Donaldson Lufkin and Jenrette Case Study

Topics: Stock market, Stock, Initial public offering Pages: 6 (2354 words) Published: December 4, 2012
DLJ was founded in 1959 by William Donaldson, Dan Lufkin, and Richard Jenrette, which whom set out with $100,000 to create an equity research firm that would serve institutional shareholders. The firm went public in 1970 after gradually increasing the services provided to clients and diversifying in the face of competition. DLJ was a member of NYSE and retained their membership by offering shares of itself to the public. DLJ sold itself to Equitable in 1985, after facing capital requirements. Equitable was a mutual life insurance company, owned by policyholders. Jenrette joined Equitable as chief investment officer, and he later became chairman of the company in 1990. He initiated a restructuring of Equitable in response to serious problems. This involved cutting $150 million in annual costs and selling 49% of Equitable to AXA, a French holding company. He demutualized Equitable, raising $450 in an initial public offering. By 1995, AXA owned approximately 60% of Equitable. DLJ’s strategy was one of patience and involved focusing on building higher margin businesses such as underwriting IPOs and high yield debt, creating specialized issues of mortgage-backed debt and merchant banking, and striving to be a leader in each market it selected. DLJ is ranked as the 11th largest securities firm serving institutional, corporate, government, and individual clients as a leading investment and merchant bank. Its’ businesses included securities underwriting, sales and trading, merchant banking, venture capital, financial advisory services, investment research, correspondent brokerage services, and asset management. It operated through Banking Group, Capital Markets Group, and a Financial Services Group. The Banking Group assisted in clients in raising capital through the issuance of debt and equity securities in the public and private markets. It was believed to have a competitive advantage focusing on 17 sectors in the industry. The Merchant Banking group invested capital directly into companies. Since 1992, DLJ had placed $580 million in 20 companies and realized $610 million from seven partial or whole realizations. DLJ had annual returns greater than 90%, making DLJ one of the highest earning companies among principal investors. Due to the success in this group, DLJ sought to form four new funds: DLJ Investment Partners, DLJ Real Estate Fund, DLJ Senior Debt Fund, and Global Retail Partners L.P. The Banking Group produced high margins with lower levels of risk in favorable environments, and most of its costs were personnel-related. However, Merchant Banking offered more risk as DLJ put its own capital in with its limited partners in purchasing securities in companies. The Capital Markets Group offered trading, research, and sales services in fixed-income and equity securities focusing on serving its’ clients. The Group held large inventories of stocks and bonds, which were financed through repurchase agreements, in order to serve its clients successfully. The Financial Services Group provided services targeting individual investors and the financial intermediaries who represented them. Its’ revenues were earned by charging a fee for services and on the interest made on the money it lent for margin trades. Also, they earned money on the spread between the rate at which it lent and the rate at which it borrowed, much like a bank did. Overall, DLJ was a very successful company and due to their desirable position, investors would soon have the opportunity to share DLJ’s success. Its growth was greater than others in the industry over the past 5 years, its’ strategy to compete in higher margin businesses was working, its’ revenues and profits were growing at a rate consistent with its increased market share, and each of the operating groups were growing at equal rates. Also, DLJ did not commit large amount of resources to the lower margin business of underwriting and trading of investment grade debt and...
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