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
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.