Credit Suisse Group Snares DLJ

DLJ shares, which surged more than $16 on Tuesday ahead of the deal, jumped $4.38 to $88.38 Wednesday as one of the most heavily traded stocks on the NYSE. The news drove shares in the brokerage sector higher.

The proposed deal would narrow the gap between CSFB, a unit of Credit Suisse Group of Switzerland, and its two biggest investment-banking rivals in the U.S., Goldman Sachs (GS) and Morgan Stanley Dean Witter (MWD), while giving much smaller DLJ a greater global reach.

Credit Suisse Group, a major financial player world-wide and Switzerland's second-largest banking group by assets, already has interests in private banking, asset management and insurance in addition to investment banking.

Acquiring midtier DLJ would give Credit Suisse a leading presence in junk bonds and merchant banking, as well as a retail online-brokerage business and a strong back-office business in clearing stock trades.

Credit Suisse will pay $8.1 billion to French insurer and asset manager AXA (AXA) for its nearly 70% stake in DLJ. Thirty percent of that will be in cash and 70% in Credit Suisse Group shares. In early September, Credit Suisse will start a cash tender offer in the U.S. for the DLJ shares that are held by the public. The firm has a total of 127.8 million primary common shares outstanding.

Paris-based AXA is expected to pocket a large profit on its stake in DLJ, which it acquired in the course of investing $1 billion in 1991 to gain control of DLJ's parent company, Equitable Cos., which has since been renamed AXA Financial (AXF).

The purchase price of $90 a share represents nearly three times book value, a fairly rich price given that DLJ's stock has lagged behind the market because of its concentration in the depressed junk-bond market and presence in the risky leveraged-buyout business.

A combination of CSFB and DLJ could pressure the remaining major independent U.S. firms — Lehman Brothers (LEH), J.P. Morgan (JPM) and Bear Stearns (BSC) — to find merger partners.

Other brokerages extending Tuesday's gains included Legg Mason (LM) and A.G. Edwards (AGE).

Under the deal, DLJ Chief Executive Joe Roby would become chairman of Credit Suisse First Boston's executive board. Allen Wheat would remain the CEO of CSFB, Credit Suisse's investment banking arm.

The move would put Credit Suisse First Boston back in the spotlight just when many believed a business perceived as inherently risky was being eclipsed by more staid wealth management operations.

DLJ's tracking stock, DLJdirect (DIR), also soared Tuesday and then sold off sharply Wednesday, down 22%, because it wasn't included in the deal. Shares of DLJ's online brokerage unit have been dragged down since an initial public offering in the spring of 1999.

Credit Suisse shares, meanwhile, slipped in Swiss trading Wednesday.

AXA's shares hit a record intraday on the Paris stock exchange, then fell back to stand 1% higher.

If Credit Suisse is approved for the deal, it will land square in the arena of such traditionally high-risk businesses as junk-bond underwriting. The deal would give CSFB a top position as junk-bonds underwriter and the third-largest stock-offering underwriter.

Credit Suisse will also have scope to expand in investment banking areas like private equity. CSFB is bringing to the table its U.S. technology team under leadership of Frank Quattrone.

Quattrone left Deutsche Morgan Grenfell for Credit Suisse in a highly publicized move in July 1998. Credit Suisse management regularly denies that he is paid a salary of several tens of millions of dollars a year, but its officials admit that there is a high cost involved in running such businesses.

Credit Suisse will set aside $1.2 billion, a so-called retention pool, to prevent DLJ personnel from defecting to rivals, a source close to the company said on Tuesday.

Credit Suisse Chairman and CEO Lukas Muehlemann has said the group wants to grow but not while sacrificing the group's uniform character.

Credit Suisse has tended to grow internally. Its strategy has been rewarded, as its shares hit all-time highs earlier this month, a feat yet to be matched by more acquisitive rival UBS (UBS).

The bank's shares hit an all-time high on Aug. 16. Credit Suisse will report first-half results on Thursday, which are expected to be strong.

Ironically, the shares recovered from troughs seen in mid-1998, suffering sharp declines due to Credit Suisse's investment banking exposure in Russia.

The move follows UBS's announcement in July that it planned to purchase PaineWebber (PWJ), the U.S. broker.

Some analysts believe that Credit Suisse was unwilling to be left behind and pride may play part in the expected acquisition.

"It does look like that. To my knowledge, Credit Suisse has always said that no big acquisition was planned in the United States. So with this news, I am absolutely surprised. I thought the focus was more in Europe," said Christoph Ritschard, analyst at Zuercher Kantonbank.