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Prepared By: Ryan Fusaro June 10, 2011 ryanfusaro@gmail.com Prepared By: Ryan Fusaro ryanfusaro@gmail.

com

All Systems Are Go

DST Systems Investment Thesis


Data processing firm that is the dominant player in both of its core operating businesses
Shareholder recordkeeping Integrated print and mail solutions

Ticker: DST Stock Price: $47.72 Recent Valuation Multiples:


9.7x 2011E Earnings (1) 3.6x EV / 2011E EBITDA (2)

Fairly stable, predictable free cash flow streams in low to modest growth businesses Asset rich balance sheet with an abundance of hidden assets that are unappreciated by the market
DST owns an investment portfolio worth up to 93% of the companys total market capitalization

Capitalization: Equity Market Value: $2.2bn Enterprise Value: $3.3bn

Materially undervalued on a sum-of-the-parts basis with numerous strategic transactions available to unlock shareholder value
Spin-off or sale of non-core businesses or assets Sale or auction of entire company to strategic or financial buyer

(1) (2)

EPS excludes affiliate income; adjusted for net debt and non-core investment portfolio EBITDA excludes affiliate income; Adjusted for non-core investment portfolio Source: Consensus Wall Street estimates

Company History
DST was founded in 1969 as the mutual fund processing subsidiary of Kansas City Southern (KSU), a railroad company DST grew rapidly over the next few decades, mirroring the growth of the broader mutual fund industry in general In 1995, DST was brought public as a separate entity One of the most distinguishing and unique features about DST is that since its inception, it has been run using a portfolio management approach. That is, aside from focusing on growing DSTs core business, management has shown a tendency to acquire and divest various related and unrelated businesses, acquire and sell equity securities of other companies, etc. Management has demonstrated excellent capital allocation skills over the years with this approach and has often used gains to buy back shares, retiring over 60% of DSTs outstanding shares since 2000

DSTs Two Businesses


DST operates in two core business segments

Financial Services
Provides technology based software and automation solutions to the mutual fund/investment management, life and P&C insurance and healthcare payer industries

Output Solutions
Provides integrated print and electronic statement and billing output solutions for customers in various industries

~67% Revenues(1) ~23% EBIT Margins(1)

~32% Revenues(1) ~13% EBIT Margins(1)

DST also operates an Investment & Other segment which houses the companys valuable but non-core investment portfolio consisting of publicly listed equity securities, private equity investments, real estate holdings and various joint ventures 4
(1) Adjusted for out-of-pocket reimbursement revenue, excludes intersegment revenues

DSTs Core Businesses

Financial Services Segment


DST is principally known for its shareholder recordkeeping or transfer agency services provided primarily to the mutual fund industry

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(1) Source: 2010 Investment Company Factbook

What is a Transfer Agent?


Transfer agents perform an unglamorous but essential function to the investment management industry, including:

Maintain records of account ownership, shareholder transactions and other activities Calculate and distribute dividends and capital gains Prepare and mail account statements, federal income tax information and shareholder notices

Business Dynamics
DST is compensated primarily on a per account basis Revenue differs based on level of complexity and who ultimately performs the underlying work
Most common account is remote service, which generates ~$4-$5 in annual revenue per account

DST is the market leader with ~36% market share of all mutual fund accounts, ~65% of outsourced market(1) Potential to earn float from client balances held (~$400mm of client funds held(2)) ~100 million US registered accounts on platform BNY nearest competitor with an estimated 30 million accounts

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(1) (2) Source: Avondale Partners estimate Includes funds held on behalf of transfer agency and pharmacy processing clients

Shareholder Recordkeeping is a Great Business


High switching costs, customer captivity and recurring revenue Attractive and sustainable operating margins High barriers to entry Long-term contracts that provide visibility

Financial Performance
Over time, DST has demonstrated consistent and predictable revenues, EBITDA and Free Cash Flow in its Financial Services segment
(in mm's)

Revenue Costs and Expenses Depreciation & Amortization Capital Expenditures EBIT
(1)

1005 638.9 83.1 61.8 283 28.2% 36.4% 304.3

2006

1127 766 81.9 49.5 279.1 24.8% 32.0% 311.5

2007

1134.5 758.1 80.6 45.4 295.8 26.1% 33.2% 331

2008

1106 786.3 80.3 49.2 239.4 21.6% 28.9% 270.5

2009

1145.8 803.7 79.4 57.9 262.7 22.9% 29.9% 284.2

2010

EBIT Margin EBITDA Margin Free Cash Flow(2)

(1) (2)

Reflects operating revenue from core businesses only EBTIDA-Capex Source: DST 2010 10-K

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The Sub-Accounting Threat


However, growth is slowing and many foresee a long-term erosion DSTs core record keeping business due to secular changes within the mutual fund industry and a negative mix shift stemming from a trend towards mutual fund sub-accounting

~45% of industry total 275 million mutual funds are currently on subaccounting platforms Sub-accounting could reach 60-70% of total mutual fund accounts Sub-accounting is an inherently lower margin businesses, with annual revenues of $2-3 per account DST could lose up 20-25% of its registered accounts over the coming 2 years; management forecasts losses of 12mm accounts in 2011

What is Sub-Accounting and Why is it Becoming More Prevalent?


Sub-accounting refers to transfer agency services being performed by broker-dealers as opposed to typical traditional agents

Industry trends have led to an increasing amount of mutual funds investments being held by financial intermediaries (broker-dealers, other financial institutions) as opposed to a direct relationships between the fund company and the investor As a result, broker-dealers have invested in sub-accounting or omnibus platforms that allow them to provide transfer agency services in house, for a lower fee than that charged by DST and other transfer agents

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The Sub-Accounting Threat is Real but is a bit Overblown


The sub-accounting threat is real but there is a somewhat of an embedded a cap in terms of the number of accounts likely to convert to sub-accounting platforms. This helps put a floor under the number of accounts DST is could potentially lose

Analysts estimate that 10-20% of broker-dealers lack the scale necessary to offer sub-accounting services(1) 10-15% of mutual fund accounts are still held directly by investors, not by financial intermediaries(1) Additionally, certain types of mutual fund accounts are less susceptible to sub-accounting conversion due to features on these accounts that require shareholder consent, etc. Tax-advantaged plans Other retirement plans

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(1) Source: Avondale Partners estimate

The Sub-Accounting Threat is Real but is a bit Overblown (contd)


In addition, there are multiple offsets DST to the ultimate loss of accounts DST may face in the coming years

Inherent in DSTs business mix are many mitigates which should serve to soften the shift towards sub accounting including:
Converting fleeing accounts to DSTs internal sub-accounting platform, international account growth, growth in the 401k/retirement plan record keeping business

In addition, DST has a more diversified revenue stream than investors typically give it credit for, allowing growth in other areas of its business mix to cushion the revenue blow from sub-accounting At less than 4x 2011e EBITDA, DST shares fully reflect most conceivable account loss scenarios Account losses from sub-accounting should see stabilization after 2012

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Management Gets It
DSTs high-quality management team has been operating in the business for decades and has demonstrated that they appreciate the sub-accounting threat and are attacking it head on

Started to develop sub-accounting business in 2005 Acquired TASS LLC in 2007, a sub-accounting service provider, which allows DST to recapture some of the lost revenue While DST is a distant second to BNY which has ~65mm accounts, its subaccounting business is growing rapidly
With CEO Thomas McDonnell owning ~3% of shares outstanding on a fully diluted basis, management is properly incentivized and has its interests aligned with shareholders

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Scenario Analysis
As mentioned earlier, the number of DSTs registered accounts(1) have been declining somewhat
2006 64.2 23.3 10.3 6.9 40.5 104.7 1.1 105.8 2007 71 27.5 10 8.7 46.2 117.2 1.9 119.1 2008 65.4 27 9.9 8.9 45.8 111.2 8.9 120.1 2009 63.6 26.8 10 9.5 46.3 109.9 11.2 121.1 2010 54.8 25.5 9.7 9.4 44.6 99.4 14.3 113.7

(in mm's)

Registered Accounts Non-tax advantaged Tax-advantaged IRA mutual fund accounts Other Retirement Accounts Section 529 and Educational IRAs

Total Registered Accounts Subaccounts Total Accounts Serviced International United Kingdom Canada

5.6 7.1

5.8 7.5

5.9 10.6

6.6 10.2

7.1 10.7

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(1) Registered accounts refer to those accounts serviced directly with the fund sponsor Source: DST 2010 10-K

Scenario Analysis (Contd)


But roughly 45% of companys accounts are tax-advantaged or retirement related accounts which are less impacted by the sub-accounting trend

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Source: DST 2010 10-K

Scenario Analysis (Contd)


Applying peer multiples and assuming the unlikely scenario of ZERO growth in any of DSTs other account types, segments or business lines over the coming years AND assuming none of the accounts lost to sub-accounting convert to DSTs platform, the market is pricing in an estimated 25% decline in the number of DSTs registered accounts. This is far too draconian of an assumption, all else equal

Accounts Lost (in mm) % of Registered Accounts Lost Revenue Lost (in mm) % of Financial Services segment revenue EBITDA Margin EBITDA Loss (in mm) Pro-Forma Multiple EBITDA Multiple

10 10% 45 4% 30% 13.5 4.5 7.9

15 15% 67.5 6% 30% 20.25 5.3

20 20% 90 8% 30% 27 6.3

25 25% 112.5 10% 30% 33.75 7.9

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Scenario Analysis (Contd)


Applying peer multiples, if DST were to recapture half of its accounting fleeing to subaccounting platforms, then the market would be pricing in losses of over 30 million accounts, an even more extreme scenario
Accounts Lost (in mm) % of Registered Accounts Lost Revenue Lost (in mm) % of Financial Services segment revenue EBITDA Margin EBITDA Loss (in mm) Sub-Accounts Recaptured (in mm) Pro-Forma Multiple Mid-Point EBITDA Multiple 10 10% 45 4% 30% 13.5 5.0 4.3 8.4 15 15% 67.5 6% 30% 20.25 7.5 4.8 20 20% 90 8% 30% 27 10.0 5.5 25 25% 112.5 10% 30% 33.75 12.5 6.4 30 30% 135 12% 30% 40.5 15.0 7.5 35 35% 157.5 14% 30% 47.25 17.5 9.3

Adding in reasonable growth rates in other areas of DSTs business, it looks as though the market is pricing in a losses of up over 40% of DSTs accounts. Clearly, the threat DST faces from sub-accounting is being vastly overstated in the marketplace
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Scenario Analysis (Contd)


Given that 45% of DST are somewhat protected from the shift to sub-accounting, if 30% of DSTs remaining accounts (or ~18mm) end up leaving (a rate that mirrors the likely conversion rate for the broader industry) and assuming zero growth or recapture, DST still look cheap relative to peers
Accounts Lost (in mm) % of Registered Accounts Lost Revenue Lost (in mm) % of Financial Services segment revenue EBITDA Margin EBITDA Loss Pro-Forma Multiple Mid-Point EBITDA Multiple 10 10% 45 4% 30% 13.5 4.5 5.8 15 15% 67.5 6% 30% 20.25 5.3 20 20% 90 8% 30% 27 6.3

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Other Financial Services Segment Services (Contd)


In addition to transfer agency services, DST also Specific businesses services performed include: offers other essential technology and software solutions primarily to the healthcare industry through its DST Health Solutions business Provides insurance claims processing, benefit plan management, member and provider management, physician practice management, billing solutions, etc.
~20% of DST operating revenue High growth rate business with secular tailwinds including increased access to healthcare and an aging population 22.9mm covered lives (~15% of market)(1) Per member per account fees, as well as software licensing fees Earns float income from client balances held Potential spin-off candidate

DST Health Solutions offers significantly better growth potential than DSTs transfer agency business and should be rewarded commensurately with a higher multiple

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(1) Source: Avondale Partners estimate

Other Financial Services Segment Services (Contd)


Lastly, DST provides other ancillary business which provide further diversify the Specific businesses services performed include: companys revenue stream, including: Business process and workflow management tools for various industries Distribution products and accounting systems for the investment management industry Electronic document storage

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Output Solutions

Output Solutions Segment


Provides integrated print and electronic statement and billing output solutions for the financial, telecommunications, video, utilities and healthcare industries Communications created and mailed include statements, monthly bills, marketing products, trade confirmations, dividend checks, year-end tax reports, etc. DST is the market leader with tremendous scale in an industry where customers seldom switch service providers Business is declining to some extent due to paperless billing trend but DST is capturing revenue, albeit at a lower margin, from digital conversion High barrier to entry business given scale required Margins are somewhat masked by accounting for out-of-pocket expenses and thus are higher than initially appear Long-term contracts provide visibility Paid on an items mailed or per image basis (~11bn images produced in 2010) Good cross-selling opportunities with transfer agency and Health Solutions business One of the largest producers of First Class mail in the US, with 2.3bn shipments in 2010. Also has presence internationally.
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Financial Performance
Over time, DST has demonstrated fairly consistent and predictable revenues , EBITDA and Free Cash Flow in its Output Solutions segment
(in mm's)

Revenue Costs and Expenses Depreciation & Amortization Cap-Ex EBIT EBIT Margin EBITDA Margin FCF

535.9 488.1 37.1 62.4 10.7 2.0% 8.9% -14.6

2006

551.1 474 42.3 33.2 34.8 6.3% 14.0% 43.9

2007

528.2 452.6 38.9 31.8 36.7 6.9% 14.3% 43.8

2008

477.4 418.1 41.5 36.7 17.8 3.7% 12.4% 22.6

2009

2010(1)
491.7 437.5 47.8 24.1 6.4

1.3% 11.0% 30.1

However, there is operational improvement potential within the segment and management thinks it can reach consistent double digit operating margins as the business gains further scale

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(1) Excludes one-time $64.3mm termination payout in 2010 Source: DST 2010 10-K

DSTs Investment Portfolio

DSTs Hidden Assets

Over the years, DST has accumulated a vast investment portfolio (housed entirely in the Investment & Other segment) that has gone unappreciated by the investment community. This investment portfolio offers substantial embedded value and downside support, as well as collateral for a potential take-private transaction

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Hidden Asset: Publicly Listed Equities


Through the buying and selling of various businesses and ownership interests, DST has accumulated sizeable stakes in various publicly listed companies, primarily in the financial and data processing segments. A listing of DSTs current holdings is below:

Company Shares Owned (mm) Value (mm) Origin of Investment State Street Corporation 10.3 439.91 Sale of JV with Kemper Financial to State Street in exchange for shares, 1994 Computershare Ltd. 15 145.61 Sale of stake in Equiserve to Computershare in exchange for shares, 2005 Euronet Worldwide 1.9 30.55 DST was an original investor in Euronet and maintained an equiy stake Undisclosed 214.4 830.48

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Source: DST 2011 Q1 10-Q Data based on 6/10/11 closing prices

Hidden Asset: Asurion


Based in Nashville, Asurion is the largest global provider of wireless handset insurance and wireless roadside assistance programs . DST sold the majority of its 37.5% stake in the business , which it acquired after merging it with another of its insurance units, to a consortium of Private Equity firms for $989mm in 2007. DST retained a 6% stake in the company

Dominant player in high-margin business with 20% share of total cell phone subscribers as users Customers include virtually all wireless cell phone service providers including AT&T, Verizon, T-Mobile and Sprint Insures over 100 million handsets Estimated ~$4bn revenue business(1)

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(1) Source: BusinessWeek

Hidden Asset: Asurion (Contd)


The value of DSTs stake in Asurion is grossly understated on the companys balance sheet. While DST accounts for its investment in Asurion using the historical cost method, which values its 6% stake at $3mm, the companys investment is probably worth between ~$120mm-$157mm
Asurion Valuation
(in mm's)

2007 Sale Price % Sold Implied Value of Asurion % Retained by DST Implied Value of DST's Stake 65% of purchase price 85% of purchase price

$968 31.4% $3,083 6% $120.23 $157.22

The value of DSTs 6% stake in Asurion may be worth considerably more than these conservative estimates given Asurions dominant market position, strong growth profile and recession resistant revenues, as consumers are more likely to insure their high-priced smart phones against damage, loss, etc. in a weaker economy
Source: DST 2008, 2010 10-K

Hidden Asset: Real Estate Investments

DST Systems owns numerous real estate assets of varying types, locations and ownership structures. The company owns apartment buildings, parking lots, raw land, office buildings, (some of which are leased back to the company), and retail and industrial properties. While it is hard to determine exactly what real estate DST owns given the companys poor disclosure practices, a reasonable estimate can be made using the limited amount of information the company does provide

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Hidden Asset: Real Estate Investments (Contd)


Production Facilities assums 20%exp, 8%cap rate

Location
Bristol, UK El Dorado Hills, CA Hartford, CT Kansas City Kansas City Toronto, Canada Office Buildings

Sq Footage
126,000 580,000 302,000 305,000 177,000 113,000 1,603,000

Rent/ Sq Ft
? 10 10 3.75 3.75 ?

Rental Value(1)

Price/ Sq Ft
? 100 100 50 50 ?

Sale Value
? 58,000,000 30,200,000 15,250,000 8,850,000 ? 112,300,000

Source
Loopnet Loopnet Costar Costar

? 58,000,000 30,200,000 11,437,500 6,637,500 ? 106,275,000 assums 30%exp, 8%cap rate

Location
El Dorado Hills, CA Johannesburg, South Africa Kansas City Kansas City Kansas City Kansas City Lawrence, MO London, UK Rochester, UK

Sq Footage
65,000 8,000 7,000 510,000 66,000 493,000 49,000 56,000 19,000 1,273,000

Rent/ Sq Ft
15 ? 15 15 15 15 10 ? ?

Rental Value(2)
8,531,250 ? 918,750 66,937,500 8,662,500 64,706,250 4,287,500 ? ? 154,043,750

Price/ Sq Ft
150 ? 110 110 110 110 70 ? ?

Sale Value
9,750,000 ? 770,000 56,100,000 7,260,000 54,230,000 3,430,000 ? ? 131,540,000

Source
Loopnet Loopnet Loopnet Loopnet Loopnet Loopnet

(1) NOI approach assumes 20% expense ratio, 8% cap rate (2) NOI approach assumes 30% expense ratio, 8% cap rate

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Hidden Asset: Real Estate Investments (Contd)


Data Centers assums 20% exp, 8% cap rate

Location
Kansas City Kansas City

Sq Footage
163,000 108,000 271,000

Rent/ Sq Ft
3.75 3.75

Rental Value(1)
6,112,500 4,050,000 10,162,500

Price/ Sq Ft
50 50

Sale Value
8,150,000 5,400,000 13,550,000

Source
Costar Costar

Retail Space

assums 30% exp, 8% cap rate

Location
Kansas City Other Properties

Sq Footage
46,000

Rent/ Sq Ft
12

Rental Value(2)
4,025,000

Price/ Sq Ft
60

Sale Value
2,760,000

Source
Costar

Location
Numerous Surface Parking Lots 120 Unit Apartment Building Underground Facility Various Developed and Undeveloped Land Undeveloped Land, El Dorado, CA JV Office Building, Leased to IRS

Size
536k sq feet kansas city 200 acres 1.1m Sq Ft

Price/Sq Ft
$25-30 $20k-$40k (acre) $15.4m/Yr

Low Value
5,000,000 3,000,000 10,720,000 ? 4,000,000 63,720,000 22,720,000 $297,226,250

High Value
7,000,000.00 9,000,000.00 16,080,000.00 ? 8,000,000.00 63,720,000.00 40080000 $300,230,000

Source
Estimate 25k-75k per apt Costar Estimate Ongo.com article

Total Value

In total, DST owns an estimated $300mm worth of real estate assets, excluding 200k+ sq feet of production facilities in the UK, 75k sq ft of office space in the UK, 8k sq ft of office space in Johannesburg and an unknown amount of developed and undeveloped land in the Kansas City area, which were omitted from the calculations due to difficulty in obtaining estimated values

(1) NOI approach assumes 20% expense ratio, 8% cap rate (2) NOI approach assumes 30% expense ratio, 8% cap rate

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Hidden Asset: Joint Ventures


DST has three unconsolidated affiliate joint venture agreements with State Street which offer full service mutual fund processing and fund administration. All three JVs generate positive and predictable earnings streams. All JVs have 50/50 ownership splits.

Boston Financial Data Services (BFDS) (1) International Financial Data Services, LP (IFDS LP) International Financial Data Services, UK (IFDS UK)

Joint Venture 2010 Share of Earnings (mm) Low Multiple (10x) High Multiple (15x) BDFS 14.8 148 222 IFDS LP 15.9 159 238.5 IFDS UK 6.2 62 93 369 553.5

(1) Holds $1.5bn+ in client balances with significant income potential from float Source: DST 2010 10-K

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Hidden Assets: Private Equity Investments, Other


DST also owns an assortment of other financial assets, including stakes in private equity funds, as well as trading and held-to-maturity investments worth over $200mm

Asset Private Equity Investments Trading Securities Held to Maturity Securities

Carrying Value (mm) 148.9 50.3 11.3 210.5

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Source: DST 2008, 2010 10-K

Adding it all up
Taking into account all of DSTs various non-core assets leads to an estimated portfolio value of between $1.9bn-or ~83%-93% of DSTs total market capitalization
DST Non-Core Investment Portfolio Valuation, values in $mm's

Asset Asurion Publically Listed Equities Real Estate Join Ventures Other
Pri va te Equi ty Tra di ng Securi ti es Hel d To Ma turi ty Securi ti es

Value (low) Value (high) $120.23 $157.22 $830.48 $830.48 $297.00 $300.00 $369.00 $553.50 $148.90 $50.30 $11.30 $1,827.20 39.2 83% $148.90 $50.30 $11.30 $2,051.70 44.0 93%

Implied Value Per Share % of DST's current market cap

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How Can All This Value be Unlocked?

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Evaluating Strategic Transactions

As currently structured, DST Systems is not well suited to be a public company. The company has a complicated corporate structure, is comprised of various operating subsidiaries and has financial interests in real estate, equities and other private ventures that cause further confusion. In order to realize fair value, DST should seek to either simplify its structure materially or consider an outright sale.

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DST Possess Many Traits of an Attractive LBO Candidate

Steady, predictable and abundant free cash flow generation Relatively low debt with ample interest coverage Good core businesses with modest growth potential Large asset portfolio which can be borrowed against or sold

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Sale to a Financial Sponsor


Update: On June 15th, Reuters(1) reported that activist investor Russell Glass recently approached DST about a potential buyout at a price in the mid-60s, sending the stock up nearly 15% on the news. DSTs board confirmed this report, and added that in recent months it has been approached by numerous parties interested in purchasing the company, albeit at what they deemed to be inadequate prices. All offers for the company have been unanimously rejected by the board While the company is not in active discussions to sell itself, with multiple offers now on the table, the company has effectively been put in play, making what was once a theoretical breakup value more real The company has not indicated that it is unwilling to sell but rather that it will sell only at a fair price The offers offered thus far have been materially beneath DSTs estimated intrinsic value and indicate that interested parties are trying to take advantage of DSTs depressed valuation and complicated story and acquire the company at an unfair price With that said, while the offer prices significantly undervalue DST, they do serve to put a floor under DSTs share price and thus provide a good margin of safety It is also likely that a bidding war erupts as some or all of the interested parties will return to the table with a more reasonable bid for the company
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(1) http://www.reuters.com/article/2011/06/15/us-dstsystems-private-equity-idUSTRE75E04E20110615

What Price Would a Financial Sponsor be Willing to pay?


At a price of up to $100 per share, a financial sponsor could still earn a high teens IRR

Price Paid % Premium Total Return IRR

100 109.6% 61.0% 17.19%

95 99.1% 65.3% 18.25%

90 88.6% 70.2% 19.40%

80 67.6% 81.8% 22.05%

75 57.2% 88.8% 23.59%

70 46.7% 96.7% 25.30%

65 60 36.2% 25.7% 105.9% 61.0% 27.22% 17.19%

Return calculations assume 40% equity contribution, 3 year term, 6x exit multiple, 1.6bn long term debt at exit, $450mm terminal EBITDA, 5% interest rate

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(1) Return scenario also assumes $250mm in annual FCF which is used entirely to pay down new and existing debt

Sale to a Strategic Acquirer


Even if a bidding war does not unfold amongst PE firms, there remains a strategic buyer in place that can likely pay a significant premium given the synergies and cost savings possible - State Street

State Street has been a long time partner of DST since 1970 and has numerous operational, strategic and business tie-ups with the company In purchasing DST, State Street would not only be able to capture cost synergies and achieve further cross selling opportunities, it would also accomplish a number of other objectives, including:
Cancel the 2% of STT shares outstanding that DST owns thereby creating EPS accretion Save $7.5mm annually in dividends currently paid to DST BFDS is DSTs largest customer at 11% of revenue; an acquisition of DST by STT would remove the need to perpetually pay DST for its services

It is also possible that one of DSTs large, well-capitalized competitors such as BNY would be interested in acquiring the company 42

Spin-off of Investment Portfolio Coupled with Improved Transparency


Alternatively, DST could consider spinning off its investment portfolio into a separate entity DST Holdings- while at the same time providing a highly detailed disclosure of its various components to allow for proper analysis. Such a transaction would:

Queue up DST for an outright sale by removing non-core assets from the picture and simplifying DSTs structure Create a portfolio of assets that may interest a new class of investors that would not otherwise be interested in DST shares Simplify the DST story, remove the discount to fair value in its shares and give investors more choice in terms of the assets they would rather own

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So, what is the company worth?

Data Processing and Output Solutions Peer Analysis

Data Processing Peers

Output Solutions Peer

Fidelity National
Market Cap (mm) Enterprise Value EV / 2011E EBITDA $9,654 $14,562 8.33

$8,948 $11,786 8.40

Fiserv

Broadridge Financial
$2,696 $3,108 8.67

Median
$8,948 $11,786 8.40

CSG Systems
$624 $796

4.61

45 Data based on 6/10/11 closing prices

Sum-Of-The-Parts Analysis
Asset Financial Services
Financial Services Healthcare Solutions

2011e EBITDA Low Multiple $250 $75 $70 6x 8x 4x

(1)

High Multiple 7x 9x 5x Add: Non-Core Assets Add: Cash Less: Debt(2) Equity Value Shares Outstanding Implied Price
Current Price

EV Low 1500 600 $280 1827 139.8 1262.1 3084.9 46.5 66.40
47.72

EV High 1750 675 $350 2052 139.8 1262.1 3704.4 46.5 79.73
47.72

Output Solutions

% Upside Dividend Yield Total Return

39% 1.5% 41%

67% 1.5% 69%

On a sum-of-the-parts basis, DST shares are currently worth between $66-$80, materially higher than where buyout offers are rumored to have come in. Additionally, a financial sponsor or strategic acquirer could likely pay a price significant above these levels and still generate an acceptable rate of return. Looking at it in a different way, at current levels you are buying DSTs non-core investment portfolio at or around fair value and getting its entire operating business nearly for free
(1) Based on consensus Wall Street estimates

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(2) Excludes $125mm accounts receivable securitization and 50% of $125.8mm of related party credit agreements

Why Does This Opportunity Exist?

DST is a complicated story with a number of moving pieces Conglomerate structure creates added difficulty in trying to determine the companys intrinsic value Poor disclosures and investor relations program DSTs financial statements have historically been somewhat complex and non-transparent. Additionally, the company does not have much of an investor relations presence, has a severely lacking website, no investor presentations and by and large has failed to effectively communicate its story to The Street. Limited sell-side coverage DST is a lightly followed name with only a handful of sell-side analysts covering the stock, which has allowed it to float beneath the radar and remain inefficiently priced
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Risks
Sub-Accounting Threat
DST has numerous embedded offsets in its higher growth business segments to make up for a loss in revenue from sub-accounting shifts Experienced and capable management team is taking tackling the sub-accounting threat on all fronts Due to the nature of the mutual fund industry and DSTs particular business mix, a reasonable estimate can be made around how many registered accounts DST will ultimately lose, providing visibility and a theoretical cap Additionally, the market is factoring in highly inflated account loss estimates which are unlikely to materialize Given the gross undervaluation of DST shares, it appears that any decline in DSTs core business is more than priced in

Concentrated Shareholder
A concentrated shareholder typically creates difficulty in effectuating change at a company However, George Argyros, former US Ambassador to Spain, DST Director and DSTs largest shareholder with ~21% of outstanding shares, does not create this obstacle Mr. Argyros acquired his shares when he sold his business, USCS International, to DST in 1998 Mr. Argyros does not have emotional ties to DST but rather appears to be purely economically motivated and thus would be open to a strategic transaction In a recent news article, Mr. Argyros indicated that he thinks shares are worth closer to $80 and is confident with the direction the company is going in

Conclusion

Conclusion Attractive core business coupled with a separate investment portfolio worth up to 93% of the companys current market capitalization Trades at a material discount to intrinsic value, providing wide margin of safety and limited downside Break-up value is materially higher than current share price Multiple bidders for the company have recently emerged and provide a floor valuation Simplification or sale of business to financial or strategic buyer presents catalyst to realize value
Upside potential: 39-67%

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