July 21, 1998
More On-Line Brokerages
Seek Access to Shares of IPOs
By REBECCA BUCKMAN
Staff Reporter of THE WALL STREET JOURNAL
On the Internet today, only customers of the nation's biggest on-line
brokerage firms have access to shares of potentially lucrative initial
public stock offerings, whose prices can skyrocket on the first day of
trading.
Now, more on-line trading houses are jockeying to use their collective
clout to muscle in on the action.
Discount and on-line brokerage firms
traditionally have been shut out of Wall
Street IPO underwriting syndicates, or
selling groups, because they don't have
investment bankers, research analysts and
armies of brokers to find and promote the
deals. That said, the largest on-line firms,
such as Charles Schwab Corp., E*Trade
Group Inc. and Fidelity Investments, have
inked special deals with Wall Street
underwriters willing to offer them limited chunks of those firms" IPOs.
Now other, smaller firms, including Ameritrade Holding Corp. and Suretrade Inc., a unit of Fleet Financial Group Inc., are considering different kinds of partnerships with on-line investment banks such as Wit Capital Group Inc.
Wit Capital, which recently beefed up its investment-banking operations and hired ex-Morgan Stanley & Co. deal-maker Robert H. Lessin as its new chief executive officer, wants to organize several
Internet brokerage firms into a kind of electronic sub-syndicate, creating a large base of potential stock-buyers it hopes will attract corporate issuers.
"We really do believe we've got a better way of doing retail [or individual investor] distribution," says former lawyer and beer-company entrepreneur Andrew D. Klein, who founded the closely
held Wit Capital two years ago and first gained notoriety for bringing his beer company, Spring Street Brewing Co., public over the Internet.
Brokerage firms participating in the "e-syndicate," as Wit's Mr. Klein calls it, would adhere to rules discouraging their customers from "flipping" their shares, or quickly selling stock once they had made a profit.
"I think issuers, in the future, are going to want to push their underwriters to include on-line distribution, particularly for technology [deals]," says Ameritrade President Joseph Konen, who is
talking to Wit as well as larger, more traditional investment banks about IPO access. Says Don Montanaro, the president of Suretrade: "This is the place where demand for technology is."
At the moment, many on-line investors seeking shares of IPOs are coming up empty. For one thing, the best deals are usually reserved for powerful institutional investors.
Frequent-Trader Clubs
At discount firms that do get some shares, such as Schwab, Fidelity and E*Trade, demand for the deals generally far exceeds supply. And often, only such firms" best customers are eligible. At Schwab, deals are offered only to members of the firm's two frequent-trader clubs, as well as wealthier investors in its Schwab Priority Gold group.
Schwab, which gets some shares of every IPO lead-managed or co-managed by J.P. Morgan & Co., Hambrecht & Quist Group Inc. and Credit Suisse First Boston Corp., declined to disclose how many shares of such deals it gets.
But Wit Capital has had trouble getting sizable allocations of IPO shares for its own tiny base of 5,800 brokerage customers, who receive stock on a first-come, first-served basis. Customers receive e-mail notification of deals and read prospectuses on-line. When Wit first started participating in syndicates in September, the firm was "fighting hard and begging" for even 5,000 or 10,000 shares of multimillion-share deals, Mr. Klein said.
Lately, though, Mr. Klein says Wit has managed to grab allocations of 50,000 and even 75,000 shares. Wit recently has worked with bigger, better-known underwriters, including the BT Alex. Brown unit of Bankers Trust Corp.; Donaldson, Lufkin & Jenrette Inc.; and Morgan Stanley Dean Witter & Co.
In April, Wit customers got shares of Morgan Stanley's IPO for computer publisher Ziff-Davis Inc., though investors also been cut in on less prominent deals, such as C.E. Unterberg's March IPO for on-line department store CyberShop International Inc. Now Wit, under Mr.
Lessin's leadership, wants to move up to serve as a co-manager on certain deals and parcel out stock to other on-line firms-an arrangement under which Wit could reasonably ask for allocations of 500,000 or even one million shares, Mr. Klein says.
The other firms "would be "e-dealers" in "e-syndicates" "e-managed" by us," he explained. Wit says it has signed up several firms, including niche player Wall Street Access, for deals that could come to market as early as August.
High-Quality Deals
Although many brokerage executives say they support Wit's idea, some still aren't convinced Wit can get enough shares of high-quality deals to make participating in them worthwhile.
"You can always find a way to get into the selling group of mediocre deals," says Ameritrade's Mr. Konen. Other on-line brokerage executives add they might have better luck striking deals with investment banks on their own, as they are the ones with the large customer bases that might be attractive to corporate issuers.
Still, Mr. Montanaro of Suretrade says his firm is looking at Wit's plan "very seriously."
Bringing more on-line investors into the IPO process has a strong
appeal for companies that do business on the Internet as well. "From
our point of view, being a cyber-retailer, we felt that the audience
[Wit] could bring to the table would be enamored with the idea of
buying an Internet IPO," said Jeffrey Tauber, the chairman and chief
executive of CyberShop.
Mr. Klein says that while about 140,000 people have signed up to look
at information about stock offerings on Wit's Web site, only a few
thousand have bought shares so far. They must undergo a suitability
analysis and open a brokerage account to actually buy stock.
Still, Mr. Klein says that in the on-line world, there is power in
numbers. He also says that even big firms such as Schwab and E*Trade
might join e-syndicates to give their customers a wider choice of
deals from multiple underwriters.
In addition, Wit can use the Internet to target potential stock buyers.
When Wit got in on the May stock offering for Cleveland Indians
Baseball Co., Mr. Klein notes, it bought advertising space on
sports-oriented Web sites to find potential investors. "It's not just the
distribution ... it's having the ability to get the data," Mr. Klein says. |
