QUESTION
This week we cover the DLJ case. For analysis, we will focus on how to value the IPO by the method of market multiples.
The one-page memo needs to include ten rubrics. Four deal with your choices and justifications for choosing a set of “comparable” firms. Four deal with the actual valuation by alternative price multiples. Two deal with combining the pricing by alternative multiples and adjusting the combined pricing to arrive at the IPO price.
Exhibit 5
Exhibit 5 |
Donaldson, Lufkin & Jenrette, 1995 |
DLJ Historical Income Statements |
(Dollars in Thousands) |
Last Twelve Mos. | ||||||||||||||||
Years Ended December 31, | Six Months Ended June 30, | Ended June 30, | ||||||||||||||
Income Statement Data: | 1990 | 1991 | 1992 | 1993 | 1994 | 1994 | 1995 | 1995 | ||||||||
Revenues: | ||||||||||||||||
Commissions | $228.9 | $257.9 | $289.7 | $358.8 | $376.1 | $194.2 | $225.0 | $406.9 | ||||||||
Underwritings | 150.3 | 170.9 | 350.3 | 574.6 | 261.1 | 139.5 | 171.2 | 292.8 | ||||||||
Fees | 88.9 | 166.2 | 158.1 | 211.3 | 281.3 | 112.9 | 173.5 | 341.9 | ||||||||
Interest – Net (a) | 362.3 | 323.0 | 381.7 | 657.3 | 791.9 | 391.4 | 423.6 | 824.1 | ||||||||
Principal Transactions-Net: | ||||||||||||||||
Trading | 98.9 | 264.2 | 272.0 | 381.5 | 165.7 | 99.2 | 154.9 | 221.4 | ||||||||
Investment | 37.9 | 17.3 | 195.9 | 79.9 | 97.6 | 28.8 | 99.1 | 167.9 | ||||||||
Other | 16.9 | 15.1 | 16.4 | 21.9 | 35.0 | 15.2 | 26.4 | 46.2 | ||||||||
Total Revenues | 984.1 | 1,214.6 | 1,664.1 | 2,285.3 | 2,008.7 | 981.2 | 1,273.7 | 2,301.2 | ||||||||
Costs and Expenses: | ||||||||||||||||
Compensation and Benefits | 413.1 | 567.9 | 886.6 | 1,200.4 | 897.8 | 477.1 | 598.1 | 1,018.8 | ||||||||
Interest | 302.3 | 236.4 | 212.3 | 381.7 | 503.8 | 221.1 | 308.9 | 591.6 | ||||||||
Other Expenses | 254.2 | 321.3 | 320.2 | 401.2 | 402.1 | 183.0 | 234.2 | 453.3 | ||||||||
Total Costs and Expenses | 969.6 | 1,125.6 | 1,419.1 | 1,983.3 | 1,803.7 | 881.2 | 1,141.2 | 2,063.7 | ||||||||
Pre-Tax Income | 14.5 | 89.0 | 245.0 | 302.0 | 205.0 | 100.0 | 132.5 | 237.5 | ||||||||
Provision for Income Taxes | 1.5 | 31.2 | 98.0 | 115.9 | 82.0 | 40.0 | 53.0 | 95.0 | ||||||||
Net Income Before Preferred Dividends | $13.0 | $57.8 | $147.0 | $186.1 | $123.0 | $60.0 | $79.5 | $142.5 | ||||||||
Dividends on Preferred Stock | – | – | – | – | 21.0 | 13.0 | 9.9 | 17.9 | ||||||||
Net Income Applicable to Common Shares | $13.0 | $57.8 | $147.0 | $186.1 | $102.0 | $47.0 | $69.6 | $124.6 | ||||||||
Earnings per Share | $1.98 | $0.91 | (c) | $1.35 | $2.42 | (c) | ||||||||||
Dividends per Share | $0.65 | NA | (c) | $0.33 | NA | (c) | ||||||||||
Common Shares Outstanding (b) | 51.5 | 51.5 | (c) | 51.5 | 51.5 | (c) |
Exhibit 6
Exhibit 6 | |
Donaldson, Lufkin & Jenrette, 1995 | |
Summary Balance Sheets & Pro Forma Capitalization | |
(Dollars in Thousands) |
Years Ended December 31, | Six Months Ended June 30, | |||||||||||||
Summary Balance Sheet Data: | 1990 | 1991 | 1992 | 1993 | 1994 | 1994 | 1995 | |||||||
Stock Price as of October 23, 1995 | ||||||||||||||
Shares Outstanding (Millions) | ||||||||||||||
Market Capitalization | $6,405.3 | $10,942.5 | $14,378.4 | $21,575.2 | $19,166.9 | $22,886.1 | $26,750.8 | |||||||
Total Assets | $13,997.1 | $18,721.7 | $24,436.2 | $38,766.7 | $33,161.1 | $41,628.8 | $42,417.1 | |||||||
Total Market Capitalization | ||||||||||||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||||||||
Securities Sold Under Agreements to | ||||||||||||||
Repurchase and Securities Loaned | $7,619.0 | $11,200.8 | $19.7 | $24,116.7 | $20,385.4 | $25,705.6 | $27,895.9 | |||||||
Long-Term Borrowings | 270.5 | 268.1 | 478.6 | 549.0 | 539.9 | 544.9 | 723.1 | |||||||
Preferred Stock | – | – | – | 225.0 | 225.0 | 225.0 | 225.0 | |||||||
Current Implied Dividend | $294.1 | $340.3 | $454.6 | $750.3 | $820.3 | $775.9 | $873.6 | |||||||
Ratio of Net Assets to Stockholders’ Equity | 25.81 | x | 22.86 | x | 22.12 | x | 22.91 | x | 17.01 | x | 24.16 | x | 17.93 | x |
Ratio of Long-Term Borrowings to Total Cap | 0.47 | 0.42 | 0.51 | 0.34 | 0.30 | 0.33 | 0.35 | |||||||
Pre-Tax Return on Average Equity | 5.0% | 28.1% | 61.6% | 50.1% | 23.4% | 23.3% | 28.9% | |||||||
Current Implied Dividend Yield | As of June 30, 1995 | Percent of Total Capital | ||||||||||||
Pro Forma Capitalization (In Thousands) (a) | Actual | As Adjusted | Actual | As Adjusted | ||||||||||
Short-Term Borrowings | $1,651,914 | $1,523,881 | ||||||||||||
Revenue Growth | ||||||||||||||
Earnings ……… | ||||||||||||||
Notes | $- | $300,000 | 0.0% | 14.2% | ||||||||||
Book Value | 250,000 | 250,000 | 13.7% | 11.9% | ||||||||||
Term Loan Agreement | 250,000 | 100,000 | 13.7% | 4.7% | ||||||||||
Beta vs S&P 500 | 105,022 | – | 5.8% | 0.0% | ||||||||||
Employees | 97,000 | 97,000 | 5.3% | 4.6% | ||||||||||
Other Borrowings | 21,067 | 21,067 | 1.2% | 1.0% | ||||||||||
Total Long-Term Borrowings | 723,089 | 768,067 | 39.7% | 36.4% | ||||||||||
Cumulative Exchangeable Preferred Stock, at Redemption Value | 225,000 | 225,000 | 12.4% | 10.7% | ||||||||||
Stockholders’ Equity: | ||||||||||||||
Common Stock ($0 10 Par Value) 150,000,000 Shares Authorized; 50,000,000 | ||||||||||||||
Actual Shares Issued & Outstanding; 53,300,000 as Adjusted | 1,000 | 5,330 | 0.1% | 0.3% | ||||||||||
Restricted Stock Units; No Actual Units Issued and Outstanding; 5,178,664 | ||||||||||||||
as Adjusted Units Issued and Outstanding | – | 106,163 | 0.0% | 5.0% | ||||||||||
Paid-in Capital | 232,080 | 368,055 | 12.7% | 17.4% | ||||||||||
Retained Earnings | 640,855 | 637,157 | 35.2% | 30.2% | ||||||||||
Cumulative Translation Adjustment | (321) | (321) | 0.0% | 0.0% | ||||||||||
Total Stockholders’ Equity | 873,614 | 1,116,384 | 48.0% | 52.9% | ||||||||||
Total Capitalization (Excl Short-Term Borrowings) | $1,821,703 | $2,109,451 | 100.0% | 100.0% | ||||||||||
(a) Pro forma effects include offering at mid-point of filing range for illustrative purposes and $300,000 proposed debt issuance. | ||||||||||||||
Exhibit 8
Exhibit 8 | |
Donaldson, Lufkin & Jenrette, 1995 | |
Comparable Analysis of Selected Securities Firms | |
(Dollars in Millions, Except per Share Data) |
Lehman | Merrill | Morgan | Salomon | ||||||||||||||
Alex. Brown | Bear Stearns | DLJ (a) | A.G. Edwards | Brothers | Lynch | Stanley | PaineWebber | Brothers | |||||||||
Stock Price as of October 23, 1995 | $46.63 | $20.00 | NA | $25.13 | $22.50 | $56.98 | $87.50 | $21.50 | $36.75 | ||||||||
Shares Outstanding (Millions) | 15.5 | 118.8 | 58.5 | 62.3 | 104.6 | 175.7 | 77.6 | 97.4 | 106.4 | ||||||||
Market Capitalization | $723 | $2,376 | NA | $1,565 | $2,353 | $10,011 | $6,790 | $2,095 | $3,911 | ||||||||
Long-Term Debt and Preferred Stock | 173 | 4,792 | 993 | – | 13,605 | 16,775 | 9,929 | – | 2,710 | – | 14,353 | ||||||
Total Market Capitalization | $897 | $7,168 | NA | $1,565 | $15,958 | $26,787 | $16,719 | $4,805 | $18,264 | ||||||||
Last Twelve Months Earnings per Share | $5.39 | $3.40 | $2.42 | $2.64 | $1.59 | $3.72 | $4.06 | $(0.26) | $0.58 | ||||||||
Last Twelve Months Book Value per Share | 29.53 | 16.59 | 19.72 | 15.80 | 27.95 | 31.06 | 52.34 | 15.04 | 34.64 | ||||||||
Cal Yr 1995 Est Earnings per Share (Value Line) | 6.16 | 1.70 | NA | 2.58 | 2.25 | 5.44 | 6.66 | 0.52 | 3.50 | ||||||||
Cal Yr 1996 Est Earnings per Share (Value Line) | 6.10 | 2.80 | NA | 2.80 | 2.45 | 5.85 | 8.00 | 2.40 | 3.75 | ||||||||
Current Implied Dividend | 0.80 | 0.60 | 0.50 | 0.56 | 0.20 | 1.00 | 1.28 | 0.48 | 0.64 | ||||||||
Stock Price / LTM Earnings per Share | 8.7 | x | 5.9 | x | NA | x | 9.5 | x | 14.2 | x | 15.3 | x | 21.6 | x | NMF | x | 63.4 |
Stock Price / Book Value per Share | 1.6 | 1.2 | NA | 1.6 | 0.8 | 1.8 | 1.7 | 1.4 | 1.1 | ||||||||
Stock Price / Cal Yr 1995 Est Earnings per Share | 7.6 | 11.8 | NA | 9.7 | 10.0 | 10.5 | 13.1 | 41.3 | 10.5 | ||||||||
Stock Price / Cal Yr 1996 Est Earnings per Share | 7.6 | 7.1 | NA | 9.0 | 9.2 | 9.7 | 10.9 | 9.0 | 9.8 | ||||||||
Current Implied Dividend Yield | 1.7% | 3.0% | NA | 2.2% | 0.9% | 1.8% | 1.5% | 2.2% | 1.7% | ||||||||
Value Line’s Estimated 1996-2000: | |||||||||||||||||
Revenue Growth | 7.5% | 12.0% | NA | 9.5% | 8.0% | 13.0% | 7.5% | 9.0% | 7.5% | ||||||||
Earnings | 5.0% | 10.0% | NA | 9.5% | 14.5% | 8.0% | 10.0% | 10.5% | NMF | ||||||||
Dividends | 10.5% | 8.0% | NA | 11.5% | 19.0% | 11.5% | 9.0% | 11.5% | 2.0% | ||||||||
Book Value | 14.5% | 14.0% | NA | 13.0% | 8.5% | 14.5% | 11.5% | 9.0% | 8.5% | ||||||||
Beta vs S&P 500 | 1.27 | 1.64 | NA | 1.41 | 1.20 | 1.79 | 1.66 | 1.67 | 1.13 | ||||||||
Employees | 2,300 | 7,500 | 4,676 | 10,741 | 7,771 | 46,023 | 9,236 | 16,025 | 6,400 |
Descriptive Information: | |||||||||||||||||||
Alex Brown, Inc: | Founded in 1800, Alex. Brown was a Baltimore-based investment bank with traditional strengths in underwriting IPOs and common stock. AB had focused on | ||||||||||||||||||
diversifying revenues into M&A and sales and trading. Maintained strong banking and research presence in selected industries where it could be a leader. | |||||||||||||||||||
Bear Stearns Cos, Inc: | Bear Stearns traced its roots to 1923 and went public in 1985. One of the largest dealers in fixed income products, especially mortgage-backed securities. Large | ||||||||||||||||||
clearance activities. Recent strong gains in corporate finance and M&A practices. Primary focus on middle market companies and selected products. | |||||||||||||||||||
AG Edwards, Inc: | St. Louis-based A.G. Edwards was founded in 1887 and went public in 1971. AGE had 534 brokerage branches, serving over 1 million clients (est. 95% retail), with | ||||||||||||||||||
over 5,600 brokers. Also maintained investment banking operations, focusing on regional clients. Offered other products targeted to individual investors. | |||||||||||||||||||
Lehman Bros Holdings: | Lehman was a major global investment bank specializing in investment-grade debt and equity underwriting, and sales and trading. Founded in 1850, LEH was acquired | ||||||||||||||||||
by AMEX in 1983 then spun-off in 1994. Had undergone major cost reduction in recent years. Approximately 40% of revenues from abroad. | |||||||||||||||||||
Merrill Lynch & Co, Inc: | Merrill Lynch continued to be the number one global underwriter for debt and equity through the 1990s. Largest retail brokerage. Strong asset management business. | ||||||||||||||||||
Strengthening presence in M&A. Excellent research staff. Primary focus on Fortune 500 clients in corporate finance. Active in real estate and insurance, as well. | |||||||||||||||||||
Morgan Stanley Group: | Morgan Stanley was a major international investment bank, with particular strengths in global offerings, M&A, merchant banking and high yield underwriting. | ||||||||||||||||||
Building asset management business. Earned 40% revenues overseas. Historical focus on Fortune 100 expanded to cover emerging companies. | |||||||||||||||||||
PaineWebber Group, Inc: | PaineWebber maintained 3rd largest brokerage force, with 6,025 brokers handling 2.5 million clients. Corporate finance and research strengths in covering middle- | ||||||||||||||||||
market companies. Recent cost cutting initiative and $200 million settlement of limited partnership claims. Purchased Kidder, Peabody in 1994. | |||||||||||||||||||
Solomon, Inc.: | Salomon conducted business through Salomon Brothers and Phibro Energy (energy activities). Traditional leader in fixed-income underwriting and trading, with | ||||||||||||||||||
premier proprietary trading department. Recent shift towards developing corporate finance activities. Some turmoil with bonus plans, Treasury scandal, and 1994 loss. |
(a) DLJ data is presented with certain expected post-offering adjustments. |
Exhibit 9
Exhibit 9 | ||||||
Donaldson, Lufkin & Jenrette, 1995 | ||||||
Inventory Holdings and Capital Structure Analysis of Selected Securities Firms | ||||||
(Dollars in Millions) |
Lehman | Merrill | Morgan | Salomon | ||||||||||||||
Alex. Brown | Bear Stearns | DLJ | A.G. Edwards | Brothers | Lynch | Stanley | PaineWebber | Brothers | |||||||||
Securities Inventory Analysis | |||||||||||||||||
Government Obligations | $3.3 | $7,620.0 | $7,336.4 | $28.5 | $24,162.0 | $17,938.6 | $23,582.0 | $6,539.6 | $66,959.0 | ||||||||
Municipals | 44.1 | 136.1 | 0.0 | 96.8 | 0.0 | 996.2 | 0.0 | 989.0 | 0.0 | ||||||||
Mortgage-Backed | 1.7 | 2,497.4 | 411.2 | 0.0 | 6,014.0 | 2,923.7 | 0.0 | 3,734.0 | 1,616.0 | ||||||||
Corporate Debt | 19.6 | 2,501.4 | 3,450.3 | 0.0 | 9,250.0 | 18,254.8 | 10,128.0 | 2,254.8 | 10,247.0 | ||||||||
Corporate Stock | 29.0 | 6,182.2 | 392.0 | 25.2 | 5,950.0 | 9,875.2 | 7,980.0 | 835.5 | 4,385.0 | ||||||||
CDs & Money Market Instruments | 0.0 | 0.0 | 0.0 | 0.0 | 2,799.0 | 1,551.5 | 0.0 | 820.4 | 0.0 | ||||||||
Commodities & Other | 0.0 | 1,841.2 | 0.0 | 0.0 | 0.0 | 11,463.1 | 7,987.0 | 0.0 | 8,412.0 | ||||||||
Total | $97.7 | $20,778.3 | $11,589.9 | $150.5 | $48,175.0 | $63,003.1 | $49,677.0 | $15,173.3 | $91,619.0 | ||||||||
Percent of Total Inventory: | |||||||||||||||||
Government Obligations | 3.4% | 36.7% | 63.3% | 18.9% | 50.2% | 28.5% | 47.5% | 43.1% | 73.1% | ||||||||
Municipals | 45.1% | 0.7% | 0.0% | 64.3% | 0.0% | 1.6% | 0.0% | 6.5% | 0.0% | ||||||||
Mortgage-Backed | 1.7% | 12.0% | 3.5% | 0.0% | 12.5% | 4.6% | 0.0% | 24.6% | 1.8% | ||||||||
Corporate Debt | 20.1% | 12.0% | 29.8% | 0.0% | 19.2% | 29.0% | 20.4% | 14.9% | 11.2% | ||||||||
Corporate Stock | 29.7% | 29.8% | 3.4% | 16.7% | 12.4% | 15.7% | 16.1% | 5.5% | 4.8% | ||||||||
CDs & Money Market Instruments | 0.0% | 0.0% | 0.0% | 0.0% | 5.8% | 2.5% | 0.0% | 5.4% | 0.0% | ||||||||
Commodities & Other | 0.0% | 8.9% | 0.0% | 0.0% | 0.0% | 18.2% | 16.1% | 0.0% | 9.2% | ||||||||
Total Assets | $1,915 | $79,517 | $42,417 | $2,617 | $117,518 | $185,473 | $132,264 | $49,545 | $162,586 | ||||||||
Note: Resell Agreements | $7 | $24,741 | $16,652 | $114 | $37,173 | $45,502 | $47,849 | $27,622 | $43,497 | ||||||||
Capitalization Structure | |||||||||||||||||
Short-Term Debt | $73 | $9,230 | $1,524 | $0 | $9,167 | $31,762 | $6,707 | $1,673 | $6,420 | ||||||||
Repurchase Agreements | 0 | 31,907 | 25,076 | 0 | 57,887 | 54,274 | 62,322 | 29,540 | 77,817 | ||||||||
Long-Term Debt | 173 | 4,205 | 768 | 0 | 12,897 | 16,156 | 9,111 | 2,423 | 13,341 | ||||||||
Preferred Stock | 0 | 588 | 225 | 0 | 708 | 619 | 818 | 287 | 1,012 | ||||||||
Total Common Equity | 458 | 1,971 | 1,116 | 985 | 2,923 | 5,459 | 4,062 | 1,466 | 3,687 | ||||||||
Total Equity | 458 | 2,558 | 1,341 | 985 | 3,631 | 6,077 | 4,880 | 1,752 | 4,699 | ||||||||
Total Capital Excluding Repos | $705 | $15,993 | $3,633 | $985 | $25,695 | $53,996 | $20,698 | $5,848 | $24,460 | ||||||||
Percent of Total Capital Structure (Excl Repos): | |||||||||||||||||
Short-Term Debt | 10.4% | 57.7% | 41.9% | 0.0% | 35.7% | 58.8% | 32.4% | 28.6% | 26.2% | ||||||||
Long-Term Debt | 24.6% | 26.3% | 21.1% | 0.0% | 50.2% | 29.9% | 44.0% | 41.4% | 54.5% | ||||||||
Preferred Stock | 0.0% | 3.7% | 6.2% | 0.0% | 2.8% | 1.1% | 4.0% | 4.9% | 4.1% | ||||||||
Total Common Equity | 65.0% | 12.3% | 30.7% | 100.0% | 11.4% | 10.1% | 19.6% | 25.1% | 15.1% | ||||||||
Total Debt / Total Equity | 53.8% | 525.2% | 170.9% | 0.0% | 607.7% | 788.5% | 324.1% | 233.8% | 420.5% | ||||||||
Long-Term Debt / Total Equity | 37.8% | 164.4% | 57.3% | 0.0% | 355.2% | 265.8% | 186.7% | 138.3% | 283.9% | ||||||||
Total Equity as % Total Assets | 65.0% | 16.0% | 36.9% | 100.0% | 14.1% | 11.3% | 23.6% | 30.0% | 19.2% | ||||||||
Senior Debt Rating (Moody’s/S&P) | NR | A2/A | Baa1/A- | NR | Baa1/A | A1/A+ | A1/A+ | Baa1/BBB+ | Baa1/BBB | ||||||||
Data as of: | 9/30/1995 | 9/30/1995 | 6/30/1995 | 8/31/1995 | 8/31/1995 | 9/30/1995 | 8/31/1995 | 9/30/1995 | 9/30/1995 | ||||||||
Source: D.P. Eberling, “Donaldson, Lufkin & Jenrette – Company Report,” Prudential Securities, December 15, 1995 and Company Reports. |
Exhibit 10 | |||
Donaldson, Lufkin & Jenrette, 1995 | |||
Revenue and Income Analysis of Selected Securities Firms | |||
(Dollars in Millions) |
Lehman | Merrill | Morgan | Salomon | ||||||||||||||
Income Statement Statistics | Alex. Brown | Bear Stearns | DLJ | A.G. Edwards | Brothers | Lynch | Stanley | PaineWebber | Brothers | ||||||||
1990–94 Compound Average Growth Rates | |||||||||||||||||
Gross Revenues | 22.2% | 8.6% | 17.7% | 17.0% | NA | 13.1% | 12.4% | 7.4% | -8.5% | ||||||||
Net Revenues (a) | 23.6% | 14.8% | 21.9% | 17.1% | NA | 13.6% | 12.9% | 9.9% | -17.5% | ||||||||
Commissions | 19.8% | 12.5% | 13.1% | 20.3% | NA | 13.1% | 13.0% | 10.4% | 12.9% | ||||||||
Investment Banking Revenues | 21.4% | 17.0% | 22.7% | 15.2% | NA | 11.7% | 9.0% | 4.9% | 4.0% | ||||||||
Principal Transactions | 40.3% | 14.9% | 17.8% | 11.4% | NA | 12.8% | 5.2% | 2.4% | NM | ||||||||
Net Income | 74.2% | 21.1% | 75.4% | 24.7% | NA | 51.7% | 9.9% | -1.1% | NM | ||||||||
Earnings per Share | 74.2% | 37.0% | NA | 23.9% | NA | 56.1% | 5.5% | NM | NM | ||||||||
Dividends per Share | 26.3% | 1.7% | NA | 17.9% | NA | 15.5% | 12.9% | 20.2% | 0.0% | ||||||||
Last 12 Months Information | |||||||||||||||||
Gross Revenues | $716.5 | $4,019.5 | $3,818.6 | $1,298.5 | $11,040.0 | $20,703.8 | $10,391.0 | $4,985.0 | $8,086.0 | ||||||||
Net Revenues | 686.2 | 2,258.9 | 1,904.8 | 1,294.6 | 2,781.0 | 9,744.8 | 3,862.0 | 3,077.1 | 2,421.0 | ||||||||
Commissions | 163.3 | 581.9 | 437.3 | 621.9 | 452.0 | 2,917.6 | 479.0 | 1,156.0 | 331.0 | ||||||||
Investment Banking Revenues | 241.0 | 377.8 | 767.5 | 97.0 | 652.0 | 1,165.2 | 1,076.0 | 295.3 | 413.0 | ||||||||
Principal Transaction Revenues | 125.9 | 944.4 | 421.6 | 216.0 | 1,227.0 | 2,406.3 | 1,366.0 | 814.5 | 493.0 | ||||||||
Net Income | 82.4 | 298.9 | 159.0 | 148.6 | 202.0 | 1,061.5 | 532.0 | 2.7 | 132.0 | ||||||||
Last Twelve Months Earnings per Share | $5.39 | $3.40 | $2.42 | $2.64 | $1.59 | $3.72 | $4.06 | $(0.26) | $0.58 | ||||||||
Current Implied Dividend per Share | $0.80 | $0.60 | $0.50 | $0.56 | $0.20 | $1.00 | $1.28 | $0.48 | $0.64 | ||||||||
Dividend Payout (Implied Div/LTM EPS) | 14.8% | 17.6% | 20.7% | 21.2% | 12.6% | 26.9% | 31.5% | NM | 110.3% | ||||||||
Net Margin (Gross Revenues) | 11.5% | 7.4% | 4.2% | 11.4% | 1.8% | 5.1% | 5.1% | 0.1% | 1.6% | ||||||||
Net Margin (Net Revenues) | 15.3% | 16.3% | 10.6% | 21.7% | 13.6% | 13.9% | 24.6% | 0.1% | 5.7% | ||||||||
Percentage Change in Line Items YTD 1994–YTD 1995 | |||||||||||||||||
Gross Revenues | 24.6% | 28.8% | 6.6% | 15.1% | 37.7% | 18.0% | 22.3% | 34.9% | 38.1% | ||||||||
Net Revenues | 23.6% | 20.9% | 36.5% | 15.4% | 3.0% | 1.6% | 20.0% | 28.2% | 80.2% | ||||||||
Commissions | 22.1% | 24.3% | 22.1% | -17.2% | 3.0% | 2.1% | 13.0% | 25.0% | -1.9% | ||||||||
Investment Banking Revenues | 28.1% | 18.3% | 63.2% | -9.5% | 24.8% | -7.3% | 33.3% | 4.9% | -19.4% | ||||||||
Principal Transaction Revenues | 8.0% | 21.3% | 79.3% | -1.7% | -16.4% | 3.8% | 44.3% | 76.5% | NM | ||||||||
Net Income | 22.6% | 40.9% | 42.1% | 26.6% | 207.1% | 5.5% | 57.6% | -56.8% | NM | ||||||||
Earnings per Share | 24.2% | 51.2% | 48.1% | 4.2% | 243.2% | -25.9% | -2.5% | -100.0% | NM | ||||||||
Dividend per Share | 15.0% | 0.0% | NA | 10.5% | -40.0% | 13.6% | 8.0% | 0.0% | 0.0% | ||||||||
Business Composition Analysis | |||||||||||||||||
Revenue Source as Percentage of Net Revenues | |||||||||||||||||
Commissions | 23.8% | 25.8% | 23.0% | 48.0% | 16.3% | 29.9% | 12.4% | 37.6% | 13.7% | ||||||||
Investment Banking Revenues | 35.1% | 16.7% | 40.3% | 7.5% | 23.4% | 12.0% | 27.9% | 9.6% | 17.1% | ||||||||
Principal Transactions | 18.3% | 41.8% | 22.1% | 16.7% | 44.1% | 24.7% | 35.4% | 26.5% | 20.4% | ||||||||
Other | 22.7% | 15.7% | 14.6% | 27.8% | 16.2% | 33.4% | 24.4% | 26.4% | 48.9% | ||||||||
Average ROE for Previous Three Years | 24.0% | 24.4% | 27.8% | 20.3% | NA | 23.8% | 17.7% | 17.5% | 11.0% | ||||||||
Source: DP Eberling, “Donaldson, Lufkin & Jenrette – Company Report,” Prudential Securities, December 15, 1995 and Company Reports | |||||||||||||||||
(a) Net revenues are net of interest expense to finance U.S. government and agency instruments. | |||||||||||||||||
Lehman | Merrill | Morgan | Salomon | ||||||||||||||
Calculation Section | Alex. Brown | Bear Stearns | DLJ | A.G. Edwards | Brothers | Lynch | Stanley | PaineWebber | Brothers | ||||||||
Goodwill | – | – | – | – | 182.00 | – | – | – | – | ||||||||
1990 Revenues | 271.70 | 2,376.10 | 1,885.40 | 644.30 | NA | 11,150.80 | 5,869.60 | 2,978.50 | 8,946.00 | ||||||||
1994 Revenues | 605.50 | 3,305.70 | 3,621.50 | 1,208.30 | 9,190.00 | 18,233.10 | 9,376.00 | 3,964.10 | 6,278.00 | ||||||||
YTD 1994 | 451.70 | 2,479.00 | 2,964.20 | 597.10 | 4,901.00 | 13,749.30 | 4,554.00 | 2,924.80 | 4,750.00 | ||||||||
YTD1995 | 562.70 | 3,192.80 | 3,161.30 | 687.30 | 6,751.00 | 16,220.00 | 5,569.00 | 3,945.70 | 6,558.00 | ||||||||
1990 Net Revenues | 250.40 | 1,117.00 | 681.80 | 639.60 | NA | 5,786.90 | 2,158.20 | 1,736.30 | 2,987.00 | ||||||||
1994 Net Revenues | 583.60 | 1,942.70 | 1,504.90 | 1,203.10 | 2,738.00 | 9,624.50 | 3,501.00 | 2,535.40 | 1,386.00 | ||||||||
YTD 1994 | 435.60 | 1,516.10 | 1,096.90 | 593.90 | 1,438.00 | 7,531.80 | 1,801.00 | 1,920.90 | 1,290.00 | ||||||||
YTD1995 | 538.20 | 1,832.30 | 1,496.80 | 685.40 | 1,481.00 | 7,652.10 | 2,162.00 | 2,462.60 | 2,325.00 | ||||||||
1990 Commission | 68.00 | 307.90 | 228.90 | 329.40 | NA | 1,756.90 | 275.10 | 652.20 | 207.00 | ||||||||
1994 Commission | 140.00 | 492.90 | 375.10 | 690.60 | 445.00 | 2,870.50 | 449.00 | 970.30 | 336.00 | ||||||||
YTD 1994 | 105.60 | 366.10 | 280.90 | 399.10 | 230.00 | 2,232.30 | 231.00 | 742.10 | 257.00 | ||||||||
YTD1995 | 128.90 | 455.10 | 343.10 | 330.40 | 237.00 | 2,279.40 | 261.00 | 927.80 | 252.00 | ||||||||
1990 Inv. Banking Fees | 91.80 | 176.60 | 239.20 | 57.90 | NA | 795.40 | 652.20 | 234.80 | 416.00 | ||||||||
1994 Inv. Banking Fees | 199.10 | 331.00 | 542.40 | 102.00 | 572.00 | 1,239.50 | 919.00 | 284.50 | 486.00 | ||||||||
YTD 1994 | 149.30 | 256.00 | 356.40 | 52.50 | 323.00 | 1,011.90 | 471.00 | 221.60 | 377.00 | ||||||||
YTD1995 | 191.20 | 302.80 | 581.50 | 47.50 | 403.00 | 937.60 | 628.00 | 232.40 | 304.00 | ||||||||
1990 Pre-Tax Profits | 30.60 | 461.10 | 136.80 | 141.40 | NA | 1,441.40 | 901.80 | 472.10 | 2,389.00 | ||||||||
1994 Pre-Tax Profits | 118.50 | 803.90 | 263.30 | 217.90 | 1,345.00 | 2,334.90 | 1,104.00 | 519.00 | (550.00) | ||||||||
YTD 1994 | 92.90 | 658.80 | 199.50 | 114.80 | 718.00 | 1,881.20 | 591.00 | 386.50 | (234.00) | ||||||||
YTD1995 | 100.30 | 799.30 | 357.80 | 112.90 | 600.00 | 1,952.60 | 853.00 | 682.00 | 809.00 | ||||||||
1990 Net Income | 7.70 | 103.00 | 13.00 | 54.60 | NA | 191.80 | 270.30 | 33.00 | 396.20 | ||||||||
1991 Net Income | 52.00 | 232.50 | 57.80 | 91.80 | NA | 696.10 | 475.10 | 150.70 | 720.20 | ||||||||
1992 Net Income | 58.60 | 297.30 | 147.00 | 113.90 | NA | 893.80 | 510.50 | 213.20 | 736.00 | ||||||||
1993 Net Income | 89.20 | 474.30 | 186.10 | 151.20 | 355.00 | 1,394.30 | 786.10 | 246.20 | 827.00 | ||||||||
1994 Net Income | 70.90 | 221.70 | 123.00 | 132.10 | 115.00 | 1,016.80 | 395.00 | 31.60 | (399.00) | ||||||||
YTD 1994 | 50.80 | 188.80 | 85.50 | 62.10 | 42.00 | 810.40 | 238.00 | 50.90 | (242.00) | ||||||||
YTD1995 | 62.30 | 266.00 | 121.50 | 78.60 | 129.00 | 855.10 | 375.00 | 22.00 | 289.00 | ||||||||
1990 EPS | 0.50 | 0.78 | NA | 1.09 | NA | 0.80 | 3.37 | (1.44) | 2.08 | ||||||||
1994 EPS | 4.60 | 2.75 | 1.98 | 2.57 | 0.69 | 4.75 | 4.18 | 0.41 | (4.31) | ||||||||
YTD 1994 | 3.27 | 1.27 | 0.91 | 1.67 | 0.37 | 3.98 | 4.76 | 0.67 | (2.67) | ||||||||
YTD1995 | 4.06 | 1.92 | 1.35 | 1.74 | 1.27 | 2.95 | 4.64 | – | 2.22 | ||||||||
1990 Dividends | 0.27 | 0.59 | NA | 0.29 | NA | 0.50 | 0.75 | 0.23 | 0.64 | ||||||||
1994 Dividends | 0.68 | 0.63 | NA | 0.56 | 0.18 | 0.89 | 1.22 | 0.48 | 0.64 | ||||||||
YTD 1994 | 0.50 | 0.45 | NA | 0.38 | 0.25 | 0.66 | 0.87 | 0.36 | 0.48 | ||||||||
YTD1995 | 0.58 | 0.45 | NA | 0.42 | 0.15 | 0.75 | 0.94 | 0.36 | 0.48 | ||||||||
Common Equity | |||||||||||||||||
1990 | 170 | 1,076 | 294 | 386 | 3,094 | 2,002 | 583 | 3,065 | |||||||||
1991 | 222 | 1,072 | 340 | 464 | 3,518 | 2,396 | 712 | 3,203 | |||||||||
1992 | 274 | 1,180 | 455 | 580 | 4,269 | 2,930 | 892 | 3,496 | |||||||||
1993 | 346 | 1,603 | 750 | 740 | 5,292 | 3,759 | 1,195 | 4,319 | |||||||||
1994 | 373 | 1,869 | 820 | 881 | 5,199 | 3,836 | 1,530 | 3,480 | |||||||||
Average 1991 | 196 | 1,074 | 317 | 425 | – | 3,306 | 2,199 | 648 | 3,134 | ||||||||
Average 1992 | 248 | 1,126 | 397 | 522 | – | 3,894 | 2,663 | 802 | 3,350 | ||||||||
Average 1993 | 310 | 1,392 | 602 | 660 | – | 4,781 | 3,345 | 1,044 | 3,908 | ||||||||
Average 1994 | 360 | 1,736 | 785 | 811 | – | 5,246 | 3,798 | 1,363 | 3,900 | ||||||||
ROEs | |||||||||||||||||
Average 1991 | 26.5% | 21.6% | 18.2% | 21.6% | #VALUE! | 21.1% | 21.6% | 23.3% | 23.0% | ||||||||
Average 1992 | 23.6% | 26.4% | 37.0% | 21.8% | #VALUE! | 23.0% | 19.2% | 26.6% | 22.0% | ||||||||
Average 1993 | 28.8% | 34.1% | 30.9% | 22.9% | #DIV/0! | 29.2% | 23.5% | 23.6% | 21.2% | ||||||||
Average 1994 | 19.7% | 12.8% | 15.7% | 16.3% | #DIV/0! | 19.4% | 10.4% | 2.3% | -10.2% | ||||||||
3 Yr Average | 24.0% | 24.4% | 27.8% | 20.3% | #VALUE! | 23.8% | 17.7% | 17.5% | 11.0% |
Selecting comparable companies for the purpose of relative valuation can be a cumbersome process as we have studied that no two companies are similar. There businesses might be similar, but the way the management of a company runs it own business can differ from others. And with the amount of diversification that the companies are doing their businesses these days, it becomes very hard to find an exactly same company. Therefore, we look at the companies which are next to similar. We look for the companies who operate in the similar business groups and have more or less similar percentage of revenue.
In the above given case there are various competitors and it is hard to choose the ones for the purpose of relative valuation. Most of the companies are diversified into various business and have revenue percentage different from others. But the most closet to DLJ is Alex, Brown & Sons in terms of revenue share. Almost similar revenue share for commission but they vary in Investment Banking Revenues and Principal Transactions. Same is the case with Bear Stearns. Therefore, we are considering both of these firms for the purpose of relative valuation.
Coming to AG Edwards, there are pretty visible difference between the two companies. On one hand DLJ serves institutional clients, AG Edwards serves retail clients. Also, difference in revenue streams can be seen easily. That is AG Edwards is not considered for the purpose of relative valuation.
Coming to the three big firms, Lehman Brothers, Merrill Lynch and Morgan Stanley, they have to be considered for the purpose of relative valuation as they are the market leaders in their segments and most of the time the share price of a company who belongs to a particular sector moves along the lines of the market leader. Therefore, for the purpose of relative valuation these firms are required to be taken into consideration.
Paine Webber is not considered for the purpose of relative valuation as the two company differ in terms of their target clients. Moreover the revenue streams of the two company are different.
There is no point taking Salomon Brothers, as it consist of two subsidiaries, out of which one operates in oil segment and almost 50% of the revenue of the company comes from that oil business which is totally out of the sector.
For the purpose of relative valuation, we mostly consider the Price/EBITDA and Price /Earning multiple. But because of the lack of information given in the case we will be able to take only PE ratio and Book Value to Earnings Ratio. In PE also we would be taking the Last Twelve Months earning as estimated earning might be wrong and the IPO has to be valued at the current price not estimated earnings.
Price/LTM EPS |
Price/Book Value |
|||
Alex Brown |
8.7 |
Alex Brown |
1.6 |
|
Bear Stearns |
5.9 |
Bear Stearns |
1.2 |
|
Lehman Brothers |
14.2 |
Lehman Brothers |
0.8 |
|
Merrill Lynch |
15.3 |
Merrill Lynch |
1.8 |
|
Morgan Stanley |
21.6 |
Morgan Stanley |
1.7 |
|
Average PE |
13.14 |
Average PE |
1.42 |
|
LTM EPS of DLJ |
2.42 |
Book Value of DLJ |
19.72 |
|
Share Price |
31.80 |
Share Price |
28.00 |
Out of these two valuation techniques more weightage would be given for the PE multiple valuation, thus 75% is allocated to the PE multiple and 25% to P/BV. This is because the book value of a company may not be able to show the correct picture.
The arrived valuation price would be discounted at 20% to arrive at the IPO price. 20% discount is to make sure that the shares are fully subscribed.
Share Price Calculation | Weightage | Price | |
Price/LTM EPS |
31.80 |
75% |
23.85 |
Price/Book Value |
28.00 |
25% |
7.00 |
Valuation Price |
30.85 |
||
Discount |
20% |
||
IPO Price |
24.68 |
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