CS Credit Suisse Group

By Justin Baer and Michael Rapoport 

Storied brokerage Donaldson, Lufkin & Jenrette hasn't received much attention since being folded into Credit Suisse AG 16 years ago. But it resurfaced Thursday as an expensive footnote in a dreary day for its Swiss parent.

Credit Suisse said it would take a write-down of about 3.8 billion Swiss francs ($3.8 billion) largely reflecting impairments from its $11.5 billion acquisition of DLJ--a move that showed the extent to which investment banking has soured as a business since the turn-of-the-century merger.

The write-down, which helped push Credit Suisse shares sharply lower Thursday, followed the bank's decision last fall to restructure and shrink its investment-bank unit.

That upheaval triggered a reassessment of the goodwill value that has remained on Credit Suisse's balance sheet from DLJ, whose businesses long ago were integrated into the Swiss bank's.

Big European lenders are cutting back their trading activities and retrenching globally due to slow growth at home and a sluggish start to shore up their capital bases following the financial crisis.

Credit Suisse said Thursday that net revenue fell 34% to 4.2 billion francs. The bank, run by CEO Tidjane Thiam, also said it would cut about 4,000 jobs as part of an attempt to reduce costs by billions of dollars.

The DLJ deal, sealed soon after the peak of the late-1990s Internet bubble, was championed by Allen Wheat, then chairman of Credit Suisse's investment-bank unit. The Swiss bank paid nearly three times the U.S. firm's book value, a pricey deal even by the standards of the dot-com-bubble era.

The acquisition brought Credit Suisse well-known bankers like Hamilton James, now president of Blackstone Group, and deal maker Ken Moelis, who now runs his own advisory firm. But it was a messy marriage from the start.

The freewheeling, energetic upstart didn't mesh well within the more buttoned-up, process-driven Credit Suisse First Boston, the Swiss lender's investment-banking unit. "It like was a group of people living on a tropical island," one former executive said of DLJ. "And then the dream ended."

There also was a lot of overlap. Some of DLJ's key employees left quickly. The economic downturn that followed accounting scandals, the dot-com bust and the 2001 terrorist attacks took a toll on the businesses that had been DLJ's strengths, including lending to companies with low credit ratings.

Credit Suisse rebounded later in investment banking under CEO Brady Dougan, a low-key trader whose risk-averse style helped the firm during the 2008 financial crisis. But the bank stumbled in recent years after tougher regulations on bond trading squeezed profits for all banks.

Mr. Dougan exited last year and was replaced by Mr. Thiam, an executive from insurer Prudential PLC who has proven less enamored with investment banking.

Mr. Thiam quickly moved ahead with plans to raise capital and cut business such as foreign-exchange trading, prompting the latest write-downs.

When a company pays a premium in a deal, it is booked as goodwill, an intangible asset that reflects the price paid beyond that covering a target's hard assets like cash and real estate.

If the company later determines that the acquisition's performance can no longer support that premium, it has to wipe out the goodwill, even if it is a decade or more after the deal.

Across the investment bank, Credit Suisse said about 2.7 billion francs, or 70% of the impairment, came from the trading businesses, while the rest came from the Asia-Pacific unit and capital-markets businesses such as underwriting and merger advisory.

Recent regulatory requirements have required Credit Suisse and other banks to hold more capital, making it harder for investment banks to generate profits, thus lowering the value of those operations.

Goodwill-impairment charges can also be an implicit acknowledgment that a company overpaid for an acquisition.

Credit Suisse isn't the first bank to write down the goodwill tied to an old investment-bank acquisition long after the fact.

Last October, Deutsche Bank AG took a write-down of 5.8 billion euros ($6.4 billion) that was partly tied to the Bankers Trust business it bought in 1999 for $10 billion. The German bank indicated at the time that the write-down was prompted in part by new regulatory requirements.

(END) Dow Jones Newswires

February 04, 2016 19:04 ET (00:04 GMT)

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