E*Trade Group (Nasdaq: EGRP) and Wit Soundview (Nasdaq: WITC) say they're creating a unique business model.
The companies today announced they would swap businesses. E*Trade gets Wit Soundview's brokerage unit. Wit gets the E*Offering investment bank.
Executives on this morning's conference call bandied about the usual glowing terms: "extraordinary event"; "home run"' "creating a new force"; "category killer"; "resounding victory." But what did this deal really accomplish?
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E*Trade picks up 100,000 accounts with average asset values of roughly $10,000, which is below E*Trade's own average. Some E*Trade shareholders might be disappointed there won't be an IPO for E*Offering. Some E*Trade customers might want more analyst sources besides Wit Soundview, which gets exclusive research rights on E*Trade as part of the deal.
But those are minor considerations, even the 100,000 customers, which isn't all that much considering E*Trade already has 2.6 million.
This deal's real impact is for Wit, which is why Wit does most of the paying, in the form of 32 million shares, worth about $348 million as of early this afternoon. Part of the agreement calls for E*Trade to buy an additional 2 million WITC shares for cash.
All told, the deal ends up with E*Trade and other E*Offering shareholders (including ZDNet stakeholder Softbank) owning about 25 percent of Wit Soundview. E*Trade expects to record more than $50 million in investment gains when the transaction closes.
The price isn't bad considering E*Offering sees revenue of $75 million in the current fiscal year, and expects to earn profits by the fourth quarter.
Wit believes the acquisition of E*Offering gives the combined company more leverage in attracting more and bigger shares of technology and Internet-related IPOs. At the same time, a tight relationship with E*Trade provides a much wider retail distribution channel.
Today's market seems flat on the idea, judging by the somewhat minor boost Wit Soundview's stock price so far. Wall Street's travails as of late have sucked out the enthusiasm for IPOs. Thomas Weisel Partners analyst Geoffrey Beard -- always strange to see investment banks with research coverage on each other -- last week slashed his estimate of Wit's IPO deals in the second quarter to 16 from 30, and downgraded Wit to "market performer" from a "buy" rating.
The IPO market will come back eventually. And Wit co-CEO Ron Readmond notes that no investment bank relies solely on IPOs for business. Companies still look for private financing, M&A advising and such.
"The need for capital doesn't dry up," Readmond said during the analyst call. "And in fact, the real power of the franchise, now coupled with this elegant distribution, is our pipeline of relationships with issuers, typically private companies that number in the thousands that are in need of capital."
But IPOs are the driving force behind this announcement. Wit bought Soundview last year largely to boost its underwriting abilities, and it's buying E*Offering now for the same reason. By picking up the "elegant distribution" channel that opens up the wallets of more than 2.6 million E*Trade users, Wit Soundview can make a stronger pitch for more and bigger shares of the IPO business.
In recent months, Wit took part in 45 deals, handling an average of 19 percent of shares being offered, executives said during today's call.
Prior to the deal, Wit traded at nearly twice the valuation of its blue chip peers, but today's agreement remains a far cry from creating another Merrill Lynch (NYSE: MER) or a Goldman Sachs (NYSE: GS). Yes, Wit gets bigger, but I don't see how its position in the overall market changes that much.
Let's face it, even with E*Offering, Wit isn't likely to beat out Goldman in a competition to lead an initial public offering. The institutional power behind Wall Street's white horses is still a heavy bargaining chip.
Make no mistake, today's announcement appears to be a good deal for both sides. It's just not as big as they'd have you think. 22GO>