WIT, 'a stock and half' says Business Week.
Wit's Double Ride on the IPO Rocket
With the "quiet period" at an end, Wit Capital Group's own new stock is on a tear. But the online distributor of initial offerings is also getting a push from the IPO market upswing
For investors who are hot on the trail of Internet IPOs, Wit Capital Group (WITC) is a stock and a half. That's because Wit, which pioneered online distribution of stock offerings, is not only an Internet IPO itself but also a play on the broader market for new issues. The market for initial public offerings went through a cool period for a month or so starting in May as Internet shares stumbled and investors worried about rising interest rates. But in the past two weeks, the IPO market has heated up again.
Not surprisingly, so have shares of Wit Capital (IPO profile), which was priced on June 3 at $9 a share. After its first few days of trading -- at around $16 a share -- it settled in between $10 and $12. But since its June 21 opening at $10 7/8, Wit shares have risen every trading day. It closed on June 29 at $34.
MORE "FIRMNESS." The hot streak is due primarily to the dynamics of the IPO process. After its initial offering, Wit, like all IPOs, was in a so-called quiet period for 25 days, which ended on June 29. That day, as was widely expected, analysts from Bear Stearns and Thomas Weisel Partners -- two firms that helped bring Wit public -- issued buy recommendations on the stock. "That happens almost every time right around when the quiet period ends," says Mark Basham, IPO analyst at Standard & Poor's equity research group.
Wit shares also got a boost from a string of successful recent IPOs. "There is an increasing level of firmness that is coming back into the marketplace for Internet IPOs, and Wit is a manager in a number of deals," says David Menlow, president of IPO Financial Network in Milburn, N.J.
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Already in 1999, Wit's participation in public offerings has shot up to 54, more than in all of 1997 and 1998
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For example, Wit Capital was co-manager on the offering for Juniper Networks (JNPR), which debuted on June 24 at $34 a share and closed on June 30 at $149. Stamps.com (STMP), another Wit IPO, has risen from $11 a share at its initial offering on June 24 to $17. Network Plus (NPLS), which was priced on June 29 at $16 a share, closed on June 30 at $20 7/8. Of Wit's recent offerings, only US Search (SRCH), which closed on June 30 at $8, is trading below its IPO price ($9). "It appears as though the market is using Wit Capital as somewhat of a proxy for the perceived health of the Internet IPO market," says Menlow.
As one of the underwriters, Wit gets part of the proceeds from each IPO, although the firm won't disclose its percentage and says investment banking fees vary widely depending on the deal. Wit never acts as the lead underwriter -- the firm that gets paid the most. "The model is really to act as co-manager on high-quality deals underwritten by bulge bracket firms," says Susan Berkowitz, Wit's senior vice-president for marketing. "Our model is to handle the online retail distribution for those deals." This year alone, Wit has participated in 54 public offerings -- more than the 39 it did in all of 1998 and 1997.
BIG GUNS ON THE BOARD. That kind of volume translates directly to the top line. For the first quarter of 1999, Wit's revenues were $3.9 million, nearly twice its take of $2 million for all of 1998. Not surprisingly for a Net company, its losses are also growing, albeit not quite as fast. The net loss for this year's first quarter was $4.9 million, equal to 67 cents a share. For all of 1998 Wit lost $8.8 million, equal to $1.23 a share.
Other measures of performance that Internet investors keep an eye on are remarkably strong at Wit. Traffic to its Web site surged from 1.9 million page impressions last January to 38 million page impressions in April, the company says. By Apr. 30, Wit had approximately 41,000 customer accounts, up from 26,000 only a month before. As of Mar. 31, 1998, Wit had only 3,100 accounts.
Analysts are also impressed that Wit has some of Wall Street's big guns on board. Chairman and co-CEO Robert H. Lessin was previously vice-chairman at Salomon Smith Barney, while the other co-CEO and president, Ronald Readmond, was vice-chairman at Charles Schwab. The director of investment banking, Mark Loehr, had been head of equity capital markets at Salomon Smith Barney. And Goldman Sachs bought a 22% stake in Wit in a deal announced on Mar. 29. Post-IPO, it owns about 13% of the firm.
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E*Offering is Wit's most notable rival, but IPO.com CEO Brad Sinrod believes there's "room for several players"
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Along with Wit's clear vulnerability to a potential slowdown in the IPO market, the biggest risk the company faces is competition. The most notable rival is probably E*Offering, which has a deal to distribute its IPOs to E*Trade (EGRP) customers and also has Walter W. Cruttenden III, founder of investment bank Cruttenden Roth, at the helm. He's another heavy hitter with lots of clout in Silicon Valley. W.R. Hambrecht & Co. has OpenIPO, which uses an auction process to sell shares. Friedman Billings & Ramsay (FBG) and Wedbush Morgan Securities also have online investment banks. "I think there will be many competitors from top-tier investment banks, but I also think there is room for several players," says Brad Sinrod, CEO of IPO.com (which supplies IPO information to Business Week Online).
Where Wit's stock goes from here depends mainly on what kind of announcements the company puts out, says Sinrod. With the $79 million cash hoard it raised in its IPO, Wit will have an opportunity to do acquisitions and strategic deals. It could also be an acquisition target. The company has already announced plans to offer, later this year, direct online trading with other investors 24 hours a day. "My feeling is that they have a rabbit in the hat that they haven't shown," says IPO Financial Network's Menlow. "This company is not going to remain stagnant. They will always be on the cutting edge of corporate finance."
(Amey Stone is an associate editor of Business Week Online)
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