Valuation & Case AnalysisDonaldson, Lufkin & Jenrette (1995)

Agenda

• Company Brief

• Objective

• Industry Analysis

• PEST Analysis

• Operational Analysis

• Ratio Analysis

• SWOT Analysis

• Pros & Cons of Going Public

• Valuation

• Recommendation

• Ending Words

Company Brief

• Donaldson, Lufkin & Jenrette or DLJ is a defunct U.S. investmentbank

• founded by William H. Donaldson, Richard Jenrette and Dan Lufkinin 1959

• Its businesses included

– securities underwriting;

– sales and trading; investment and merchant banking;

– financial advisory services;

– investment research;

– venture capital;

– correspondent brokerage services;

– online, interactive brokerage services; and

– asset management.

• In 1995, ranked second among 19 firms in the quality of its research.

Objective

• What should be the ‘price’ per share for the new IPO?

• How Many Shares to be Offered?

• How Many shares would be allocated to Employees’ as Stock Option?

• At which average price employees could get the shares?

Industry Analysis

Concurrent Analysis:

1. Introduction of New Products like SWAPs and Yankee bonds

2. Change of Control from Individual investors to Institutional

Investors

3. Change in the Scope of Operation

4. Rise of Derivates

5. Moving into Principal Trading

6. Participation in Merchant Banking and Venture Capital

Investments

7. Expansion in the Global Arena

8. Building up Asset Management Business

9. Volatility of Earnings

10. Expected Consolidation Within the Industry

Industry Analysis (Contd.)

0

20,000

40,000

60,000

80,000

100,000

120,000

19801985198819891990199119921993

Revenue & Expense Trends of Security Industry 1980-1993Figures 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%

5.00%

10.00%

15.00%

20.00%

$0

$2000

$4000

$6000

$8000

$10000

$12000

$14000

1980 1985 1988 1989 1990 1991 1992 1993

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

Pretax profits Pretax margin

PEST Analysis

• Political Factors

– Employee Retirement Income Security Act

– Elimination of Fixed Brokerage Commission

– Introduction of Rule 415 of permitting "shelf registration"

• Economic Factors

– Before mid-1970s, IBs served as only as fin. Intermediaries

– required little capital of their own

– Providing shield for Event Risk, Business Risk & Credit Risk

• Social Factors

– Doubtfulness of critical success factors

– Social acceptance & customer mentality towards IBs

• Technological Factors

– Introduction of Computers

– Inception of innovative financial instruments; e.g. Options, derivatives etc.

Operational Analysis

DLJ Business Groups

Banking Group

Investment Banking

Merchant Banking

Emerging Markets

Capital Markets Group

Institutional Equities

Taxable Fixed Income

Equity Derivatives

Sprout Venture Capital

Financial Services Group

Pershing Division

Investment Services Group

Wood, Struthers & Winthrop

Operational Analysis (Contd.)

• The Banking Group:

– The Investment Banking Group

– The Merchant Banking Group

1.DLJ Merchant Banking Partners L.P. and

2. DLJ Bridge Fund.

Mergers & Acquisitions

Restructuring and other

transaction

Private Placement, Pr

ivate Fund Raising

Structured Finance &

Restructuring

DLJ Real State Fund DLJ Senior Debt Fund

DLJ investment Partners Global Retail Partners L.P.

Funds

Operational Analysis (Contd.)

• The Capital Market Group

– The Institutional Equities division

– The Taxable Fixed Income division

– Equity Derivatives division

– Sprout Venture Capital

Business Services

Retailing

Leveraged Transaction

Computer Graphics & Peripherals

Office Automation

Health Care

Telecom

Investing Areas

Operational Analysis (Contd.)

• Financial Services Group

– The Pershing Division

– The Investment Services Group (ISG)

– Wood, Struthers & Winthrop

– AUTRANET

Ratio Analysis

-

0.10

0.20

0.30

0.40

0.50

0.60

1990 1991 1992 1993 1994 1994 (Till Jun 30)

1995(Till Jine 30)

Ratio of Long-Term Borrowings to Total Cap

Ratio Analysis (Contd.)

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%

1990 1991 1992 1993 1994 1994 (Till Jun 30)

1995(Till Jine 30)

Net Profit Margin

Ratio Analysis (Contd.)

00.10.20.30.40.50.60.70.8

DLJ

Ind. Avg.

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

Average 1991 Average 1992 Average 1993 Average 1994

DLJ

Ind. Avg.

SWOT Analysis

• Strength:

– Firm's outpacing growth

– Successful strategy

– Revenue, profits & consistent market share growth

– The three operating groups have expanded roughly at equal rates

• Opportunity:

– Investors’ opportunity to share in DLJ's success

– One of the most desirable franchise in Wall Street

– Yet not committed large amount of resources to the lower margin businesses of underwriting and trading of investment grade debt and municipal bonds

SWOT Analysis

• Weakness:

– increasingly compete with large firms like GoldmanSachs, Merrill Lynch and Morgan Stanley to continue gainingmarket share

– does not have sufficient operations overseas or largerecurring-fee operations

– profits were tied to trading activity by its client

– does not have sources of steady revenue stream from assetmanagement activity

• Threats:

– finding new business lines

– Increasingly competitive high yield market and lack ofdiversification

– Employee retention

– The stock offering by DLJ may that be perceived as theowners' decision of thinking it as a good time to sell the firmand thus become unattractive to the investors

Pros & Cons of Going Public

• Advantages:

– It will increase liquidity and allow founders to harvest their wealth

– It will permit founders to diversify

– It is going to facilitate raising new corporate cash

– It will again establish the value for the firm

– It will increase the potential markets

• Disadvantages:

– There will be Cost of reporting

– New disclosures are needed

– There will be self-dealings

– There may be Inactive market and price will reduce

– Firm will lose some of its control

– Higher degree of Investor relations has to be maintained

Valuation

• Impediments to identifying future cash flows:-

– Interest rates in the United States and abroad

– Merger-and-acquisition activity

– Domestic savings & Investment rates

– Overall direction of the stock market

• Methods of Valuation:-

– DCF Method (Free Cash flow to the Firm)

– DCF Method (Free Cash flow to the Equity)

– EBIT Multiple Method

– Book Value Method

Valuation (DCF 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

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

Valuation (EBIT Multiple & Book Value method)

EBIT Multiple Method:

EBIT 132.50

Number of Shares 51.50

EBIT Multiple 10.00

Share Value 25.73

Book Value Method:

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Stock Price as of October 23,

199546.63 20.00 25.13

22.5

0

56.

98

87.

5021.50

36.7

5

Shares Outstanding (Millions) 15.52 118.78 62.30104.

57

17

5.7

2

77.

6097.44

106.

43

Last Twelve Months Earnings

per Share5.39 3.40 2.64 1.59

3.7

2

4.0

6(0.26) 0.58

Last Twelve Months Book

Value per Share29.53 16.59 15.80

27.9

5

31.

06

52.

3415.04

34.6

4

SP/BV per shares 1.58 1.21 1.59 0.801.8

3

1.6

71.43 1.06

Average SP/BV Per shares 1.40

BV Per Share (DLJ) 20.95

Share Value 29.26

Recommendation

Per Shares should be the IPO Price

DFCFF 28.47

27.82

26.71

EBIT Multiple 25.73

Book Value 29.26

DFCFE 21.81

25.60EBIT Multiple 25.73

Book Value 29.26

Recommendation

Employees’ Option:

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 Employess

7,285,477.31

Average Price Per Stock 22.97

Ending Words

Thanks to all

&

Any Queries??

Presenters

• Md. Shaheenur Rahman # 20063

• Md. Raihan Reza # 20020

• S. M. Zubayer Hussain # 20048

• Md. Tanvir Hossain # 20013