Credit Suisse Group's bid to buy Donaldson, Lufkin & Jenrette Inc. will swiftly bulk up its presence in an area that has been increasingly attractive to banking companies in the last year: merchant banking.

Thanks to a long-running bull market and last year's financial reform law, commercial banks have been given new reasons to expand and, in some cases, spotlight their merchant banking activities.

"The big banks were pushing so hard for the Gramm-Leach-Bliley Act because merchant banking was the one [activity] that separated them from the investment banks," said Robert Kabel, Washington counsel for the Bank Private Equity Coalition.

Though Gramm-Leach-Bliley was heralded as easing the way for banks to merge with insurers or brokerage firms, it also had an immediate impact on the merchant banking activities of many larger banks. Since then, many large banking companies have converted to a financial holding company structure in order to take advantage of their expanded latitude in merchant banking.

The efforts make sense, observers said, particularly as banks try to compete head-to-head with Wall Street firms to offer a complete array of corporate advisory services.

"They're complementary businesses," said David Berry, director of research at Keefe, Bruyette & Woods Inc. "A lot of merchant banking bubbles up through investment banking, and it can run the other way, too," he said.

Axa Financial said Wednesday it had agreed to sell its majority-owned investment banking arm, Donaldson, Lufkin & Jenrette, to Credit Suisse Group for $11.5 billion.

Credit Suisse will pay $90 a share in cash to public shareholders of DLJ and $2.4 billion in cash and $5.6 billion in stock for Axa Financial stake. DLJ will become part of the Swiss company's existing U.S. securities operation, Credit Suisse First Boston.

DLJ invested more than $460 million last year in private equity projects through The Sprout Group and DLJ Capital units, which ranked 7th and 16th respectively, according to Venture Economics. Credit Suisse First Boston invested about $100 million, ranking 24th, according to Venture Economics.

Combined, the companies' private equity investing would have been roughly in line with sixth-ranked Blackstone Group and behind Goldman Sachs Group, Chase Manhattan Corp., and Hicks Muse Tate & Furst, according to Venture Economics.

DLJ claims to have the oldest venture capital group on Wall Street in The Sprout Group and has made it quite clear that its direct activities criss-cross all aspects of its business. Under the title "Private Equity - a "Magnet" Business," the firm includes a diagram in its 1999 investor fact book linking core DLJ businesses like high-yield underwriting and trading or leveraged buyout clients to its private equity group. By the end of last year, it had close to $16 billion in funds under management.

And its combination with Credit Suisse should only reinforce that presence - particularly in Europe. Though smaller in scope than its merger partner, Credit Suisse First Boston makes its own merchant banking investments through CSFB Private Equity.


The combination also builds a powerhouse in the leveraged finance arena.DLJ, a force to be reckoned with in junk bonds, is the second-largest U.S. high-yield underwriter, according to first-half data from Thomson Financial Securities Data. The company had been swapping places with Goldman Sachs Group for the top spot. Credit Suisse First Boston, ranked as the tenth-largest junk bond underwriter in the first half, has been moving up the leveraged lending tables, climbing from tenth last year to ninth in the first half, according to Securities Data. DLJ's leveraged lending shop, though suffering from defections and a significant drop in market share in recent months, still draws praise from competitors as one of the most forceful investment banks in a business once dominated by commercial banks.

"It's a perfect marriage," said Bruce Ling, global head of syndicated finance at First Boston. Both areas were "a very important consideration in this merger," he added. And DLJ adds mid-cap muscle to First Boston's focus on Fortune 500 companies, he said.

Helen Stock contributed to this article.

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