Last week, the IPO market demonstrated that there is seemingly endless
liquidity. There were two mega IPOs: UPS, which raised $5.47 billion and
Charter Cable, which raised $3.23 billion. In fact, UPS had demand for
over 1 billion shares of its stock.
With such demand, the IPO market should be very strong next year, which is
good for Net companies, which have a voracious appetite for capital. But
it is also good news for investment banks. One that stands to be a
beneficiary is Wit Capital.
The company is the pioneer in online investment banking. Its founder,
Andrew Klein, was a securities attorney who got the entrepreneurial itch
when he decided to start his own microbrewry. However, he had much
difficulty raising money from traditional sources, so he decided to do his
own IPO. But he did not use a normal distribution channel; rather, he used
the Internet. It was 1995 and he had made history.
Interestingly enough, the beer industry was not as attractive as the
emerging online IPO market. So, he created Wit Capital.
Now, the company is growing like, well, an Internet company. In the past
nine months, revenues have been soaring, reaching $27.6 million. This
compares to $1.3 million in the same period a year ago. Losses, however,
surged from $5.6 million to $12.8 million.
It helps to provide after-market support for public companies so Wit Capital has been
shrewdly purchasing marketshare with its stock. Key to any investment bank
is a high-quality research department, so the company purchased SoundView
Technology, a leader in public company research, especially in Internet
sector, for $320 million.
The acquisition will mean 44 more research analysts atop Wit
Capital’s 14. There will be coverage of about 240 companies. There will
also be an additional 23 investment bankers, who handled 31 IPO deals this
year. Year to date, SoundView had $100 million in revenues and net income
of $16 million, which compares to $60 million and $2 million in 1997,
respectively. As an added bonus, note that Wit Capital’s losses will
shelter SoundView’s profits from taxes.
Conclusion
Wit Capital has some shrewd investors. Of particular importance is Goldman
Sachs, which has a 20 percent stake. This relationship has resulted in strong
deal flow.
Overseas, Wit Capital is expanding by pursuing a partnering strategy. For
example, Wit Capital Japan raised $30.3 million in its second round (the
first round was $10.1 million). Wit Capital Japan is a joint venture with
Mitsubishi and Trans Cosmos. The joint venture will provide such things as
research, capital raising and IPO services, as well as the establishment of
an online brokerage firm in Japan.
There is competition, such as from DLJ Direct, E*TRADE and Discover
Brokerage. What’s more, yesterday there was announcement to form a new
online investment bank, involving Schwab, TD Waterhouse, Ameritrade, Kle
iner Perkins, Benchmark Capital and Trident Capital.
But the competition validates the concept. Most importantly, Wit Capital
has been able to effectively create a unique, pure Net investment banking
brand, which is growing stronger and
stronger.
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