Focus on Wealthy Individuals Sets DLJdirect Up for Success

The success of the DLJ unit, whose IPO was priced last evening, isn't strongly linked with Internet stocks' health.
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DLJdirect's

(DIR:NYSE) well-heeled upbringing should give the online brokerage firm a solid footing even if Internet stocks continue to slip.

The unit of the understated Wall Street investment bank

Donaldson Lufkin & Jenrette

(DLJ)

Tuesday raised more than $320 million in an initial public offering underwritten by DLJ.

The deal gives the public a 16% stake in the Jersey City, N.J.-based brokerage. The new DLJ shares sold in the offering will track the performance of DLJdirect and will begin trading this morning on the

New York Stock Exchange

.

The recent pullback in Internet stocks, the favorite vehicle of many active online investors, stands to reward DLJdirect's practice of catering to high net worth individuals even as it burdens many competitors. DLJdirect's focus could protect the online brokerage firm from any steep drop in trading activity and revenue growth that might accompany a lasting bear market.

The success of the offering, which was priced at the top of its range at $20 a share Tuesday evening, illustrates investors' faith in DLJ and the resiliency of the Internet IPO market. Net IPOs were seemingly dealt a heavy

blow Tuesday when the highly anticipated

barnesandnoble.com

(BNBN:Nasdaq) IPO rose just 27% on its first trading day, far below the average 114% first-day gain Net IPOs had enjoyed in the year to date.

The comparitively weak performance of the

Barnes & Noble

(BKS) - Get Report

spinoff loomed larger in light of the recent suffering of Internet stocks.

TheStreet.com Internet Sector

index is about a third off its 52-week high, and online brokers such as

E*Trade

(EGRP)

,

Ameritrade

(AMTD) - Get Report

and industry leader

Schwab

(SCH)

have led the decline, with Schwab and E*Trade down roughly a third from their highs and Ameritrade off by more than half.

Still, DLJdirect's IPO is expected to be successful in the aftermarket, given the firm's stature in the fast-growing online brokerage community and the vast seas of liquidity chasing players in it.

"

Datek

just

raised $300 million in a private placement," says Tom Taulli, author of the book

Investing in IPOs

. "There is a lot of money that wants to go into these sectors, and even though the valuations of online brokerages have fallen, they are still pretty high."

Online brokers have grown quickly largely because of their emphasis on cheap, fast trading. But one portfolio manager says they would be better off improving the quality of their accounts, not just increasing their numbers. That could play to DLJdirect's strengths.

"I would prefer to see the customer base really building into more of an all-season mainstream investor and for there to be less focus on people trying to supplement their incomes by daytrading stocks in a bull market," says Steven Appledorn, senior portfolio manager of the

Munder

(MNNAX) - Get Report

NetNet fund, a $2.5 billion fund with positions in Ameritrade, E*Trade and Schwab.

DLJdirect's emphasis on asset growth has left it behind some of its peers by some measures. According to

U.S. Bancorp Piper Jaffray

, DLJdirect is the seventh-largest online brokerage. It boasts more than 240,000 accounts, compared with leader Schwab's 2.5 million online accounts and No. 2 E*Trade's 1 million.

But when it comes to assets per account, DLJdirect outshines its peers: It has about $46,000 in assets per account, while E*Trade, for instance, has just $23,000.

If DLJdirect sticks to building a niche among high net-worth investors, the company is likely to be judged more like Schwab, the discount brokerage that is recasting itself as a full-service provider, than some competitors that aim to deliver breakneck account growth, says Scott Appleby, an e-finance analyst at

BancBoston Robertson Stephens

. The firm isn't an underwriter in the DLJdirect offering.

"We wouldn't necessarily expect to see the same increase out of Schwab as we would out of Ameritrade and E*Trade," Appleby says. "And DLJdirect would probably fall into the Schwab" category, he adds.

Appleby figures the industry's focus will eventually turn to service from account growth. But for now the battle for accounts continues, as reflected in the big firms' advertising budgets, which in some cases run north of $100 million. So just in case, DLJdirect is planning a new marketing campaign. The company is putting aside $65 million for ads, up from 1998's $25 million.