded through this service soared at an annual rate of 128 percent. The Investment Services Group (ISG) served high-net-worth investors and smaller institutions. ISG gave its clients access to DLJ’s research and sales and trading capabilities. DLJ purchased Wood, Struthers & Winthrop in 1977 to provide investment management and trust services to its clients. Wood, Struthers & Winthrop managed $205 billion, and operated three U.S. equity funds and two fixed-income funds. DLJ earned interest income by lending to customers to purchase securities and by holding higher yielding inventory funded with lower cost capital. In this capacity, DLJ made money much like a

Business Services

Retailing

Leveraged Transaction

Computer Graphics & Peripherals

Office Automation

Health Care

Telecommuni-cation

Investing Areas


bank did, on the spread between the rates at which in lent or invested money and the rate at which it borrowed money. In 1994, DLJ made $288.1 million in net interest income. Separated to the above three group, DLJ owned Autranet, a distributor of independent research. Approximately 450 independent research firms, who had no affiliation with underwriters, supplied Autranet with research. Autranet distributed the research to over 400 institutions.


2.4 SWOT & Ratio Analysis

RATIO ANALYSIS OF DLJ:

By examining the Balance sheet and Income statement of DLJ, we have calculated and found some

of the key ratios shown in the Table below:

Key Ratios Years Ended December 31, Six Months Ended June 30,

1990 1991 1992 1993 1994

1994 (Till Jun 30)

1995(Till Jine 30)

Current Ratio 0.84 0.98 729.13 0.89 0.94 0.89 0.96

Ratio of Net Assets to Stockholders' Equity

25.81 22.86 22.12 22.91 17.01 24.16 17.93

Ratio of Long-Term Borrowings to Total

Capital 0.47 0.42 0.51 0.34 0.30 0.33 0.35

Revenue Growth

Gross Profit Margin 58.0% 53.2% 46.7% 47.5% 55.3% 51.4% 53.0%

Gross Profit Growth

Net Profit Margin 1.3% 4.8% 8.8% 8.1% 6.1% 6.1% 6.2%

Net Profit Growth

Return On Assets (ROA)

0.1% 0.3% 0.6% 0.5% 0.4% 0.1% 0.2%

Pre-Tax Return on Average Equity

5.0% 28.1% 61.6% 50.1% 23.4% 23.3% 28.9%

According to the ratio analysis, DLJ has a current ratio (Fig.1) close to 0.9: 1, which is satisfactory

for an Investment bank and we have found that the industry current ratio is also somewhat close to

1:1. Although ratio of Net Assets to Stockholders' equity(Fig.2) has recently shown a downward

trend but overall, the ratio is reflecting a positive trend and has not deviated much. Long-term

borrowing to total capital ratio (Fig.3) is consistent over the years and it is 1:3 for the last two years

which is also satisfactory. The revenue growth found by the Gross Profit Margin (Fig.4) is very good

in terms of the industry and it is around 50% for the last 5 years which suggests the firm has good

control over its costs. Net profit margin (Fig.5) for DLJ is also showing consistent trends and

satisfactory in contrast with the industry. Moreover, Return on Asset (Fig.6) and Pre-tax Return on

Average Equity (Fig.7) is consistent with the industry. We have also found from the income

statement statistics of 1990-1994 that DLJ has performed better than the industry average in terms

of revenue growth (Fig.8) and ROE (Fig.10), although last twelve months' less than average revenue

(Fig.9) is a matter of concern.


Trends of these ratios are shown in the figures below to get a synopsis and visual pattern of the

ratios:

Figure- 01 Figure- 02

Figure- 03: Ratio of Long term borrowing to total cap


-

0.20

0.40

0.60

1990 1991 1992 1993 1994 1994 (Till Jun 30)

1995(Till Jine 30)

Ratio of Long-Term Borrowings to Total Cap

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%

Gross Profit Margin

0.0%2.0%4.0%6.0%8.0%

10.0%

Net Profit Margin



1990-1994 Compound Average Growth Rates:

Income Statement

Statistics Alex.

Brown Bear

Stearns DLJ

A.G. Edwa

ds

Merrill Lynch

Morgan Stanley

PaineWebber

Ind. Avg.

Gross Revenues 0.2218

169 0.0860

497 0.1772569

0.1702312

0.1308073

0.1242225

0.0740803

0.1406378

Net Revenues (a) 0.2355

782 0.1483

867 0.2188848

0.1711117

0.13562 0.128561

2 0.09927

27 0.1624879

Commissions 0.1978

565 0.1248

31 0.1314238

0.2033051

0.1305835

0.1302875

0.1044125

0.1461

Investment Banking Revenues

0.2135485

0.1700632

0.2271273

0.1520741

0.1172883

0.0895162

0.0491704

0.1455411

Principal Transactions

0.4028112

0.1490839

0.1778533

0.1141713

0.1281606

0.0518764

0.0239608

0.1497025

Net Income 0.7419

628 0.2112

453 0.7538419

0.2471754

0.5173883

0.0994811

0.0107791

0.3657594

0.0%0.1%0.2%0.3%0.4%0.5%0.6%0.7%

Return On Assets (ROA)

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%

Pre-Tax Return on Average Equity


Figure- 08

Last twelve months' Income Statement Statistics:

Figure- 9

Table: Analysis of ROE of the Industry:

ROEs Alex.

Brown

Bear Stearn

s DLJ

A.G. Edwar

ds

Merrill Lynch

Morgan Stanley

PaineWebbe

r

Salomon Brothers

Ind. Avg.

Average 1991

0.265442

0.21648

0.182219

0.216 0.2105

57 0.21605

3 0.23274

1 0.229802

0.221162

Average 1992

0.23629

0.264032

0.369858

0.218199

0.229562

0.191701

0.265835

0.219734 0.249402

Average 1993

0.287742

0.340855

0.308905

0.229091

0.291664

0.235043

0.235937

0.211644 0.26761

Average 1994

0.197218

0.127707

0.156628

0.162986

0.193842

0.104016

0.023193

-0.10232 0.107909

00.10.20.30.40.50.60.70.8

Gross Revenues

Net Revenues (a) Commissions

Investment Banking

Revenues

Principal Transactions

Net Income

DLJ

Ind. Avg.

0

2000

4000

6000

8000

10000

12000

Gross Revenues

Net Revenues Commissions

Investment Banking

Revenues

Principal Transaction

Revenues

Net Income

Ind. Avg.

DLJ


Figure. 10

DLJ's Performance and Outlook:

On the strength and opportunity side of DLJ, there are several issues to be considered, which are listed

below:

Firm's growth has outpaced most of the industry over the last five years It has a successful strategy of competing in several higher margin businesses like IPO, high-

yield underwriting and trading, and merchant banking The revenue and profits have grown consistently with the increased market share From 1990 to 1994 revenues have increased at a compound average rate of 21.9 percent During this period net income has also increased at 75.4 percent generating an average

annual pretax return on common equity of 33.6 percent The three operating groups have expanded roughly at equal rates The investors will have opportunity to share in DLJ's success with the new public offering Many securities-industry specialists called DLJ one of the most desirable franchise in Wall

Street DLJ has not committed its large amount of resources to the lower margin businesses of

underwriting and trading of investment grade debt and municipal bond

On the other side of weaknesses and threats, DLJ has the following issues to face:

It would have to increasingly compete with firms like Goldman Sachs, Merrill Lynch and Morgan Stanley to continue gaining market share

DLJ does not have sufficient operations overseas or large recurring-fee operations Its profits were tied to trading activity by its client It does not have sources of steady revenue stream from asset management activity Critics were not sure whether DLJ would find new business lines that would maintain its

growth rates and profit margins Increasingly competitive high yield market and lack of diversification may hinder post-IPO

profit Employee retention by DLJ may face public scrutiny The stock offering by DLJ may that be perceived as the owners' decision of thinking it as a

good time to sell the firm and thus become unattractive to the investors

0

0.1

0.2

0.3

0.4

Average 1991 Average 1992 Average 1993 Average 1994

DLJ

Ind. Avg.


Advantages & Disadvantages Analysis of going public of DLJ:

Advantages of going public:

1. It will increase liquidity and allow founders to harvest their wealth

2. It will permit founders to diversify

3. It is going to facilitate raising new corporate cash

4. It will again establish the value for the firm

5. It will increase the potential markets

Disadvantages of going public:

1. There will be Cost of reporting

2. New disclosures are needed

3. There will be self-dealings

4. There may be Inactive market and price will reduce

5. Firm will lose some of its control

6. Higher degree of Investor relations has to be maintained


DLJ VALUATION


3.1 Problem Statement & related issues

DLJ expected to sell the stock to investors who wanted exposure to the securities industry. These

investors would examine DLJ and its prospects relative to other publicly traded securities firms.

Earnings and cash flows of DLJ were difficult to predict as there were some external factors beyond

the industry's control that could affect their business dramatically such as:-

Interest rates in the United States and abroad

Merger-and-acquisition activity

Domestic savings & Investment rates

Overall direction of the stock market

Additionally, analysts couldn’t accurately predict how the firms would fare" in their principal

activities like trading, merchant banking, and venture capital. On the trading side, strategies that

succeeded in the past might fall low or key traders may not stay till that long. Realization of profits

from principal investments depended upon the opportunity to exit the investment through a public

offering or a sale, and results fluctuated from year to year.

DLJ posed extra valuation challenges due to its concentration in several key areas that

were especially difficult to forecast, like high yield and IPO underwritings, and merchant banking.

Picking comparable companies would be fragile, as many of the other firms maintained large retail

divisions, extensive principal trading activities, and broad investment-grade debt underwriting and

trading operations.

The market tended to segregate the firms into four categories:

1. Bulge bracket,

2. Special bracket,

3. Regional and boutique firms, and

4. Discount brokers

The bulge brackets tended to compete for the business of large corporations, maintaining extensive

staffs domestically and abroad in corporate finance and sales and trading. They were the largest

firms, offering extensive services in almost every area of investment banking and brokerage.

Special bracket firms often competed with the bulge brackets for business in selected industries

and products, though keeping smaller operations and focusing primarily on U.S. clients.

They generally possessed fewer people and less capital than the bulge-bracket firms.

Regional investment banks and boutiques catered to companies and investors in their

regions or industry specialties. Most of them concentrated on covering a few key industries.


Discount brokerages competed on price for retail investors' brokerage business, but generally

didn't maintain underwriting or advisory departments. Some of the information is presented in

tabular form in the following:-

Alex.

Brown Bear

Stearns A.G.

Edwards Lehman Brothers

Merrill Lynch

Morgan Stanley

PaineWebber Salomon Brothers

Stock Price as of October 23, 1995

$46.63 $20.00 $25.13 $22.50 $56.98 $87.50 $21.50 $36.75

Shares Outstanding

(Millions) 15.5 118.8 62.3 104.6 175.7 77.6 97.4 106.4

Market Capitalization

$723 $2,376 $1,565 $2,353 $10,011 $6,790 $2,095 $3,911

Long-Term Debt and Preferred

Stock

173 4,792 - 13,605 16,775 9,929 2,710 14,353

Total Market Capitalization

$897 $7,168 $1,565 $15,958 $26,787 $16,719 $4,805 $18,264

Certainly, investors would count on receiving dividends from DLJ. During the past five years

investors in other brokerage stocks had fared well, as dividends from these firms had grown

considerably and stock prices had increased. Beginning in the first quarter of 1996, DLJ's board of

directors planned on instituting a $0.l25 quarterly dividend per share, or $0.50 at an annual rate.

Securities-industry analyst Guy Moszkowski of Sanford C. Bernstein & Company offered a separate

valuation technique. He stated that he had observed a historical relationship between the

current return on equity and the price-to-book ratio for capital markets firms like DLJ.

Moszkowski noted that these firms often possessed a price-to-book ratio of 10 times the current

return on equity in this part of the earnings cycle.

An important part of the IPO process is the estimation of the value of the firm. This, together with the size of the IPO, will determine the value per share for the firm. After the intrinsic value per share is estimated, the issuer and the underwriter will agree on the offering price per share. In most cases, the price will be set below its value so that there is a higher likelihood of successfully selling the shares. Investors prefer to purchase shares in an IPO under the anticipation that there will be a considerable capital gain in the aftermath. A standard approach to firm valuation is the DCF valuation. In this approach, we discount expected free cash flows at a rate that reflects the firm’s risk (typically the firm’s cost of capital). This approach is tedious and numerous issues must be addressed throughout the process. These include the estimation of expected free cash flows, the estimation of the tax rate to be used, the estimation of the firm’s future reinvestment needs, the estimation of the discount rate, the consideration of the value of cash and non-operating assets (such as marketable securities the firm may own), the impact of warrants, management options and convertible bonds on firm value, and the impact of the IPO on the control of the current owners.


In firms like DLJ, it may simply be very difficult to obtain good estimates of expected cash flows due to the fact that these are affected by several factors that are beyond the control of the company (such as the economic cycle, interest rates, etc.). We can think of the free cash flows as including the sum of the cash flows to the firm’s shareholders and bondholders. One approach is to use the firm’s after-tax earnings after having subtracted reinvestment expenses. For example, the free cash flow to the firm can be given by: FCFF = EBIT (1-tax rate) – (capital spending – depreciation) – change in noncash working capital Accounting for the firm’s reinvestment needs is important because these investments will impact the firm’s current and future growth and, thus, its operating cash flows. In any case, after we have derived the value of the firm through the DCF approach, we can obtain the value of the firm’s shares by discounting the expected cash flows to shareholders: FCFE = FCFF – debt payments + new debt issued It is notable that, in addition to subtracting the cash flows to creditors from the free cash flows to

the firm we must also add any cash inflows from new debt that the firm issues. These are also part

of the cash flows to shareholders.

If we have forecasts of free cash flows for a future period of, let’s say, four to five years, we can use

them to perform a DCF valuation. In this case, we would discount these cash flows at the firm’s cost

of capital and add to them the firm’s terminal value. This value is calculated by assuming that free

cash flows beyond our forecasting horizon will continue to grow at a constant rate. This rate (g)

could be equal to the rate of sales growth that was assumed in the forecasting. Note, though, that

the sales growth rate cannot realistically exceed the nominal rate of growth of the economy (GDP)

in the long run. In the US, this has been around 8%. If there is information about both the sales

growth rate during the forecast period and the growth rate of nominal GDP, then we must compare

the two to ensure that we do not use a rate (g) higher than the nominal GDP rate. Thus, we can use a

constant-growth-valuation model and calculate the terminal value as follows:

TV = (FCFF(1+g))/(WACC-g)

More typically, investment banks may obtain an estimate of a firm’s value and the value of its

shares though a relative valuation approach. In this approach a firm’s value or the value of its

shares is obtained by looking at how similar companies and their shares are currently valued in the

market. This approach uses various multiples, such as earnings multiples, book value multiples, and

revenue multiples. For example, commonly used ratios are:

• Price/Earnings per share

• EBIT Multiple

• Price/Book Value


3.2 Valuation

We have followed the 3 approaches & got the IPO prices like this:-

1. Discounted Cash-flow Method:

Cash Flow FCFF FCFE

Enterprise Value 147,360.85

Debt Value 723.09 -

Equity Value 146,637.76 112,301.49

No of Equity Shares 5,150.00 5,150.00

Share Value 28.47 21.81

WACC:

RM 10.00% Market Risk Premium

Rf 2.30% Risk Free Rate

Tax 30.00% Tax Rate in US

Cost of Debt 8.61%

Equity beta 1.31 Refer Beta of DLJ

Rf 2.30% US Treasuries traded at a yield of 2.30%

RM 10.00% Rm = Rf + Rp

RM-Rf 7.70% Market risk premium is 20%

Cost of common stock 12.39% Ke = Rf + b*(Rm-Rf)

Weight of Debt 40.8% 768,067.00

Weight of common stock 59.2% 1,116,384.00

WACC 10.85% WACC = Kd (1-t) * Wd + Kp*Wp + Ke* We


2. EBIT Multiple Method:

EBIT Multiple Method:

EBIT 132.50

Number of Shares 51.50

EBIT Multiple 10.00

Share Value 25.73

3. Book Value Method:

Book Value Method:

Firms Alex.

Brown Bear

Stearns

A.G. Edward

s

Brothers

Lynch

Stanley

PaineWebber

Brothers

Stock Price as of October 23, 1995

46.63 20.00 25.13 22.50 56.9

8 87.5

0 21.50 36.75

Shares Outstanding (Millions)

15.52 118.78 62.30 104.5

7 175.72

77.60

97.44 106.4

3 Last Twelve Months Earnings per Share

5.39 3.40 2.64 1.59 3.72 4.06 (0.26) 0.58

Last Twelve Months Book Value per Share

29.53 16.59 15.80 27.95 31.0

6 52.3

4 15.04 34.64

SP/BV per shares 1.58 1.21 1.59 0.80 1.83 1.67 1.43 1.06

Average SP/BV Per shares 1.40

BV Per Share (DLJ) 20.95

Share Value 29.26


3.3 Recommendation

DFCFF 28.47

27.82

26.71

EBIT Multiple 25.73

Book Value 29.26

DFCFE 21.81

25.60 EBIT Multiple 25.73

Book Value 29.26

After considering all the IPO valuation techniques, the recommended price of the DLJ IPO should be

$26 per shares.

Employee Options:

In conjunction with the offering, DLJ offered approximately 500 employees the opportunity to exchange $100 millions of their interests in compensation plans for approximately 5.2 million shares of restricted stock. This stock was subject to vesting and forfeiture in certain circumstances. Additionally, these employees could exchange $55.7 millions of future compensation under these plans for options to purchase approximately 7.2 million shares of DLJ stock at the offering price. Employees who opted to not exchange their interests would receive cash instead. The number of shares and options issued would depend on the final offering price. Their average offered price would be $23.

Employees' Options:

Total Value for 500 Employees: 100,000,000

Number of Stocks offered: 5,200,000.00

Average Price Per Stock: 19.23

Additional Value for 500 Employees: 55,700,000.00

Offer Price of Stock: 26.71

Number of Stocks Available: 2,085,477.31

Total Number of Shares to the Employees: 7,285,477.31

Average Price Per Stock: 22.97


DLJ ANNEXURE

Documents

DLJ Final