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DLJ deal generates buzz
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August 30, 2000: 3:58 p.m. ET
Investors speculate on which investment firm might be the next acquisition target
By Staff Writer Kim Khan
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NEW YORK (CNNfn) - Three is now the magic number as Wall Street looks for the next investment bank to be swallowed.
Credit Suisse Group's $11.5 billion purchase Wednesday of Donaldson, Lufkin & Jenrette again stirred up interest in financial sector consolidation as investors for the past two days have flooded money into the stocks, betting on which company might be the next acquisition target -- kind of like the trading equivalent of playing roulette.
By midday, three apparent favorites had emerged: J.P. Morgan & Co., Bear Stearns Cos. and Lehman Brothers Holding Corp. All three are large brokerage firms, but still considered undersized in today's environment where size and scale rule, leaving them vulnerable to a takeover, analysts said.
"One thing this [deal] does underscore is that the investment banking business has become a global business in a hurry and if you don't have a strong presence on both sides of the Atlantic you might as well not show up," said Michael Ancell, banking analyst with Banc of America Capital Management.
Ancell said there are a number of strategic buyers with investment banking holes to fill.
This is hardly a new position for Bear Stearns, Lehman Brothers and J.P. Morgan. All three were named as takeover candidates in July after Switzerland's UBS bought Paine Webber Group for $12 billion.
But with DLJ now officially off the target, speculation is now stirring once again.
"There aren't a lot of names left of the major players," said Dan Veru of Palisade Capital Management. "The [consolidation trend] is going to continue, and one thing that Citicorp has certainly proved is that you can be a multi-lined multi-product financial services company and offer various products."
"Merrill [Lynch] is probably not going to be one that's consolidated, it's going to be a consolidator because of its size," Veru added.
J.P. Morgan gets the big buzz
J.P. Morgan (JPM: Research, Estimates) was at the center of the consolidation speculation with the stock jumping sharply in the wake of the DLJ deal. There is a possibility AXA Financial may even look at J.P. Morgan as a replacement for DLJ.
Shares of J.P. Morgan rose $4.19, or 2.8 percent, to $153.19 in afternoon trading.
ING Barings on Wednesday raised its rating of the stock to "buy" from "hold" and set a 12-month price target of $200 for the Dow Jones industrials component in the wake of the DLJ sale.
 Merrill Lynch analyst Judah Kraushaar also issued a report tipping J.P. Morgan as the favorite investment target ahead of Bear Stearns and Lehman, "either as a going concern or as a takeover speculation."
Kraushaar said in the report that J.P. Morgan's asset management business differentiates it from the other two investment banks available and that the business alone could be worth $60 to $80 per share.
Ironically, Ancell said asset and money management operations werer the most likely target for AXA Financial, which suddenly finds itself with $8 billion in cash raised from the DLJ (DLJ: Research, Estimates) sale.
Kraushaar pointed to J.P. Morgan's international earnings, which account for more than 50 percent of profits, as another attraction. He also said Merrill estimates the company's stock price to hit $180 by 2001.
But Invesco Funds portfolio manager Jeff Morris said takeover speculation comes and goes with J.P. Morgan and tipped Bear Stearns of Lehman Brothers as more appealing. (396K WAV or 396K AIFF)
Rounding out the big three
In late July, Bear Stearns (BSC: Research, Estimates) confirmed speculation that it is looking for a buyer.
 Salomon Smith Barney analyst Guy Moszkowski said in a report that Bear Stearns' chief executive James Cayne has changed his mind about considering a sale or merger of the New York securities firm. Cayne has made "it quite clear that an acquisition is not out of the question," the report said.
According to Moszkowski, the company hasn't really gotten into European mergers and acquisitions at the rate of its competitors, which necessitates a new ally.
But while it has fallen behind in Europe, the company leads Latin America in underwriting and is also strong in Asia.
Cayne told the Wall Street Journal earlier this year he is seeking a price four times the firm's current book value, which translates into $18.9 billion or $120 per share.
Shares of Bear Stearns rose $2.44 to $65.56 in Wednesday afternoon trading.
Lehman Brothers shares remained steady on the day, but the stock has been rising steadily in recent months, nearly doubling since the end of May.
Lehman brings strong technology underwriting and a European presence to the table, but has not topped many lists as the next acquisition target.
Shares of Lehman (LEH: Research, Estimates) fell 0.12 to 140.38 Wednesday afternoon.
But with the premiums on these three investment banks already high, the real deals may come from smaller companies.
"A lot of the prices have already reflected a lot of takeover speculation so you need a deal really to support current valuations and to get a premium," said Palisade Capital's Veru.
A company such as retail brokerage A.G. Edwards, which operates solely in the United States, could be the smaller brokerage at a lower price that a European bank may be looking for.
Shares of A.G. Edwards (AGE: Research, Estimates) rose $1.41 to $55.81 Wednesday afternoon. 
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