Donaldson, Lufkin & Jenrette, Inc.
Donaldson, Lufkin & Jenrette, Inc.
Operating Revenues: $2.76 billion (1996)
Stock Exchanges: New York
SICs: 6211 Security Brokers, Dealers & Flotation Companies; 6282 Investment Advice; 6289 Services Allied with the Exchange of Securities or Commodities, Not Elsewhere Classified; 6712 Offices of Bank Holding Companies, Not Elsewhere Classified; 6722 Management Investment Offices, Open-End; 6726 Unit Investment Trusts, Face-Amount Certificate Offices, and Closed-End Management Investment Offices
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.
Fledgling Private Firm in the 1960s
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 start-up 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.
Surviving the Difficult 1970s
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.
Junk-Bond and LEO Windfalls in the 1980s
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.
We have grown from a research boutique to a fully integrated investment and merchant bank, serving a diverse and demanding universe of domestic and international clients. The path we have followed has been illuminated by the same principles formulated during our early years: to keep clients’ interests at the forefront of our business and to act as one firm in each client’s behalf, marshaling our substantial financial and intellectual resources to help each client succeed.
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.
Broad-Based Growth in the 1990s
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 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.
During 1994, a bad year for the securities industry, DLJ’s net revenues slid to $1.5 billion, but the company achieved a coup when an investment fund it managed sold four television stations for $717 million that had been purchased the previous year for only $320 million. In 1995 The Equitable Cos., the parent company of Equitable Life, sold 20 percent of DLJ in a public offering for $27 a share, or $285.7 million. DLJ received $89.1 million in new capital from the sale, boosting the company’s total capital to $2.2 billion. That year the company had net income of $179 million on record revenues of $2.08 billion. DLJ chairman, John Chalsty, earned $12.6 million in cash and stock, more than any other chief executive officer in the industry.
By 1996 DLJ’s stock underwriting ranking had jumped from 15th to 4th in a decade, and the company was selling more than one-fifth of all new junk bonds, compared to five percent in 1989. The firm had record net revenues of $2.76 billion in 1996 and record net income of $291 million that year. Long-term debt was $1.6 billion in March 1997.
DLJ in 1996
In 1996 DLJ was conducting business through three principal operating groups. The Banking Group included: the Investment Banking Group, which managed and underwrote public offerings of securities, arranged private placements, and provided advisory and other services in connection with mergers, acquisitions, restructurings, and other financial transactions; the Merchant Banking Group which pursued direct investments in a variety of areas through a number of investment vehicles funded with capital provided primarily by institutional investors, the company, and its employees; and the Emerging Markets Group which specialized in client advisory services for mergers, acquisitions, and financial restructurings, as well as merchant banking and the underwriting, placement, and trading of equity, debt, and derivative securities in Latin America, Asia, and Eastern Europe.
The Capital Markets Group encompassed a broad range of activities, including trading, research, origination and distribution of equity and fixed-income securities, private equity investments, and venture capital. It consisted of the company’s Fixed Income, Institutional Equities, and Equity Derivatives divisions; Antranet, a distributor of investment research products; and Sprout, its venture capital affiliate.
The Financial Services Group provided a broad array of services to individual investors and the financial intermediaries that represented them. One of these was the Pershing Division, which cleared transactions for more than 550 brokerage firms that collectively maintained over 1.4 million client accounts. The Investment Services Group provided high net worth individuals and medium- to smaller-sized institutions with access to the company’s equity and fixed-income research, trading services, and underwriting. The Asset Management Group provided cash management, investment, and trust services primarily to high net worth individuals and institutional investors.
Among DLJ’s operating groups, the Capital Markets Group accounted for 36.5 percent of its net revenues in 1996. The Banking Group accounted for 33.7 percent, and the Financial Services Group accounted for 29.8 percent. The company leased its headquarters in midtown Manhattan and 12 other U.S. cities as well as offices in 10 cities in Europe, Asia, and Latin America.
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, Antranet, and 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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