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Wit Capital: IPOs for Everyone

While IPOs are still allocated mostly to institutions and wealthy individuals, this has been changing. More and more, individual investors are also participating in the new issues market. The pioneer in this industry has been Wit Capital . The company was started several years ago by an ex-Wall Street attorney, Andrew Klein, who wanted to raise money for his microbrewery. When every venture capitalist rejected his business plan, he went direct to the people. Literally. He launched his IPO via the Internet.

I'm not sure what happened to the brewery; however, Klein realized there was lots of opportunity in using the Net to raise money for companies. Wit Capital was born.

The company has, itself, gone public. It has a top management team, with seasoned professionals from the traditional investment banking world.

But having a traditional management team has not stifled Wit Capital's pioneering spirit. Look at the deal with ITG, which manages shareholder services. The joint venture will create an online auction system for secondary and follow-on stock offerings. It is called Vostock. While a traditional secondary offering can take a month or more, the Vostock system takes about a week. What's more, there will be two tranches of stock: one for retail investors and another one for institutions.

Wit Capital has been savvy with its acquisitions. One was for SoundView (purchased for $313 million). SoundView, which was founded in 1979, is a private investment banking firm.

In fact, the acquisition has shown immediate results. In the last quarter, Wit Capital had $7.5 million in net income on $106.6 million in sales. While analysts estimated earnings of 2 cents a share in earnings, the number was instead 8 cents a share.

Another sound deal looks to be the acquisition of E*Offering, which is an online investment bank. The biggest investor in E*Offering was E*TRADE. In the deal, E*TRADE has agreed to buy the retail broker unit of Wit Capital (about 100,000 customers). In return, Wit Capital will be the exclusive provider of new issues for E*TRADE. Moreover, Wit Capital will get the online investment banking unit of E*Offering. In all, Wit Capital will pay $328 million in shares.

True, the IPO market has been anemic. But with Wit Capital's acquisitions strategy, the company is rapidly becoming a diversified online financial institution. So while IPOs may slow, mergers and acquisitions will likely increase or there may be more demand for private offerings (yes, both Wit Capital and E*Offering handle private placements). In other words, Wit Capital is building for the long-term, which should be good for its shareholders, as well as investors who want access to financial markets that have traditionally been the domain of institutions and wealthy investors.