IT LOOKS LIKE E*Trade Group (ET), the nation's third-biggest online brokerage, may have dealt itself a bad hand when it came up with a strategy last year for allowing its customers to invest in new stock offerings.
For the past seven months, qualified E*Trade customers have been able to buy stock in high-tech initial public offerings through a partnership with Wit SoundView (WITC), one of the first true online investment banks. So far, the IPO shares available to E*Trade customers have been few and far between — especially after the tech crash. But for E*Trade customers, the deal is a lot better than the even slimmer pickings available to most other online investors.
Last week, however, the tables were turned when E*Trade's two main competitors — Charles Schwab (SCH) and TD Waterhouse (TWE) — inked their own IPO agreements with Goldman Sachs Group (GS), the prestigious New York investment bank. In effect, Schwab and Waterhouse will now be able to provide some of their estimated 11 million customers access to IPOs underwritten by Goldman. That deal stems from Goldman's June 14 purchase of Epoch Partners, a fledgling online investment bank in which both Schwab and Waterhouse had been early-stage investors.
Of course, given the dearth of new stock offerings these days, you might be wondering why this is a big deal. But someday the market will start rising, the IPOs will start flowing and Goldman's investment bankers will be in the thick of it, bringing many of those new stock offerings to market. Schwab and Waterhouse customers will benefit, while E*Trade customers will be forced to subsist on the thin gruel of IPO shares allocated by Wit SoundView, which has played a minor role in just two IPOs this year.
Indeed, in investment-banking circles, Wit SoundView is a mere flea to the proverbial 300-pound Goldman gorilla. The problem for E*Trade is that when it forged its Wit SoundView alliance 13 months ago, it agreed to a five-year exclusive deal. That means E*Trade can't keep pace with Schwab and Waterhouse by going out today and negotiating an IPO arrangement with some other big investment house like Credit Suisse First Boston or J.P. Morgan Chase (JPM). E*Trade officials wouldn't comment on their deal with Wit SoundView.
Given that reality, it isn't hard to imagine a frustrated E*Trade customer surfing over to the Schwab or Waterhouse Web sites to invest in IPOs. And that could be a thorny problem for E*Trade. Unfortunately for the Menlo Park, Calif.-based brokerage company, it's usually only the wealthiest and best customers who are allowed to invest in IPOs. So the defections could come among E*Trade's most lucrative accounts.
So is there any way for E*Trade to unchain itself from Wit SoundView? Well, the deal between the two firms is pretty ironclad. In fact, if E*Trade is acquired by another financial firm, the purchaser will have to pay between $80 million to $120 million to sever the agreement. There's no provision allowing E*Trade to unilaterally walk away. And presumably, Wit wouldn't allow E*Trade to break the pact without at least paying the same $80 million that a firm acquiring E*Trade would have to dish out. A Wit SoundView official wouldn't comment, except to note that the firm considers the deal a binding agreement.
Another option would be for E*Trade to simply acquire Wit SoundView outright. With Wit SoundView shares trading just a shade above the $2 mark, the investment bank carries a market capitalization of about $248 million — not much considering the assets involved — including the highly respected SoundView institutional research operation. Already, E*Trade is Wit SoundView's largest shareholder, owning some 13% of its outstanding stock. But several Wall Street financial-services analysts who didn't want to be identified dismissed the buyout scenario, noting it would be a drastic move to correct what now appears to be a bad agreement.
So unless E*Trade wants to cough up a lot of cash, it looks like it may be stuck. The trouble is, E*Trade's customers can do whatever they want, and those Goldman IPOs are going to look pretty tasty when the market warms up.
E*Trade Trivia
First there was the move this year to the New York Stock Exchange. Then there was the opening of the extravagant E*Trade Center on New York's posh Madison Avenue. Now, it seems, E*Trade's corporate brass is giving up the Bay Area for the Big Apple.
Sources say that within the next few weeks, E*Trade Chairman and Chief Executive Christos Cotsakos and Chief Financial Officer Leonard Purkis will be relocating to New York, at least part-time, to set up a miniheadquarters at E*Trade Center. The goal is to give the upstart firm more credibility with Wall Street, sources say.
E*Trade officials wouldn't comment on the report, except to say that it's consolidating some of the office space it leases in Manhattan at E*Trade Center. As for Cotsakos, an E*Trade spokeswoman puts it this way: "Christos is a global executive who conducts business on both coasts and, indeed, around the world."
For the past seven months, qualified E*Trade customers have been able to buy stock in high-tech initial public offerings through a partnership with Wit SoundView (WITC), one of the first true online investment banks. So far, the IPO shares available to E*Trade customers have been few and far between — especially after the tech crash. But for E*Trade customers, the deal is a lot better than the even slimmer pickings available to most other online investors.
Last week, however, the tables were turned when E*Trade's two main competitors — Charles Schwab (SCH) and TD Waterhouse (TWE) — inked their own IPO agreements with Goldman Sachs Group (GS), the prestigious New York investment bank. In effect, Schwab and Waterhouse will now be able to provide some of their estimated 11 million customers access to IPOs underwritten by Goldman. That deal stems from Goldman's June 14 purchase of Epoch Partners, a fledgling online investment bank in which both Schwab and Waterhouse had been early-stage investors.
Of course, given the dearth of new stock offerings these days, you might be wondering why this is a big deal. But someday the market will start rising, the IPOs will start flowing and Goldman's investment bankers will be in the thick of it, bringing many of those new stock offerings to market. Schwab and Waterhouse customers will benefit, while E*Trade customers will be forced to subsist on the thin gruel of IPO shares allocated by Wit SoundView, which has played a minor role in just two IPOs this year.
Indeed, in investment-banking circles, Wit SoundView is a mere flea to the proverbial 300-pound Goldman gorilla. The problem for E*Trade is that when it forged its Wit SoundView alliance 13 months ago, it agreed to a five-year exclusive deal. That means E*Trade can't keep pace with Schwab and Waterhouse by going out today and negotiating an IPO arrangement with some other big investment house like Credit Suisse First Boston or J.P. Morgan Chase (JPM). E*Trade officials wouldn't comment on their deal with Wit SoundView.
Given that reality, it isn't hard to imagine a frustrated E*Trade customer surfing over to the Schwab or Waterhouse Web sites to invest in IPOs. And that could be a thorny problem for E*Trade. Unfortunately for the Menlo Park, Calif.-based brokerage company, it's usually only the wealthiest and best customers who are allowed to invest in IPOs. So the defections could come among E*Trade's most lucrative accounts.
So is there any way for E*Trade to unchain itself from Wit SoundView? Well, the deal between the two firms is pretty ironclad. In fact, if E*Trade is acquired by another financial firm, the purchaser will have to pay between $80 million to $120 million to sever the agreement. There's no provision allowing E*Trade to unilaterally walk away. And presumably, Wit wouldn't allow E*Trade to break the pact without at least paying the same $80 million that a firm acquiring E*Trade would have to dish out. A Wit SoundView official wouldn't comment, except to note that the firm considers the deal a binding agreement.
Another option would be for E*Trade to simply acquire Wit SoundView outright. With Wit SoundView shares trading just a shade above the $2 mark, the investment bank carries a market capitalization of about $248 million — not much considering the assets involved — including the highly respected SoundView institutional research operation. Already, E*Trade is Wit SoundView's largest shareholder, owning some 13% of its outstanding stock. But several Wall Street financial-services analysts who didn't want to be identified dismissed the buyout scenario, noting it would be a drastic move to correct what now appears to be a bad agreement.
So unless E*Trade wants to cough up a lot of cash, it looks like it may be stuck. The trouble is, E*Trade's customers can do whatever they want, and those Goldman IPOs are going to look pretty tasty when the market warms up.
E*Trade Trivia
First there was the move this year to the New York Stock Exchange. Then there was the opening of the extravagant E*Trade Center on New York's posh Madison Avenue. Now, it seems, E*Trade's corporate brass is giving up the Bay Area for the Big Apple.
Sources say that within the next few weeks, E*Trade Chairman and Chief Executive Christos Cotsakos and Chief Financial Officer Leonard Purkis will be relocating to New York, at least part-time, to set up a miniheadquarters at E*Trade Center. The goal is to give the upstart firm more credibility with Wall Street, sources say.
E*Trade officials wouldn't comment on the report, except to say that it's consolidating some of the office space it leases in Manhattan at E*Trade Center. As for Cotsakos, an E*Trade spokeswoman puts it this way: "Christos is a global executive who conducts business on both coasts and, indeed, around the world."
