DST Systems: All Systems Are Go

Prepared By: Ryan [email protected]

All Systems Are GoJune 10, 2011

Prepared By: Ryan [email protected]

DST Systems Investment Thesis

Data processing firm that is the dominant player in both of its core operating businesses

Shareholder recordkeepingIntegrated print and mail solutions

Fairly stable, predictable free cash flow streams in low to modest growth businesses

Asset rich balance sheet with an abundance of hidden assets that are unappreciated by the market

DST owns an investment portfolio worth up to 93% of the company’s total market capitalization

Materially undervalued on a sum-of-the-parts basis with numerous strategic transactions available to unlock shareholder value

Spin-off or sale of non-core businesses or assetsSale or auction of entire company to strategic or financial buyer

Ticker: “DST”Stock Price: $47.72

Recent Valuation Multiples:

9.7x 2011E Earnings (1)

3.6x EV / 2011E EBITDA (2)

Capitalization:Equity Market Value: $2.2bnEnterprise Value: $3.3bn

(1) EPS excludes affiliate income; adjusted for net debt and non-core investment portfolio

(2) EBITDA excludes affiliate income; Adjusted for non-core investment portfolio

Source: Consensus Wall Street estimates

Company History

DST was founded in 1969 as the mutual fund processing subsidiary of Kansas City Southern (KSU), a railroad companyDST grew rapidly over the next few decades, mirroring the growth of the broader mutual fund industry in generalIn 1995, DST was brought public as a separate entityOne of the most distinguishing and unique features about DST is that since its inception, it has been run using a “portfolio management” approach. That is, aside from focusing on growing DST’s core business, management has shown a tendency to acquire and divest various related and unrelated businesses, acquire and sell equity securities of other companies, etc.Management has demonstrated excellent capital allocation skills over the years with this approach and has often used gains to buy back shares, retiring over 60% of DST’s outstanding shares since 2000

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DST’s Two Businesses

DST operates in two core business segments

Financial Services

Output Solutions

Provides technology based software and automation solutions to the mutual fund/investment management, life and P&C insurance and healthcare payer industries

Provides integrated print and electronic statement and billing output solutions for customers in various industries

~67% Revenues(1) ~32% Revenues(1)

~23% EBIT Margins(1)

DST also operates an Investment & Other segment which houses the company’s valuable but non-core investment portfolio consisting of publicly listed equity securities, private equity investments, real estate holdings and various joint ventures

(1) Adjusted for out-of-pocket reimbursement revenue, excludes intersegment revenues

~13% EBIT Margins(1)

DST’s Core Businesses

Financial Services Segment

DST is principally known for its shareholder recordkeeping or transfer agency services provided primarily to the mutual fund industry

6(1) Source: 2010 Investment Company Factbook

What is a Transfer Agent?

Transfer agents perform an unglamorous but essential function to the investment management industry, including:

Maintain records of account ownership, shareholder transactions and other activities

Calculate and distribute dividends and capital gains

Prepare and mail account statements, federal income tax information and shareholder notices

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Business Dynamics

DST is compensated primarily on a per account basis

Revenue differs based on level of complexity and who ultimately performs the underlying work

Most common account is remote service, which generates ~$4-$5 in annual revenue per account

DST is the market leader with ~36% market share of all mutual fund accounts, ~65% of outsourced market(1)

Potential to earn float from client balances held (~$400mm of client funds held(2))

~100 million US registered accounts on platform

BNY nearest competitor with an estimated 30 million accounts

8(1) Source: Avondale Partners estimate

(2) Includes funds held on behalf of transfer agency and pharmacy processing clients

Shareholder Recordkeeping is a Great Business

High switching costs, customer captivity and recurring revenue

Attractive and sustainable operating margins

High barriers to entry

Long-term contracts that provide visibility

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Financial Performance

Over time, DST has demonstrated consistent and predictable revenues, EBITDA and Free Cash Flow in its Financial Services segment

10(1) Reflects operating revenue from core businesses only

(2) EBTIDA-Capex

Source: DST 2010 10-K

(in mm's) 2006 2007 2008 2009 2010Revenue(1) 1005 1127 1134.5 1106 1145.8Costs and Expenses 638.9 766 758.1 786.3 803.7Depreciation & Amortization 83.1 81.9 80.6 80.3 79.4Capital Expenditures 61.8 49.5 45.4 49.2 57.9EBIT 283 279.1 295.8 239.4 262.7

EBIT Margin 28.2% 24.8% 26.1% 21.6% 22.9%EBITDA Margin 36.4% 32.0% 33.2% 28.9% 29.9%Free Cash Flow(2) 304.3 311.5 331 270.5 284.2

The Sub-Accounting Threat

However, growth is slowing and many foresee a long-term erosion DST’s core record keeping business due to secular changes within the mutual fund industry and a negative mix shift stemming from a trend towards mutual fund sub-accounting

~45% of industry total 275 million mutual funds are currently on sub-accounting platforms

Sub-accounting could reach 60-70% of total mutual fund accounts

Sub-accounting is an inherently lower margin businesses, with annualrevenues of $2-3 per account

DST could lose up 20-25% of its registered accounts over the coming 2 years; management forecasts losses of 12mm accounts in 2011

What is Sub-Accounting and Why is it Becoming More Prevalent?

Sub-accounting refers to transfer agency services being performed by broker-dealers as opposed to typical traditional agents

Industry trends have led to an increasing amount of mutual fundsinvestments being held by financial intermediaries (broker-dealers, other financial institutions) as opposed to a direct relationships between the fund company and the investor

As a result, broker-dealers have invested in sub-accounting or omnibus platforms that allow them to provide transfer agency services in house, for a lower fee than that charged by DST and other transfer agents

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The Sub-Accounting Threat is Real but is a bit Overblown

The sub-accounting threat is real but there is a somewhat of an embedded a cap in terms of the number of accounts likely to convert to sub-accounting platforms. This helps put a floor under the number of accounts DST is could potentially lose

Analysts estimate that 10-20% of broker-dealers lack the scale necessary to offer sub-accounting services(1)

10-15% of mutual fund accounts are still held directly by investors, not by financial intermediaries(1)

Additionally, certain types of mutual fund accounts are less susceptible to sub-accounting conversion due to features on these accounts that require shareholder consent, etc.

Tax-advantaged plans

Other retirement plans

(1) Source: Avondale Partners estimate

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The Sub-Accounting Threat is Real but is a bit Overblown (cont’d)

In addition, there are multiple offsets DST to the ultimate loss of accounts DST may face in the coming years

Inherent in DST’s business mix are many mitigates which should serve to soften the shift towards sub accounting including:

Converting fleeing accounts to DST’s internal sub-accounting platform, international account growth, growth in the 401k/retirement plan record keeping business

In addition, DST has a more diversified revenue stream than investors typically give it credit for, allowing growth in other areas of its business mix to cushion the revenue blow from sub-accounting

At less than 4x 2011e EBITDA, DST shares fully reflect most conceivable account loss scenarios

Account losses from sub-accounting should see stabilization after 2012

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Management Gets It

DST’s high-quality management team has been operating in the business for decades and has demonstrated that they appreciate the sub-accounting threat and are attacking it head on

Started to develop sub-accounting business in 2005

Acquired TASS LLC in 2007, a sub-accounting service provider, which allows DST to recapture some of the lost revenue

While DST is a distant second to BNY which has ~65mm accounts, its sub-accounting business is growing rapidly

With CEO Thomas McDonnell owning ~3% of shares outstanding on a fully diluted basis, management is properly incentivized and has its interests aligned with shareholders

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Scenario Analysis

As mentioned earlier, the number of DST’s registered accounts(1) have been declining somewhat

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(1) Registered accounts refer to those accounts serviced directly with the fund sponsor


(in mm's) 2006 2007 2008 2009 2010Registered Accounts

Non-tax advantaged 64.2 71 65.4 63.6 54.8

Tax-advantagedIRA mutual fund accounts 23.3 27.5 27 26.8 25.5Other Retirement Accounts 10.3 10 9.9 10 9.7Section 529 and Educational IRAs 6.9 8.7 8.9 9.5 9.4

40.5 46.2 45.8 46.3 44.6

Total Registered Accounts 104.7 117.2 111.2 109.9 99.4

Subaccounts 1.1 1.9 8.9 11.2 14.3

Total Accounts Serviced 105.8 119.1 120.1 121.1 113.7

InternationalUnited Kingdom 5.6 5.8 5.9 6.6 7.1Canada 7.1 7.5 10.6 10.2 10.7

Scenario Analysis (Cont’d)

But roughly 45% of company’s accounts are tax-advantaged or retirement related –accounts which are less impacted by the sub-accounting trend

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Applying peer multiples and assuming the unlikely scenario of ZERO growth in any of DST’s other account types, segments or business lines over the coming years AND assuming none of the accounts lost to sub-accounting convert to DST’s platform, the market is pricing in an estimated 25% decline in the number of DST’s registered accounts. This is far too draconian of an assumption, all else equal

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Accounts Lost (in mm) 10 15 20 25% of Registered Accounts Lost 10% 15% 20% 25%Revenue Lost (in mm) 45 67.5 90 112.5% of Financial Services segment revenue 4% 6% 8% 10%

EBITDA Margin 30% 30% 30% 30%EBITDA Loss (in mm) 13.5 20.25 27 33.75Pro-Forma Multiple 4.5 5.3 6.3 7.9

EBITDA Multiple 7.9


Applying peer multiples, if DST were to recapture half of its accounting fleeing to sub-accounting platforms, then the market would be pricing in losses of over 30 million accounts, an even more extreme scenario

Adding in reasonable growth rates in other areas of DST’s business, it looks as though the market is pricing in a losses of up over 40% of DST’s accounts. Clearly, the threat DST faces from sub-accounting is being vastly overstated in the marketplace

Accounts Lost (in mm) 10 15 20 25 30 35% of Registered Accounts Lost 10% 15% 20% 25% 30% 35%Revenue Lost (in mm) 45 67.5 90 112.5 135 157.5% of Financial Services segment revenue 4% 6% 8% 10% 12% 14%

EBITDA Margin 30% 30% 30% 30% 30% 30%EBITDA Loss (in mm) 13.5 20.25 27 33.75 40.5 47.25Sub-Accounts Recaptured (in mm) 5.0 7.5 10.0 12.5 15.0 17.5Pro-Forma Multiple 4.3 4.8 5.5 6.4 7.5 9.3

Mid-Point EBITDA Multiple 8.4

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Given that 45% of DST are somewhat protected from the shift to sub-accounting, if 30% of DST’s remaining accounts (or ~18mm) end up leaving (a rate that mirrors the likely conversion rate for the broader industry) and assuming zero growth or recapture, DST still look cheap relative to peers

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Accounts Lost (in mm) 10 15 20% of Registered Accounts Lost 10% 15% 20%Revenue Lost (in mm) 45 67.5 90% of Financial Services segment revenue 4% 6% 8%

EBITDA Margin 30% 30% 30%EBITDA Loss 13.5 20.25 27Pro-Forma Multiple 4.5 5.3 6.3

Mid-Point EBITDA Multiple 5.8

Other Financial Services Segment Services (Cont’d)

Specific businesses services performed include:

Provides insurance claims processing, benefit plan management, member and provider management, physician practice management, billing solutions, etc.

~20% of DST operating revenue

High growth rate business with secular tailwinds including increased access to healthcare and an aging population

22.9mm covered lives (~15% of market)(1)

Per member per account fees, as well as software licensing fees

Earns float income from client balances held

Potential spin-off candidate

DST Health Solutions offers significantly better growth potential than DST’s transfer agency business and should be rewarded commensurately with a higher multiple

In addition to transfer agency services, DST also offers other essential technology and software solutions primarily to the healthcare industry through its DST Health Solutions business

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(1) Source: Avondale Partners estimate

Other Financial Services Segment Services (Cont’d)

Specific businesses services performed include:

Business process and workflow management tools for various industries

Distribution products and accounting systems for the investment management industry

Electronic document storage

Lastly, DST provides other ancillary business which provide further diversify the company’s revenue stream, including:

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Output Solutions

Output Solutions Segment

Provides integrated print and electronic statement and billing output solutions for the financial, telecommunications, video, utilities and healthcare industries

Communications created and mailed include statements, monthly bills, marketing products, trade confirmations, dividend checks, year-end tax reports, etc.

DST is the market leader with tremendous scale in an industry where customers seldom switch service providers

Business is declining to some extent due to paperless billing trend but DST is capturing revenue, albeit at a lower margin, from digital conversion

High barrier to entry business given scale required

Margins are somewhat masked by accounting for out-of-pocket expenses and thus are higher than initially appear

Long-term contracts provide visibility

Paid on an items mailed or per image basis (~11bn images produced in 2010)

Good cross-selling opportunities with transfer agency and Health Solutions business

One of the largest producers of First Class mail in the US, with 2.3bn shipments in 2010. Also has presence internationally.

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Financial Performance

Over time, DST has demonstrated fairly consistent and predictable revenues , EBITDA and Free Cash Flow in its Output Solutions segment

However, there is operational improvement potential within the segment and management thinks it can reach consistent double digit operating margins as the business gains further scale

(1) Excludes one-time $64.3mm termination payout in 2010


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(in mm's) 2006 2007 2008 2009 2010(1)

Revenue 535.9 551.1 528.2 477.4 491.7Costs and Expenses 488.1 474 452.6 418.1 437.5Depreciation & Amortization 37.1 42.3 38.9 41.5 47.8Cap-Ex 62.4 33.2 31.8 36.7 24.1EBIT 10.7 34.8 36.7 17.8 6.4

EBIT Margin 2.0% 6.3% 6.9% 3.7% 1.3%EBITDA Margin 8.9% 14.0% 14.3% 12.4% 11.0%FCF -14.6 43.9 43.8 22.6 30.1

DST’s Investment Portfolio

DST’s Hidden Assets

Over the years, DST has accumulated a vast investment portfolio (housed entirely in the “Investment & Other segment) that has gone unappreciated by the investment community. This investment portfolio offers substantial embedded value and downside support, as well as collateral for a potential take-private transaction

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Hidden Asset: Publicly Listed Equities

Through the buying and selling of various businesses and ownership interests, DST has accumulated sizeable stakes in various publicly listed companies, primarily in the financial and data processing segments. A listing of DST’s current holdings is below:

28Source: DST 2011 Q1 10-Q

Data based on 6/10/11 closing prices

Company Shares Owned (mm) Value (mm) Origin of InvestmentState Street Corporation 10.3 439.91 Sale of JV with Kemper Financial to State Street in exchange for shares, 1994Computershare Ltd. 15 145.61 Sale of stake in Equiserve to Computershare in exchange for shares, 2005Euronet Worldwide 1.9 30.55 DST was an original investor in Euronet and maintained an equiy stakeUndisclosed - 214.4 -

830.48

Hidden Asset: Asurion

Based in Nashville, Asurion is the largest global provider of wireless handset insurance and wireless roadside assistance programs . DST sold the majority of its 37.5% stake in the business , which it acquired after merging it with another of its insurance units, to a consortium of Private Equity firms for $989mm in 2007. DST retained a 6% stake in the company

Dominant player in high-margin business with 20% share of total cell phone subscribers as users

Customers include virtually all wireless cell phone service providers including AT&T, Verizon, T-Mobile and Sprint

Insures over 100 million handsets

Estimated ~$4bn revenue business(1)

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(1) Source: BusinessWeek

Hidden Asset: Asurion (Cont’d)

The value of DST’s stake in Asurion is grossly understated on the company’s balance sheet. While DST accounts for its investment in Asurion using the historical cost method, which values its 6% stake at $3mm, the company’s investment is probably worth between ~$120mm-$157mm

The value of DST’s 6% stake in Asurion may be worth considerably more than these conservative estimates given Asurion’s dominant market position, strong growth profile and recession resistant revenues, as consumers are more likely to insure their high-priced smart phones against damage, loss, etc. in a weaker economy

Source: DST 2008, 2010 10-K

Asurion Valuation

(in mm's)

2007 Sale Price $968% Sold 31.4%Implied Value of Asurion $3,083

% Retained by DST 6%Implied Value of DST's Stake

65% of purchase price $120.2385% of purchase price $157.22

Hidden Asset: Real Estate Investments

DST Systems owns numerous real estate assets of varying types, locations and ownership structures. The company owns apartment buildings, parking lots, raw land, office buildings, (some of which are leased back to the company), and retail and industrial properties. While it is hard to determine exactly what real estate DST owns given the company’s poor disclosure practices, a reasonable estimate can be made using the limited amount of information the company does provide

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Hidden Asset: Real Estate Investments (Cont’d)

32(1) NOI approach assumes 20% expense ratio, 8% cap rate

(2) NOI approach assumes 30% expense ratio, 8% cap rate

Production Facilities assums 20% exp, 8% cap rateLocation Sq Footage Rent/ Sq Ft Rental Value(1) Price/ Sq Ft Sale Value Source

Bristol, UK 126,000 ? ? ? ?El Dorado Hills, CA 580,000 10 58,000,000 100 58,000,000 LoopnetHartford, CT 302,000 10 30,200,000 100 30,200,000 LoopnetKansas City 305,000 3.75 11,437,500 50 15,250,000 CostarKansas City 177,000 3.75 6,637,500 50 8,850,000 CostarToronto, Canada 113,000 ? ? ? ?

1,603,000 106,275,000 112,300,000Office Buildings assums 30% exp, 8% cap rate

Location Sq Footage Rent/ Sq Ft Rental Value(2) Price/ Sq Ft Sale Value SourceEl Dorado Hills, CA 65,000 15 8,531,250 150 9,750,000 LoopnetJohannesburg, South Africa 8,000 ? ? ? ?Kansas City 7,000 15 918,750 110 770,000 LoopnetKansas City 510,000 15 66,937,500 110 56,100,000 LoopnetKansas City 66,000 15 8,662,500 110 7,260,000 LoopnetKansas City 493,000 15 64,706,250 110 54,230,000 LoopnetLawrence, MO 49,000 10 4,287,500 70 3,430,000 LoopnetLondon, UK 56,000 ? ? ? ?Rochester, UK 19,000 ? ? ? ?

1,273,000 154,043,750 131,540,000

Hidden Asset: Real Estate Investments (Cont’d)

In total, DST owns an estimated $300mm worth of real estate assets, excluding 200k+ sq feet of production facilities in the UK, 75k sq ft of office space in the UK, 8k sq ft of office space in Johannesburg and an unknown amount of developed and undeveloped land in the Kansas City area, which were omitted from the calculations due to difficulty in obtaining estimated values

33(1) NOI approach assumes 20% expense ratio, 8% cap rate

(2) NOI approach assumes 30% expense ratio, 8% cap rate

Data Centers assums 20% exp, 8% cap rateLocation Sq Footage Rent/ Sq Ft Rental Value(1) Price/ Sq Ft Sale Value Source

Kansas City 163,000 3.75 6,112,500 50 8,150,000 CostarKansas City 108,000 3.75 4,050,000 50 5,400,000 Costar

271,000 10,162,500 13,550,000

Retail Space assums 30% exp, 8% cap rateLocation Sq Footage Rent/ Sq Ft Rental Value(2) Price/ Sq Ft Sale Value Source

Kansas City 46,000 12 4,025,000 60 2,760,000 Costar

Other PropertiesLocation Size Price/Sq Ft Low Value High Value Source

Numerous Surface Parking Lots - - 5,000,000 7,000,000.00 Estimate120 Unit Apartment Building - - 3,000,000 9,000,000.00 25k-75k per aptUnderground Facility 536k sq feet $25-30 10,720,000 16,080,000.00 CostarVarious Developed and Undeveloped Land kansas city - ? ?Undeveloped Land, El Dorado, CA 200 acres $20k-$40k (acre) 4,000,000 8,000,000.00 EstimateJV Office Building, Leased to IRS 1.1m Sq Ft $15.4m/Yr 63,720,000 63,720,000.00 Ongo.com article

22,720,000 40080000

Total Value $297,226,250 $300,230,000

Hidden Asset: Joint Ventures

DST has three unconsolidated affiliate joint venture agreements with State Street which offer full service mutual fund processing and fund administration. All three JV’s generate positive and predictable earnings streams. All JV’s have 50/50 ownership splits.

Boston Financial Data Services (BFDS) (1)

International Financial Data Services, LP (IFDS LP)

International Financial Data Services, UK (IFDS UK)

Joint Venture 2010 Share of Earnings (mm) Low Multiple (10x) High Multiple (15x)BDFS 14.8 148 222IFDS LP 15.9 159 238.5IFDS UK 6.2 62 93

369 553.5

(1) Holds $1.5bn+ in client balances with significant income potential from float


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Hidden Assets: Private Equity Investments, Other

DST also owns an assortment of other financial assets, including stakes in private equity funds, as well as trading and held-to-maturity investments worth over $200mm

Asset Carrying Value (mm)Private Equity Investments 148.9Trading Securities 50.3Held to Maturity Securities 11.3

210.5

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Source: DST 2008, 2010 10-K

Adding it all up

Taking into account all of DST’s various non-core assets leads to an estimated portfolio value of between $1.9bn-or ~83%-93% of DST’s total market capitalization

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DST Non-Core Investment Portfolio Valuation, values in $mm's

Asset Value (low) Value (high)Asurion $120.23 $157.22Publically Listed Equities $830.48 $830.48Real Estate $297.00 $300.00Join Ventures $369.00 $553.50Other

Private Equi ty $148.90 $148.90Trading Securi ties $50.30 $50.30Held To Maturi ty Securi ties $11.30 $11.30

$1,827.20 $2,051.70

Implied Value Per Share 39.2 44.0% of DST's current market cap 83% 93%

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How Can All This Value be Unlocked?

Evaluating Strategic Transactions

As currently structured, DST Systems is not well suited to be a public company. The company has a complicated corporate structure, is comprised of various operating subsidiaries and has financial interests in real estate, equities and other private ventures that cause further confusion. In order to realize fair value, DST should seek to either simplify its structure materially or consider an outright sale.

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DST Possess Many Traits of an Attractive LBO Candidate

Steady, predictable and abundant free cash flow generation

Relatively low debt with ample interest coverage

Good core businesses with modest growth potential

Large asset portfolio which can be borrowed against or sold

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Sale to a Financial Sponsor

Update: On June 15th, Reuters(1) reported that activist investor Russell Glass recently approached DST about a potential buyout at a price in the mid-60’s, sending the stock up nearly 15% on the news. DST’s board confirmed this report, and added that in recent months it has been approached by numerous parties interested in purchasing the company, albeit at what they deemed to be inadequate prices. All offers for the company have been unanimously rejected by the board

While the company is not in active discussions to sell itself, with multiple offers now on the table, the company has effectively been “put in play”, making what was once a theoretical breakup value more real

The company has not indicated that it is unwilling to sell but rather that it will sell only at a fair price

The offers offered thus far have been materially beneath DST’s estimated intrinsic value and indicate that interested parties are trying to take advantage of DST’s depressed valuation and complicated story and acquire the company at an unfair price

With that said, while the offer prices significantly undervalue DST, they do serve to put a floor under DST’s share price and thus provide a good margin of safety

It is also likely that a bidding war erupts as some or all of the interested parties will return to the table with a more reasonable bid for the company

(1) http://www.reuters.com/article/2011/06/15/us-dstsystems-private-equity-idUSTRE75E04E20110615

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What Price Would a Financial Sponsor be Willing to pay?

At a price of up to $100 per share, a financial sponsor could still earn a high teens IRR

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Return calculations assume 40% equity contribution, 3 year term, 6x exit multiple, 1.6bn long term debt at exit, $450mm terminal EBITDA, 5% interest rate

(1) Return scenario also assumes $250mm in annual FCF which is used entirely to pay down new and existing debt

Price Paid 100 95 90 80 75 70 65 60% Premium 109.6% 99.1% 88.6% 67.6% 57.2% 46.7% 36.2% 25.7%Total Return 61.0% 65.3% 70.2% 81.8% 88.8% 96.7% 105.9% 61.0%IRR 17.19% 18.25% 19.40% 22.05% 23.59% 25.30% 27.22% 17.19%

Sale to a Strategic Acquirer

Even if a bidding war does not unfold amongst PE firms, there remains a strategic buyer in place that can likely pay a significant premium given the synergies and cost savings possible - State Street

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State Street has been a long time partner of DST since 1970 and has numerous operational, strategic and business tie-ups with the company

In purchasing DST, State Street would not only be able to capture cost synergies and achieve further cross selling opportunities, it would also accomplish a number of other objectives, including:

Cancel the 2% of STT shares outstanding that DST owns thereby creating EPS accretion

Save $7.5mm annually in dividends currently paid to DST

BFDS is DST’s largest customer at 11% of revenue; an acquisition of DST by STT would remove the need to perpetually pay DST for its services

It is also possible that one of DST’s large, well-capitalized competitors such as BNY would be interested in acquiring the company

Spin-off of Investment Portfolio Coupled with Improved Transparency

Alternatively, DST could consider spinning off its investment portfolio into a separate entity – “DST Holdings”- while at the same time providing a highly detailed disclosure of its various components to allow for proper analysis. Such a transaction would:

Queue up DST for an outright sale by removing non-core assets from the picture and simplifying DST’s structure

Create a portfolio of assets that may interest a new class of investors that would not otherwise be interested in DST shares

Simplify the DST story, remove the discount to fair value in itsshares and give investors more choice in terms of the assets they would rather own

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So, what is the company worth?

Data Processing and Output Solutions Peer Analysis

Data based on 6/10/11 closing prices

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Output Solutions Peer

Fidelity National Fiserv Broadridge Financial Median CSG SystemsMarket Cap (mm) $9,654 $8,948 $2,696 $8,948 $624Enterprise Value $14,562 $11,786 $3,108 $11,786 $796

EV / 2011E EBITDA 8.33 8.40 8.67 8.40 4.61

Data Processing Peers

Sum-Of-The-Parts Analysis

On a sum-of-the-parts basis, DST shares are currently worth between $66-$80, materially higher than where buyout offers are rumored to have come in. Additionally, a financial sponsor or strategic acquirer could likely pay a price significant above these levels and still generate an acceptable rate of return.

Looking at it in a different way, at current levels you are buying DST’s non-core investment portfolio at or around fair value and getting its entire operating business nearly for free

(1) Based on consensus Wall Street estimates

(2) Excludes $125mm accounts receivable securitization and 50% of $125.8mm of related party credit agreements

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Asset 2011e EBITDA(1) Low Multiple High Multiple EV Low EV HighFinancial Services

Financial Services $250 6x 7x 1500 1750Healthcare Solutions $75 8x 9x 600 675

Output Solutions $70 4x 5x $280 $350

Add: Non-Core Assets 1827 2052Add: Cash 139.8 139.8Less: Debt(2) 1262.1 1262.1Equity Value 3084.9 3704.4

Shares Outstanding 46.5 46.5Implied Price 66.40 79.73

Current Price 47.72 47.72

% Upside 39% 67%Dividend Yield 1.5% 1.5%Total Return 41% 69%

Why Does This Opportunity Exist?

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DST is a complicated story with a number of moving pieces

Conglomerate structure creates added difficulty in trying to determine the company’s intrinsic value

Poor disclosures and investor relations program

DST’s financial statements have historically been somewhat complex and non-transparent. Additionally, the company does not have much of an investor relations presence, has a severely lacking website, no investor presentations and by and large has failed to effectively communicate its story to The Street.

Limited sell-side coverage

DST is a lightly followed name with only a handful of sell-side analysts covering the stock, which has allowed it to float beneath the radar and remain inefficiently priced

Risks

Sub-Accounting Threat

Concentrated Shareholder

DST has numerous embedded offsets in its higher growth business segments to make up for a loss in revenue from sub-accounting shifts

Experienced and capable management team is taking tackling the sub-accounting threat on all fronts

Due to the nature of the mutual fund industry and DST’s particular business mix, a reasonable estimate can be made around how many registered accounts DST will ultimately lose, providing visibility and a theoretical cap

Additionally, the market is factoring in highly inflated account loss estimates which are unlikely to materialize

Given the gross undervaluation of DST shares, it appears that any decline in DST’s core business is more than priced in

A concentrated shareholder typically creates difficulty in effectuating change at a company

However, George Argyros, former US Ambassador to Spain, DST Director and DST’s largest shareholder with ~21% of outstanding shares, does not create this obstacle

Mr. Argyros acquired his shares when he sold his business, USCS International, to DST in 1998

Mr. Argyros does not have emotional ties to DST but rather appears to be purely economically motivated and thus would be open to a strategic transaction

In a recent news article, Mr. Argyros indicated that he thinks shares are worth closer to $80 and is confident with the direction the company is going in

Conclusion

Conclusion

Attractive core business coupled with a separate investment portfolio worth up to 93% of the company’s current market capitalization

Trades at a material discount to intrinsic value, providing widemargin of safety and limited downside

Break-up value is materially higher than current share price

Multiple bidders for the company have recently emerged and provide a floor valuation

Simplification or sale of business to financial or strategic buyer presents catalyst to realize value

Upside potential: 39-67%

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Documents

DST Systems: All Systems Are Go