E-Trade, O.C. Executive Plan to Capitalize on the Internet
E-Trade Group Inc., the Palo Alto-based online brokerage, on Tuesday unveiled plans to create an online investment bank that will help companies raise money over the Internet and be led by Orange County investment banker Walter Cruttenden III.
The company, EOffering, will be challenging some powerhouse Wall Street firms, much as E-Trade did when it began selling stocks online. Investors include Sanford Robertson and Cruttenden, who both previously led their own California-based investment banks. Cruttenden, 48, will be chief executive and the largest shareholder.
EOffering, which will be based in Newport Beach and is expected to begin operating by year-end, hopes to capitalize on investor mania for Internet stocks by offering 50% of any securities deal directly to individuals via the Net--and the rest to institutional investors.
“E-Trade has been trying to rewrite the rules of the investment food chain and now they want a bigger piece of the IPO [initial public offering] pie,” said Bill Burnham, analyst with Credit Suisse First Boston in San Francisco. “Still, investment banking is all about reputation and track record.”
Indeed, some analysts questioned whether EOffering will be able to attract good-quality companies to its fledgling investment banking operation, and whether offering individuals more shares in often high-risk Internet stocks is a good thing.
“Offering these stocks over the Internet to the general public is a disservice,” said Gail Bronson, analyst with IPO Monitor, a Calabasas data company.
Late last year, the National Assn. of Securities Dealers, which operates the Nasdaq Stock Market, said it expects to propose rules aimed at curbing the volatility of recent Internet IPO stocks.
A spokeswoman for E-Trade, which will own 28% of the new company, said that while the firm is aware of regulators’ concerns and will cooperate with officials, it has a different philosophy.
“We believe our investors are intelligent people and they have come through quite a process to come to E-Trade in the first place,” said Lisa Nash. “They are Internet-savvy and are tracking financial information online.”
EOffering plans to attract small, fast-growing companies by cutting 30% from the cost of a corporate securities deal; using electronic trading systems; and including “virtual roadshows” broadcast directly on the Internet to spread information about the companies. EOffering estimates the costs of an IPO could be cut to about 4.5% of the amount raised, compared with a traditional Wall Street investment bank’s fee of about 7%.
The company expects to put together deals of about $25 million to $50 million each, but some analysts questioned whether EOffering can attract solid companies, noting that Cruttenden Roth--the company Walter Cruttenden was chairman of until last year--has not had the best IPO track record recently.
Cruttenden Roth was lead manager on six IPOs during 1998. At the end of the year, stocks of those IPOs were down an average of 20.7% from their offer price, according to Securities Data Co., a New Jersey data tracker.
Still, EOffering will be successful, Cruttenden argued, predicting that the lower costs, plus the ability to speed up the costs of going public, will be attractive as long as strong research and marketing capabilities are offered.
“Our phones are ringing off the hook today,” said Cruttenden, who said he has experience on more than 100 securities offerings.
Robertson, who founded Robertson Stephens & Co. in 1978 and resigned last year when BankBoston bought the firm, is expected to take a larger role in EOffering once his non-compete clause expires in 12 months.
E-Trade already has added bond trading and mutual funds to its lineup of offerings, which are part of a plan to become a more diversified house of financial services on the Internet.
Several companies, including New York-based Wit Capital Corp., allow individuals to buy shares in IPOs on the Internet. E-Trade and Charles Schwab Corp. let customers place buy orders for shares in some traditional IPO sales.
“We don’t really see them [EOffering] as competition,” said Tracey Gordon, spokeswoman for online trading leader Schwab. “You can’t produce an investment bank overnight and expect good companies to want to go with you.”
The announcement sent E-Trade shares soaring $12.44 on Tuesday to close at a record $100.94 on Nasdaq. The stock has more than doubled this year.
Times wire services were used in compiling this report.
