Get Big Fast

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DLJdirect
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Content

• Overview of the company
• Goals strategies
• Competitors
• Primary stakeholders
• GBF

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Overview of the Company

• DLJdirect is an online brokerage company
• Blake Darcy is the CEO
• Trade 4 of online brokerage trades
• High profile deals led by DLJ include Fleets 16
  billion acquisition of BankBoston, Olivettis 65
  billion hostile takeover of Telecom Italia, TCIs
  69 billion merger with ATT

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Some history

• Donaldson, Lufkin Jenrette, Inc. was founded in
  1959
• Initially a boutique investment bank known for
  outstanding institutional equity research
• Went public in 1995
• At year-end 1998 DLJ was 72 owned by French
  insurance giant AXA

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Goals Strategies

• The goal was to attract affluent, self-directed
  investors who would value access to DLJs equity
  research and to IPOs underwritten by the parent
  companys investment bank.

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? Over companys goals

• Such customers were highly profitable, yet Darcy
  wondered if this target market was too narrow.
  Was the company forfeiting opportunity by not
  aggressively pursuing day traders and/or less
  affluent mainstream investors?

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Earlier Strategies

• DLJ pursued an aggressive strategy to break into
  the bulge bracket of leading Wall Street firms
  during 1990s.
• Also accelerated the expansion of its investment
  banking ad trading operations into international
  markets
• During the second half of the 1990s, DLJs
  Banking Group continued to serve smaller
  companies in need of high-margin equity and debt
  financing and merger advice, but gradually
  broadened its client base to include larger
  corporations.

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Earlier Strategies

• These strategies resulted in
• Significant growth in revenues, profitability,
  and shareholder value
• For fiscal 1998, the companys net revenues were
  4.0 billion and net profits were 370 million
• By mid-1999, the market value of the firms
  equity was worth nearly 9 billion
• As of June 1999, DLJ was ranked 1 underwriter of
  U.S. high-yield debt issues.

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Pershing Division

• In 1977, DLJ, Inc. diversified into securities
  clearing business through the acquisition of
  Pershing Co.
• Clearing agents provided a range of trading and
  back office processing services that allowed
  their clients to complete customers
  transactions
• By year-end 1998, Pershing served over 550
  correspondents with a total of 2.5 million
  customers and account balances of 279 billion
• It was a significant profit generator for DLJ

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Entering the Online Brokerage Business

• Prodigy was a mass market online service created
  during mid-1980s by a joint venture between IBM
  and Sears
• Prodigys managers decided to offer an exclusive
  online discount brokerage service and approached
  established brokerage companies for help in
  creating the service
• Nobody was interested, except Pershing

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Entering the Online Brokerage Business

• Why Pershing?
• It was consistent with its entrepreneurial
  corporate culture
• Every year the division launched a few new
  businesses to serve the rapidly evolving needs of
  its correspondents
• Pershing had successfully confronted channel
  conflicts before

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Entering the Online Brokerage Business

• The new venture was named PC Financial Network,
  avoiding an obvious brand affiliation with either
  Pershing or DLJ
• The management could experiment with business
  strategy
• PCFN offered discounted commission rates
• Had minimal marketing and customer acquisition
  costs
• Relied on e-mails to existing Prodigy customers

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Entering the Online Brokerage Business

• Despite PCFN success, the new unit struggled
  inside Pershing to secure resources to build the
  data processing systems required to support its
  growth
• Management decided to abandon the Prodigy
  exclusivity model and pursue a multiple-channel
  distribution strategy instead (partnership with
  AOL).

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PCFN becomes DLJdirect

• PCFN was pressured by competitors lower
  commission rates
• Another source of pressure came from its parent
  company
• If PCFN to became DLJdirect, they would have the
  access to the parent companys research and to
  IPOs underwritten by its investment bank

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DLJdirect

• DLJdirects management decided to lower its
  commission rates to 20
• Temporary revenue slippage in 1997, but by 1998
  commission revenues increased by 55 over 1997,
  active accounts grew by 46, and total
  transaction volumes rose by 84
• The next challenge
• How to respond to its competitors marketing
  campaigns?
• Darcy felt that DLJdirect had to increase its
  commitment to marketing and customer acquisition
  efforts in order to prevent further market share
  erosion

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DLJdirect

• DLJdirect lacked its competitors spending power
• Options
• Sell its online brokerage business, and let
  someone else fund its growth
• It could be separated completely from the parent
  company through a spin-off or the parent could
  retain management control and partial equity
  ownership of the online brokerage through a
  separately valued tracking stock

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DLJdirect

• After weighing all the concerns, DLJ management
  decided to proceed with a tracking stock IPO,
  with DLJ, Inc. retaining 84 of DLJdirects
  equity
• The tracking stock was issued in May 1999 at 20,
  valuing the online unit at 2 billion

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Online Brokerage Industry

• Mostly technologically-savvy, aggressive
  investors
• Held multiple accounts with different brokerages
• A tremendous growth in the online brokerage
  business was based on few factors
• Falling computer prices
• Development of faster modems that made timely
  online trading possible
• Growing acceptance of the Internet as a
  legitimate channel for retail purchases
• Financial services were well suited for the
  Internet

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Customer segmentation

• Retirement by the Book (RBB)
• Moderate risk tolerance, looking to invest for a
  comfortable retirement
• Interested in reliable trade execution,
  user-friendly interfaces, and variety of
  financial offerings
• Portfolio Cruise Control (PCC)
• Average total assets of over 350,000
• Most wealthy and oldest customer segment
• The most important feature was advice and quality
  information

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Customer segmentation

• Aggresively Affluent (AA)
• The most common segment among Internet investors
  in the late 1990s
• High-net worth individuals who traded more than
  10 times a year
• AAs sought timely execution and low trading
  commission fees, and typically were willing to
  pay a modest premium for consistent high-quality
  service
• Get Rich Fast (GFF)
• Day traders
• The most visible clients of online brokers
• Young individuals with modest net worth
• Made frequent, small trades in the hopes of
  accumulated gains related to minute-by-minute
  fluctuations in stock prices

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Competitors

• Schwab
• ETrade
• Fidelity
• Merrill Lynch
• Datek
• Schwab and ETrade were dominant competitors in
  the online brokerage industry. Spending heavily
  on marketing and customer acquisition. Result
  strong brands, controlled over 40 of the market
  between them (1999).

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DLJdirects Operations

• Customer focus
• Web site and client offerings
• Marketing strategy
• Clearing and customer service operations

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Customer focus

• Focused on customer acquisition efforts
• Targeted self-directed, sophisticated online
  investors, who on average have higher account
  balances than other investors
• Specifically sought customers in the
  Aggressively Affluent segment they were more
  likely to buy large blocks of stock, trade of
  margin, and own a diverse array of financial
  investments
• Many of them were customers of DLJdirects
  competitors, seeking to move to a higher end
  online broker

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Web site and client offerings

• Web site contained the full range of information
  and transactional services that online investors
  had come to expect from the industry
• The site offered free access to news feeds and
  stock quotes and portfolio tracking services that
  provided alerts when share prices moved outside
  of a specified range
• The only brokerage firm to offer new customers
  the ability to apply online and begin trading
  immediately without forwarding cash to cover
  initial investment
• DLJdirects customers who maintained asset
  balances in excess of 100,000 had access to DLJ
  research
• DLJdirect provided tiered service levels for
  accounts with high asset balances
• DLJdirect was ranked near the top of the industry
  in terms of speed of execution

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Marketing strategy

• Pursued high end customers with a variety of
  marketing slogans
• In 1997 13 million spent on marketing 19 of
  total revenue
• 1998 increased marketing budget to 25 million
• In 1999 DLJdirect planned to spend 65 million on
  marketing
• 30 of the budget was spent online, including
  12.5 million per year for a two year
  distribution deal with AOL that featured
  DLJdirect as one of four online brokers within
  AOLs proprietary service

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Clearing and customer service operations

• DLJdirect had a partnership with Pershing
• It was beneficial because it reduced the need to
  invest in technical support, personnel, and
  infrastructure
• It also benefited from order flow rebates from
  Pershing
• On the other hand this relationship was costly
  DLJdirect was the only major online brokerage
  that didnt clear its own trades
• Customer service was critical to companys high
  end customers
• Telephone support was provided 24/7, free of
  charge

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Primary Stakeholders

• Customers
• Businesses

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GBF

• Network effects
• Medium to Strong
• They were focusing on client exclusivity
• Economies of scale
• Strong
• Costs are fixed
• Customer retention rates
• Stickiness is important
• High CR rates

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Success or Failure?

• A big question mark ?.
• It depends on many factors
• Marketing strategy
• Network effects implementation
• Customer retention rates
• Latest update
• DLJdirect as acquired by TD Waterhouse. The web
  site is no longer available

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Questions???