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 & thats 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.

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, S. M. Zubayer Hussain, Md. Tanvir Hossain, Md. Raihan Reza, ID# 20063 ID # 20048 ID# 20013 ID# 20020

Date of Submission: August 10, 2012

Department of Finance Dhaka University Dhaka.

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ACKNOWLEDGEMENT
Its 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.

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Table of Contents
Declaration: Acknowledgement: Part 1: Preface 1.1 Origin of the Report: 1.2 Objectives: 1.3 Limitations of the research: 1.4 Methodology: 6 6 7 7 iv v

Part -2: Case analysis 2.1 Company Information: 2.2 Industry Analysis: 2.3 Details of its Operation 2.4 SWOT & Ratio Analysis 9 13 19 25

Part -3: Valuation 3.1 Problem Statement & related issues 3.2 Valuation 3.3 Recommendation 32 35 38

Part -4: Annexure Microsoft Excel Calculations

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DLJ

PREFACE

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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
The objective of this report is to

Objectives

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 companys 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.

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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 companys 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.

Data collection from the Case Data Compilation Analysis & Valuation Results & Recommendation

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DLJ

CASE ANALYSIS

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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 startup 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. # Valuation & Detailed Analysis of Donaldson, Lufkin & Jenrette (DLJ) # Page | 9

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.

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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 # Valuation & Detailed Analysis of Donaldson, Lufkin & Jenrette (DLJ) # Page | 11

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).

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2.2
CON-CURRENT INDUSTRY OVERVIEW

Industry Analysis

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

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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, # Valuation & Detailed Analysis of Donaldson, Lufkin & Jenrette (DLJ) # Page | 14

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.

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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.

Revenue & Expense Trends of Security Industry 19801993

Figures in Million US$
120,000 100,000 80,000 Total revenues 60,000 40,000 20,000 0 1980 1985 1988 1989 1990 1991 1992 1993 Total expenses Linear (Total revenues) Linear (Total expenses)

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. Pre-Tax Profits (Figures in Million US$) & Pre-Tax Margin (%) 1980-1993
15.94% 13.05% 10.20% 10.06%

$14000 $12000 $10000 $8000 $6000 $4000 $2000 $0

5.26% 3.67% 1.11%

18.00% 16.00% 11.93%14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00%

1980

1985

1988

1989
Pretax profits

1990

1991

1992

1993

Pretax margin

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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. 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. 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.

II.

III.

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 # Valuation & Detailed Analysis of Donaldson, Lufkin & Jenrette (DLJ) # Page | 17

banks required little capital of their own, quickly moving securities from corporations to investors, 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.

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2.3
Inception

Details of its operation

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 nations 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 DLJs original asset-management operations, Alliance Capital Management (Alliance), from DLJ. Later, Equitable sold part of Alliance to the public. In June of 1995, Alliances 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. DLJs 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 # Valuation & Detailed Analysis of Donaldson, Lufkin & Jenrette (DLJ) # Page | 19

in 1990, DLJ sought out and hired a core group of junk-bond specialists from fallen market leader Drexel Burnham Lambert. DLJs 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. DLJs 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.

Capital Markets Group: Institutional Equities Taxable Fixed Income Equity Derivatives Sprout Vevture Capital Banking Group Investment Banking Merchant Banking Emerging Markets

Financial Services Group Pershing Division Investment Services Group Wood, Struthers & Winthrop

DLJ Business 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.

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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

Mergers & Acquisitions

Restructuring and other transaction

Private Placement, Priva te Fund Raising

Structured Finance & Restructuring

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:

DLJ Real State Fund Funds

DLJ Senior Debt Fund

DLJ investment Partners

Global Retail Partners L.P.

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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 groups 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 clients 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.

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Business Services Retailing Leveraged Transaction

Computer Graphics & Peripherals Office Automation

Health Care

Investing Areas

Telecommunication

DLJ earned the moniker The House that Research Built, referring to DLJs 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 DLJs 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. Pershings 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. Pershings 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 DLJs 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 # Valuation & Detailed Analysis of Donaldson, Lufkin & Jenrette (DLJ) # Page | 23

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.

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2.4
RATIO ANALYSIS OF DLJ:

SWOT & Ratio Analysis

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
1990

Years Ended December 31, 1991 0.98 22.86 0.42 1992 729.13 22.12 0.51 1993 0.89 22.91 0.34 1994 0.94 17.01 0.30

Current Ratio Ratio of Net Assets to Stockholders' Equity Ratio of Long-Term Borrowings to Total Capital Revenue Growth Gross Profit Margin Gross Profit Growth Net Profit Margin Net Profit Growth Return On Assets (ROA) Pre-Tax Return on Average Equity

0.84 25.81 0.47

Six Months Ended June 30, 1994 (Till 1995(Till Jun 30) Jine 30) 0.89 0.96 24.16 0.33 17.93 0.35

58.0% 1.3% 0.1% 5.0%

53.2% 4.8% 0.3% 28.1%

46.7% 8.8% 0.6% 61.6%

47.5% 8.1% 0.5% 50.1%

55.3% 6.1% 0.4% 23.4%

51.4% 6.1% 0.1% 23.3%

53.0% 6.2% 0.2% 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.

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

Figure- 01

Figure- 02

Ratio of Long-Term Borrowings to Total Cap 0.60 0.40 0.20 1990 1991 1992 1993 1994 1994 (Till Jun 30) 1995(Till Jine 30)

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

Gross Profit Margin

70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

Net Profit Margin

Figure- 04

Figure- 05

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Return On Assets (ROA)

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

Pre-Tax Return on Average Equity

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

Figure- 06

Figure- 07

1990-1994 Compound Average Growth Rates: A.G. Edwa ds 0.170 2312 0.171 1117 0.203 3051 0.152 0741 0.114 1713 0.247 1754

Income Statement Statistics Gross Revenues Net Revenues (a) Commissions Investment Banking Revenues Principal Transactions Net Income

Alex. Brown 0.2218 169 0.2355 782 0.1978 565 0.2135 485 0.4028 112 0.7419 628

Bear Stearns 0.0860 497 0.1483 867 0.1248 31 0.1700 632 0.1490 839 0.2112 453

DLJ 0.177 2569 0.218 8848 0.131 4238 0.227 1273 0.177 8533 0.753 8419

Merrill Lynch 0.13080 73 0.13562 0.13058 35 0.11728 83 0.12816 06 0.51738 83

Morgan Stanley 0.124222 5 0.128561 2 0.130287 5 0.089516 2 0.051876 4 0.099481 1

PaineW ebber 0.07408 03 0.09927 27 0.10441 25 0.04917 04 0.02396 08 0.01077 91

Ind. Avg. 0.140 6378 0.162 4879 0.146 1 0.145 5411 0.149 7025 0.365 7594

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Figure- 08
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Gross Revenues Net Investment Principal Revenues (a) Commissions Banking Transactions Revenues Net Income

DLJ Ind. Avg.

Last twelve months' Income Statement Statistics:

12000 10000 8000 6000 4000 2000 0 Gross Revenues Net Revenues Commissions Investment Principal Banking Transaction Revenues Revenues Net Income Ind. Avg. DLJ

Figure- 9

Table: Analysis of ROE of the Industry:

ROEs Averag e 1991 Averag e 1992 Averag e 1993 Averag e 1994

Alex. Brown 0.2654 42 0.2362 9 0.2877 42 0.1972 18

Bear Stearn s 0.2164 8 0.2640 32 0.3408 55 0.1277 07

DLJ 0.18 2219 0.36 9858 0.30 8905 0.15 6628

A.G. Edwar ds 0.216 0.2181 99 0.2290 91 0.1629 86

Merrill Lynch 0.2105 57 0.2295 62 0.2916 64 0.1938 42

Morgan Stanley 0.21605 3 0.19170 1 0.23504 3 0.10401 6

Paine Webbe r 0.23274 1 0.26583 5 0.23593 7 0.02319 3

Salomon Brothers 0.229802 0.219734 0.211644 -0.10232

Ind. Avg. 0.22 1162 0.24 9402 0.26 761 0.10 7909

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0.4 0.3 0.2 0.1 0 Average 1991 Average 1992 Average 1993 Average 1994 DLJ Ind. Avg.

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, highyield 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

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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

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DLJ

VALUATION

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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 couldnt 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.

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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 Stock Price as of October 23, 1995 Shares Outstanding (Millions) Market Capitalization Long-Term Debt and Preferred Stock Total Market Capitalization $46.63 Bear Stearns $20.00 A.G. Edwards $25.13 Lehman Brothers $22.50 Merrill Lynch $56.98 Morgan Stanley $87.50 PaineWebber $21.50 Salomon Brothers $36.75

15.5 $723

118.8 $2,376

62.3 $1,565

104.6 $2,353

175.7 $10,011

77.6 $6,790

97.4 $2,095

106.4 $3,911

173

4,792

13,605

16,775

9,929

2,710

14,353

$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 firms risk (typically the firms 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 firms 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.

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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 firms shareholders and bondholders. One approach is to use the firms 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 firms reinvestment needs is important because these investments will impact the firms 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 firms 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, lets 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 firms cost of capital and add to them the firms 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 firms value and the value of its shares though a relative valuation approach. In this approach a firms 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

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3.2
We have followed the 3 approaches & got the IPO prices like this:-

Valuation

1. Discounted Cash-flow Method:

Cash Flow Enterprise Value Debt Value Equity Value No of Equity Shares FCFF 147,360.85 723.09 146,637.76 5,150.00 FCFE 112,301.49 5,150.00

Share Value
WACC:
RM Rf Tax 10.00% 2.30% 30.00% 8.61% 1.31 2.30% 10.00% 7.70% 12.39% 40.8% 59.2%

28.47

21.81

Market Risk Premium Risk Free Rate Tax Rate in US

Cost of Debt
Equity beta Rf RM RM-Rf

Refer Beta of DLJ US Treasuries traded at a yield of 2.30% Rm = Rf + Rp Market risk premium is 20% Ke = Rf + b*(Rm-Rf) 768,067.00 1,116,384.00 WACC = Kd (1-t) * Wd + Kp*Wp + Ke* We

Cost of common stock

Weight of Debt Weight of common stock WACC

10.85%

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2. EBIT Multiple Method: EBIT Multiple Method:

EBIT Number of Shares EBIT Multiple 132.50 51.50 10.00

Share Value

25.73

3. Book Value Method:

Book Value Method:

Firms Stock Price as of October 23, 1995 Shares Outstanding (Millions) Last Twelve Months Earnings per Share Last Twelve Months Book Value per Share SP/BV per shares Average SP/BV Per shares BV Per Share (DLJ) Alex. Brown 46.63 15.52 5.39 29.53 1.58 1.40 20.95 Bear Stearns 20.00 118.78 3.40 16.59 1.21 A.G. Edward s 25.13 62.30 2.64 15.80 1.59 Brot hers 22.50 Lyn ch Stan ley 87.5 0 77.6 0 4.06 52.3 4 1.67 PaineW ebber 21.50 97.44 (0.26) 15.04 1.43 Brot hers 36.75 106.4 3 0.58 34.64 1.06

56.9 8 104.5 175. 7 72 1.59 27.95 0.80 3.72 31.0 6 1.83

Share Value

29.26

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3.3
DFCFF EBIT Multiple Book Value DFCFE EBIT Multiple Book Value 28.47 25.73 29.26 21.81 25.73 29.26

Recommendation
27.82

26.71
25.60

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: Number of Stocks offered: Average Price Per Stock: Additional Value for 500 Employees: Offer Price of Stock: Number of Stocks Available: Total Number of Shares to the Employees: Average Price Per Stock: 100,000,000 5,200,000.00 19.23 55,700,000.00 26.71 2,085,477.31 7,285,477.31 22.97

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DLJ

ANNEXURE

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