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New DLJdirect Shareholders Left Holding Bag


Not all investors in Donaldson, Lufkin & Jenrette are richer and happier today.

On the contrary, the scores of individual investors who gobbled up shares of its DLJdirect online brokerage subsidiary Tuesday are both much poorer and plenty disappointed.

DLJdirect's stock surged 39% on Tuesday amid rumors that Credit Suisse Group would buy DLJ. DLJdirect investors expected to make a quick buck because they assumed that Credit Suisse also would scoop up the electronic brokerage unit, analysts said.

But when Credit Suisse unveiled its $11.5-billion offer for DLJ on Wednesday, the firm made a point of saying that it is not bidding for the roughly 18% of DLJdirect that is owned by the public.

The revelation drove DLJdirect shares down 21% as investors who rushed to buy the stock Tuesday scrambled to dump it Wednesday.

"When they [bought DLJdirect stock Tuesday] they probably thought they were smart because everybody else was running to buy DLJ," said Alan Weichselbaum, an analyst at Gerard Klauer Mattison & Co. in New York. "There were probably a lot of individuals who went in [on Tuesday] and got suckered."

After rising as high as $11.50 on Tuesday in the heaviest trading since DLJdirect went public in May 1999, the shares slid $2.31 to $8.69 on Wednesday.

By contrast, DLJ shares rose 5% to $88.25.

"Sheesh," moaned one individual on an Internet message board. "I didn't intend for [DLJdirect] to go down while DLJ goes up."

The confusion surrounding DLJdirect shares may have been exacerbated by the fact that DLJdirect is a so-called tracking stock.

Rather than being a separate company, DLJdirect is a subsidiary of DLJ. Though DLJdirect shares are supposed to track the performance of the online brokerage unit, its investors own shares of the parent company rather than the subsidiary.

That may have led some investors to mistakenly believe that Credit Suisse was obligated to buy the 18% of DLJdirect owned by the public as well as the 82% it would automatically pick up by acquiring the parent company itself, analysts said.

Adding to the confusion is a pledge that DLJ made 15 months ago when it sold a minority stake in DLJdirect to the public.

At the time, DLJ said that if, under specific circumstances, it redeemed DLJdirect shares within three years it would pay investors a premium of 15% to 25% over the market price.

If applied to the Credit Suisse deal, the formula would have paid DLJdirect shareholders a 21% premium. However, Wednesday's proposed buyout does not require DLJ to redeem the shares of its online brokerage subsidiary.

Despite the short-term disappointment, analysts said the long-term outlook for DLJdirect is positive, and predicted that Credit Suisse will eventually buy the publicly held DLJdirect shares.

DLJdirect has an operation in Britain and a joint venture in Japan. Both units should fit well with Credit Suisse, whose global presence can speed DLJdirect's overseas growth, said Russell Keene, an analyst at Keefe, Bruyette & Woods in New York.

DLJdirect also owns a promising technology unit that helps other financial services companies set up Web sites.

"From a business perspective, [the outlook for DLJdirect] is a lot brighter," Keene said.

Until Tuesday, DLJdirect shares had been on a steady decline alongside those of many other online brokerage firms. The stock rose as high as $45.63 on the day following its May 1999 initial public offering, but hasn't come close to that level since.

Investors have soured on e-brokers in the last year, believing that they're too dependent on the fluctuations of the market and the whims of fickle individual investors.

As the market sagged in the second quarter, DLJdirect's revenue from commissions slipped 39% from the first quarter as its daily trading volume ebbed by 35%, according to Chase H&Q.

DLJdirect has catered to wealthier individual investors and has generally drawn high marks from independent rating services. But in an industry where firms dole out enormous sums on advertising, DLJdirect has been criticized for spending too much money to draw too few new customers.

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