|Chalsty: saddened by DLJ's sell-off|
|O'Hara: helped CSFB ahead in high yield|
Makeweights or heavyweights?DLJ has three business lines that have received relatively little attention since the merger was announced. One is its private equity unit. As of the end of 1999, the firm had $12 billion in funds, either invested or ready to invest, one of the largest funds on the street, and one of the most successful. Competitors quip that the unit is so profitable that it can afford to pay the salaries and bonuses of all DLJ executives of managing director level and above. This is a business that CSFB does not have, or at least not in any size (it owns, for example, 20% of asset management and private equity firm Warburg Pincus). And it is a business that major banks have been lending more weight to. Chase, Citigroup, Morgan Stanley Dean Witter, Goldman Sachs, each have, or are building, significant private equity arms. Goldman, for example, recently closed a $5 billion fund, one of the largest single funds ever. The second business is the quiet money spinner: Pershing. This is the second-largest clearing operation on the New York Stock Exchange (Bear Stearns is larger), accounting for 10% of volume, and acts as the perfect earnings foil to DLJ's more volatile businesses. It is an operation CSFB does not have, but an earnings stream it could benefit from. As yet there are no plans to incorporate the unit under the CSFB banner. The same cannot be said of the third business line, DLJdirect. This is DLJ's retail distribution arm, a 12-year-old business that has been among the leaders of the retail brokers' rush to go on-line. Last year DLJ listed 20% of its subsidiary on Nasdaq, although its shares have not been trading all that well. DLJdirect is nowhere near as large as Schwab or E*Trade, but that was intentional, as DLJdirect is aimed at the mass affluent - $10,000 gets you a trading account, but to get the full benefit of the service, such as DLJ's equity research, clients have to have $100,000 or more of investable assets. CSFB developed its own access to retail investors three years ago when it, along with JP Morgan, struck up an agreement with Schwab to distribute IPOs to its customers. At the time it was a stop-gap measure to help CSFB to compete at least in part with the retail platforms investment banking powerhouses Merrill Lynch and Morgan Stanley (which bought Dean Witter in 1997) could bring to the table. As retail trades have increased, so the need for a dedicated retail platform to complement institutional sales coverage has increased. For their part, retail houses recognize the need to have access to institutional investors, which is why Schwab has set up Epoch Partners. The agreement with Schwab is due to lapse within the next few months, and neither side was particularly keen to extend it, even before CSFB got its hands on DLJdirect. CSFB had been working on its own retail platform, called Apollo, for the past 18 months. CSFB set aside $250 million for it, and put Kevin English in charge. He hired about 120 people, who sat on their own floor in the bank's Madison Avenue headquarters, out of bounds to the rest of the firm. The team had spent about $100 million thus far, but once the DLJ acquisition is finalized the group is to be disbanded.
In its place CSFB gets a ready-built platform with a recognized brand and a solid customer base, saving it hundreds of millions. It appears to be recognizing the full benefits of this, as initial plans to change the name to CSFBdirect have been shelved, at least for now. Retail customers, it appears, are more loyal and discerning than institutions.