Wit Capital An Online Investment Bank

 

A Case Study

By

Bruce Egsieker

 

Ron Readman executive officer and president of Wit Capital, an online investment bank headquartered in New York City has put together a capable team of investment bankers.  The firm, from its inception, had also begun producing research on leading Internet and technology companies.  In addition, Goldman Sachs and venture capital firm Capital Z each invested $25 million in Wit Capital.  Finally, in June 1999, Wit Capital went public, its stock price increasing from $9 to $38 per share over a period of two weeks.

 

Competition was emerging from both established and new quarters.  Two online investment banks, E*Offering and W.R. Hambrecht, had begun distributing IPO’s (initial public offerings…which is a first time a company sells stock to the public) over the Internet, and traditional investment bank brokerage houses such as Merrill Lynch were enabling their clients to trade securities at a low-cost on the web.  Readmon commented that Wit Capital is a true Internet company, as we cannot exist without the World Wide Web. 

 

When the company decided to go public (sell their companies stock) and raise capital on the open market, it searched for an investment bank to shepherd it through the initial public offering (IPO) experience.  Banks chosen to manage the offering began the underwriting process by completing “due diligence” on the company and writing a prospectus.  This document stated the company’s business strategy and why it was to raise money.  In the prospectus, the investment bank began the process of valuing the company, although the actual price of the securities was often not set until just prior to their sale. 

 

The investment banks then took the senior officers of the company on a road show giving executives of the company an opportunity to tell their story to potential investors.  They went to fifteen cities in ten days and spoke to 50 audiences.  This proved successful for them.  Just before the offering, the investment banks priced the shares and bought all of them.  The banks then offered to sell the shares to their clients.  Traditionally banks sold the shares of high demand IPO shares.  As a result, the stock price of an IPO often moves up during the first day of trading, rising 10 to 20 percent or more.  The lead manager receives a fee of approximately seven percent of the amount of capital raised.

 

Wit Capital had its origins in Spring Street Brewing Company, a smaller company formed in 1993 by Andrew Klein, a Manhattan securities attorney.  In February 1995, needing more capital to sell the firm’s withier, Klein's objective for his new company was to offer retail investors access to IPO’s, creating truly “democratic” financial markets.

 

In February 1997, Readman became an equity investor in Wit Capital as well as Chairman.  In April 1998, Bob Lessin joined the firm becoming co-chief executive officer.  Readman had been vice chairman of Charles Schwab, a managing director at Alex Brown and Sons, and chairman of the board of the National Securities Clearing Corporation.  Lessin, had over 20 years of experience on Wall Street.  Prior to joining Wit Capital, he had been vice chairman of Solomon Smith Barney.  As of January 2000, Wit capital had offices in New York and San Francisco engaged in investment banking and brokerage. 

 

Wit Capital as E-Manager.  The E-Manager concept, pioneered by Wit Capital, signified the firm’s ability to serve as a conduit, between the IPO (initial public offering) issuer and online retail investors.  Wit Capital typically secured ten to fifteen percent of the offering shares for online investors.  Wit Capital’s analysts produced regularly updated reports on a number of firms it had taken public.  Lessin believed that analyst coverage of Wit Capital clients enhanced the firm’s credibility and provided more value to its customers.  Because they know are know for research on Internet companies, retail investors know that they can come to us for timely and free research.

 

Wit Capital charged a discounted commission, $14.95 per online trade or $50 per trade if an order was placed over the telephone.  Eighty percent of trades were made over the Internet.  The firm’s customer base grew from 5,000 in June of 1998 to over 100,000 by January of 2000.  Sixty seven percent of accounts were active.

 

Lessin commented: we have a customer acquisition cost of zero.  Other on-line brokerages pay between $400 and $500 per customer.  Everyone wants IPO’s. If you want Wit IPO’s you will have to come to Wit Capital.  In order to open an account with Wit Capital, a customer needed to deposit $2,000.  They prefer to have their customers with at least two to three years of investing experience and have over $50,000 in annual income. 

 

Wit Capital also has made its IPO shares available to 25 other online brokerage firms.  These E-dealers were members of Wit Capital’s E-syndicate.  By creating these E-syndicates with other online brokerages, Wit Capital offered its client companies access to over one million Internet investors.  Wit Capital shared its selling commissions with E-syndicate members. 

 

The distribution process began with an IPO “alert.”  Approximately 200,000 emails were sent to Wit Capital retail accounts customers, registered website visitors, and E-syndicate members.  This email contained a hyperlink to an issuer’s prospectus and information on possible pricing and timing of the offering.  Wit Capital customers went to its website to place their orders.  Customers of E-syndicate brokerages went to their firm’s websites to place orders.  One in four customers typically received about 100 shares.

 

Lessin envisioned future revenue being derived from capital raising (50 percent), brokerage (25%), and strategic advisory services (25%).  By the end ot the fourth quarter 1999, Wit Capital planned to implement its “digital trading facility” (DTF), a virtual trading floor, or what some managers called “an eBay for stocks.”  The DTF was expected to offer the clients the opportunity to trade 24 hours a day, seven days a week.  Wit Capital planned to eliminate broker spreads on stock trades, in theory giving investors more competitive execution prices.

 

Wit Capital would help small private companies find willing investors online.  This type of offering under the Securities and Exchange Commission’s Regulation D allowed the issuing company to avoid registration requirements and save underwriting fees by offering shares directly to institutional and accredited investors. 

 

Value Proposition…Ron Readman has stated “most conventional financial service products have become commodities.  We’re focusing on specialty financial products…research and IPO offerings.”  Wit Capital’s value proposition for individual investors was rooted in the notion of democratic, non-preferential access to financial markets.

 

E*Offerings…Announced in January of 1999, E*Offerings was a joint venture between E*Trade (an online brokerage with over one million clients) and Sandy Robertson, founder and former CEO of Roberston Stephens (a well-known brokerage house).  This provides E*Trade’s customers with access to IPO stocks.

 

Wit Capital managers had announced that they planned to build experience in areas other than internet related companies including consumer goods, education, and health care, as a bulwark against a possible downturn in the Internet IPO market. 

 

Questions to answer: 

 

1)    Go to www.witcapital.com/    I want you to locate” IPO’s and Other Offerings” or “Research” and find several  new stock offering and research these companies.  Write me a few paragraphs about the two or three companies that you chose.

 

2) Explain what is Wit Capitals E-syndicate.  What do you think this does?