Merrill’s Online Plans Could Wilt Wit IPO

In much the same way that software start-ups proclaim Microsoft’s
incursion into their market “validates” their vision, Internet
competitors of Merrill Lynch greeted the brokerage giant’s announcement
Tuesday that it will offer discount online trading later this year with
a mixture of smugness and false bravado.

Investors weren’t fooled, however. The stock prices of other online
brokers fell Tuesday and continued to fall Wednesday morning.

DLJdirect (DIR), the online spinoff of Wall Street investment firm
Donaldson, Lufkin & Jenrette, closed Tuesday at $38.75, down 10 percent from
Friday’s $43 close, and was trading as low as $32.06 Wednesday morning.

E*TRADE (EGRP) finished Tuesday’s session at $39.31 in heavy trading,
down 12 percent from Friday’s closing price of $44.50. Shares were selling
Wednesday morning for as low as $36.13.

And Ameritrade (AMTD) was trading Wednesday morning as low as $73.50
after closing Tuesday at $79.75, 11 percent below Friday’s closing price.

What investors realize, of course, is that Merrill will take business
from all of these companies. It also will drive down the profits from
each transaction as online brokers slash prices to fight for market
share.

And Merrill will drag even more competitors into the online fray because
other full-service brokerages will be forced to offer discounted
Internet investment services.

If that’s not enough, continuation of the current slump in Internet
stocks could force thousands of day traders out of the game, thus
reducing the size of the potential customer base for online brokers even
as the number of competitors increases.

Against this backdrop of turbulence and uncertainty, the company perhaps
most associated with online investing is slated to go public any day
now. Talk about timing.

Wit Capital Group’s IPO could be the biggest victim of Merrill’s online
incursion. The New York-based company hopes to raise $60.8 million (down
from the $80 million cited in its original SEC filing) in an offering of
7.6 million shares at $7 to $9 each. Nasdaq ticker symbol will be WITC;
underwriters are Bear Stearns, Wit and Thomas Weisel Partners.

When the offering was announced on
March 22, Wit looked like a winner. (Granted, almost all Internet IPOs
did way back then.) A week later, when Goldman Sachs announced it would
take a 22 percent stake in Wit, a build-up toward a monster launch appeared in
progress. (See Midday
Report
from March 30.)

Now the question is whether Wit should delay its IPO. The confluence of
larger events conspiring against Wit argues for discretion as the better
part of valor. But the Internet IPO schedule is relatively light this
week and Wit appears to have the pole position in that it is the most
well-known in a smallish field.

Wit probably is on the way this week anyway. Given the cool Internet IPO
market and Merrill’s latest move, though, the online broker is more likely to stumble than soar in its ticker debut.


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