Wit Accepts E*Trade’s E*Offering

E*Trade married off its E*Offering unit to Wit Capital
for a handsome $328 million dowry. This stock swap
looks tailor made for both companies in a couple of respects. This is a
case of trading Baltic and Mediterranean in exchange for the remaining two
Railroads I don’t already own.

Bottom line is, both parties got what they wanted and can get back to what
they do best.

Here’s how the deal breaks down. E*Trade gets 32 million shares, or 25%, of
Wit stock and 100,000 brokerage accounts to boot, courtesy of Wit’s
Soundview subsidiary. The discount e-broker with the funny commercials
already boasts more than 2.5 million retail accounts, so it’s not much more
than a drop in the bucket.

But it sure spots E*Trade and venture partners, Softbank and General
Atlantic, smashing returns on a struggling venture into the investment
banking biz. And that’s how E*Trade comes out a winner here. The 100,000
Soundview accounts and some access to Wit’s IPOs and secondary offerings
just sweeten the pot.

Wit Capital dumped its brokerage accounts which gives it some wiggle room
to focus on its bread and butter – underwriting duties related to IPOs,
secondaries, and follow-ons. It’s also key to have sugar daddy Softbank’s
deep pockets stay for a visit.

Menlo Park’s E*Trade is on a mission to diversify its revenue streams, and
the upstart is doing a heck of a job so far. Its $2 billion Telebank Financial land-grab put online
bill-pay, loans, fund transfers, and access to ATMs, at the fingertips of
armchair investors. In March, E*Trade added brick-and-mortar deposit
capabilities with its acquisition of Card Capture Services and its 8,500
ATM machines.

It’s a story of the chicken and the egg, and I’d speculate that it’s easier
to get savvy new investors to warm to the idea of banking services through
their brokerage. Stock trading through my brick-and-mortar bank holds
little appeal, which explains why E*Trade ate the veggies first, before
adding the dessert platter.

Would I buy low and sell high through First Union online? I
wouldn’t even dream of banking with the arrogant offline dinosaur. How
about pure-Web banker Net.B@nk ? Anybody who’s used ’em would likely prefer to trust their
funds with a rodeo clown.

Brick-and-mortar banks face stiff competition down the road, while most
online banks will have the stuffing beat out of them by e-brokers who offer
an umbrella of services to the retail investor.

And, then there’s Andy Klein’s Wit
Capital. I just love this guy’s story so much, I never tire of
retelling it. Let me bore you with how the swashbuckling entrepreneur
stumbled into the underwriting business.

Klein founded the Spring Street Brewing Co. in an effort to offer
aficionados traditional Belgian-style microbrews. His line of Wit beers
were named for the Flemish word for wheat, a staple ingredient in beer.

He looked to raise some capital to expand his niche product, and his search
led him onto the Web in 1995. Creating a simple Web site that functioned as
the company’s prospectus of sorts, Klein offered nearly 3 million shares of
Wit Beer common stock at just under 2 bucks a pop in one of the Internet’s
first-ever direct public offerings.

Without underwriters or middlemen, Klein raised a cool $1.6 million from
3,500 private investors. The venture led to an SEC brouhaha, and Klein knew
he was on to something.

In March of 1996, Wit-Trade was born; and the rest is history. Andy’s since
taken a back seat role to more seasoned management, but the company’s
founder sure has a big fish story to tell the grandkids.

Any questions or comments, love letters or hate mail? As always, feel free
to forward them to kblack@internet.com.