IPO Could Raise DLJdirect's Profile

A DLJdirect IPO could provide just the spark the online broker needs.

Jersey City, N.J.-based DLJdirect hasn't grabbed much attention lately. The firm's market share fell to 3.7% in the fourth quarter, down from 5% just a year ago, according to Credit Suisse First Boston. It ranks seventh, with less than half the average daily trades of No. 6 broker Ameritrade (AMTD).

Yet DLJdirect has been trading online longer than most of its competitors. As long ago as 1988, the company introduced services with online pioneer Prodigy and then with America Online (AOL) before it was a dominant player online. It went on the Internet by itself in 1996's second half.

As it has grown, the company changed its name and laid the foundation to launch online trading in Japan and the U.K. Now, it faces the possibility of taking a step that could have an even bigger impact on its business. Donaldson Lufkin & Jenrette (DLJ) -- the broker's owner -- may decide sometime this quarter to spin off DLJdirect. Such a move likely would give DLJdirect more freedom (as well as money and hype) to market its reputation for quality and innovation in the noisy competition among online brokers.

"Going public will enable them to get more in the public eye," says Anurag Pandit, part of the small-cap equity management team at John Hancock Advisors and an industry investor. "Online trading is about building mind share and market share. They have a good name on the Street, a respected name. If they can leverage that, it would be a good thing."

Indeed, DLJdirect's reputation is derived from its service and technology. Blake Darcy, DLJdirect's chief executive, says quality has been the watchword all along. "Even though DLJ was an institutional type of firm, they still felt the reputation was very important," Darcy says. "It helped us dramatically to have that focus on quality."

With Suresh Kumar as chief technology officer, the broker quickly made a name as a technological leader. One industry insider calls Kumar "the best technologist I've ever met," adding that DLJdirect has long been an innovator on the front end and back end. And Pandit at John Hancock commends DLJdirect's services, putting it in the company of industry leaders such as E*Trade (EGRP) and calling DLJdirect a "class-act operation."

"They've been market leaders," says Peter Ellison, president of Corporate Insight, which monitors online brokerage services. He points to DLJdirect's MarketSpeed product, which is downloadable software for trading and getting market information, as an example. It is many times faster than standard browser-based transactions, Ellison says. (Corporate Insight won't disclose its clients, but counts top online brokers among its customers.)

But DLJdirect has a lower profile than brokers without such a strong tech track record, such as Ameritrade or Toronto-Dominion Bank's (TD) Waterhouse unit. Part of the reason is the incremental approach that the broker has taken and its focus on high-end customers instead of the mass market.

An Evolving Strategy Moves Toward the High End

After joining DLJ in 1984, Darcy was picked to create a unit at DLJ's Pershing division that focused on providing turnkey discount brokerage services to banks and insurance companies. He launched PC Financial Network in 1988, one of the first online discount brokerage services, to Prodigy's nascent customer base. In mid-1995, PCFN launched with rapidly growing AOL, after building an entirely new service for the partner. (PCFN also introduced a service with CompuServe a year and a half later.)

PCFN debuted on the Internet in 1996's third quarter, probably six months later than it should have, says Darcy. In early 1997, Darcy spearheaded a strategy overhaul to figure out where DLJdirect wanted to be in the market. The plan that emerged in October that year was to focus on the DLJ name (including a switch to DLJdirect), high-quality technology and products, access to institutional research and IPOs and strong customer service. It also cut commissions to $20 from $29.95 for active traders, another move Darcy says came too late.

DLJdirect decided to let Charles Schwab (SCH), Fidelity and E*Trade fight it out for the middle market and focus on the higher end.

DLJdirect continues to refine the strategy, honing services for customers with $1 million and more in assets, even visiting them in person. It seems to be paying off. While online transaction growth hasn't kept pace with brokers that attract more active traders or convert their traditional traders online, asset growth has been strong, according to Piper Jaffray. The account base grew about 36% in 1998, according to preliminary numbers, but the asset base grew 94%.

"They're after quality over quantity, and that's what they've done," says analyst Tim Klein at Piper. But it's a strategy that's still evolving. As recently as the third quarter, DLJdirect ranked 10th among online brokers in assets per account, according to Piper. One reason for the low ranking, however, is that some accounts DLJdirect attracted as PCFN are now relatively inactive. Piper hasn't participated in underwriting for DLJ.

Flashy Competitors

But DLJdirect's history runs up against the dramatic, showy changes and expensive marketing campaigns of the brokers with larger market share. Judging by the success of E*Trade, Schwab and Fidelity, brand is a powerful force in online trading. Even though DLJdirect is going for a high-end clientele and not bulky market share, marketing matters. And DLJdirect has to become a well-known brand off Wall Street, where DLJ is known and respected. So with two new markets to make a name in, the question of flash rears its head.

"At this point, we're fine doing it on our own," says Darcy, pointing out that DLJdirect is profitable. But he says there are limits to what DLJ -- a margin-conscious investment bank -- is willing to spend on marketing. The allure of becoming a helium-filled online broker stock aside, greater freedom to spend could be a compelling reason to go public.

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