This Bank Keeps Growing And Growing And...

CSFB's acquisition of DLJ makes sense if the cultures mesh

Few were surprised when AXA Group Chairman and CEO Henri de Castries announced on Aug. 30 that he had finally found a buyer for U.S. investment bank Donaldson, Lufkin & Jenrette Inc. After all, the boyish-looking, 46-year-old de Castries had been hawking the French insurer's 72% stake in DLJ for at least three months. What did jolt bankers and insurers, however, was the name of the acquirer: Credit Suisse Group, Switzerland's financial-services powerhouse.

Just two weeks earlier, Credit Suisse Chief Executive Lukas Muhlemann had said that the bank and its investment-banking arm, Credit Suisse First Boston, wanted to expand but that the growth would be organic. "The primary thing is to grow under our own steam because acquisitions usually come with significant goodwill and financial costs," he declared. "In addition, the subsequent integration can lead to problems."

It certainly can. And in this case, there are likely to be plenty of them. Considerable overlap exists between CSFB and DLJ, especially in underwriting and trading. So analysts foresee lots of job losses. But DLJ CEO Joe L. Roby insists to BUSINESS WEEK that the overlap is "minimal" and that redundant jobs add up to "less than 10%" of the combined companies' 26,000 employees. Whatever happens, most of the heads are expected to roll at DLJ.

JUNK SALE. Credit Suisse's move comes just weeks after the July acquisition of PaineWebber Inc. by UBS--leading some observers to think Credit Suisse was playing catch-up with its Swiss archrival. But CSFB Chief Financial Officer Richard E. Thornburgh said that the DLJ talks predated the PaineWebber deal. Moreover, Credit Suisse got a better price. It's paying just under three times book value for DLJ, while UBS agreed to fork over 3.8 times book for PaineWebber.

The deal will make sense if it's well handled. DLJ had been struggling to compete against much larger rivals in the rapidly consolidating investment- banking world. The combined group would have ranked third in global mergers and acquisitions in the first half of this year, fourth in global equity underwriting, and third in global debt underwriting. And acquiring DLJ, the leading trader of junk bonds in the U.S., gives CSFB instant global standing in the high- yield debt market.

DLJ brings with it a well-established private equity business and DLJDirect, an online brokerage. "DLJDirect is at the cutting edge of retail distribution," boasts Thornburgh. He says the online operation, which CSFB will likely market aggressively in Europe, attracts "upscale, self-motivated" customers. It all helps in the drive to rise in the league tables, says Alex Nixon, a banking analyst at Merrill Lynch & Co. in London. "The integration of DLJ moves Credit Suisse further along in its aim of being one of the top four global bulge bracket players." The two banks combined would have had net income last year of $1.8 billion. By contrast, Goldman Sachs & Co.'s net was $3 billion in 1999.

NEXT TARGET? On the other side of the ledger, the deal frees AXA from DLJ. As an investment bank with volatile earnings, DLJ was always an uneasy bedfellow for an insurance company, even a relatively aggressive one like AXA. "Although it generated very high profits, it has a volatility and a risk that is different from other activities in the group," de Castries said at a Paris press conference. He was partially responsible for acquiring DLJ, which came as part of the package when AXA bought Equitable Cos. in 1991.

DLJ is now controlled by AXA Financial, AXA's 58%-owned U.S. subsidiary. AXA is expected to use the $8.1 billion proceeds from the sale--of which $2.4 billion comes in cash and $5.7 billion in Credit Suisse shares--to expand further into asset management and insurance.

In charge since last year, de Castries has shown a hearty appetite for acquisitions. In June, he agreed to buy New York investment manager Sanford C. Bernstein & Co., a move that adds wealthy clients and stock research. His next target could be the huge Italian insurer Assicurazioni Generali, say some observers. De Castries isn't talking, but his DLJ acquisition could kick off an eventful autumn in transatlantic finance.