Commentary: Wit Capital's E*Offering buy tangles financial services ownership

See news story: E*Trade, Wit cut $325 million brokerage deal

By David Furlonger

The most notable result of this deal is that Wit Capital will divest itself of the retail brokerage business operated by its subsidiary, Wit SoundView.

SoundView had 100,000 retail brokerage accounts--far fewer than the 2.6 million of E*Trade, one of the industry leaders. Wit Capital will therefore be freed to concentrate on its core business--helping to arrange corporate financing, especially initial public offerings, or IPOs.

At the same time, Wit will receive extra capital from Softbank, investing here through E*Trade, and General Atlantic Partners.

Through this deal, E*Trade will get out of the corporate financing and IPO business, which was not its main focus anyway, and will increase the customer base of its retail brokerage business incrementally by taking over SoundView's accounts. E*Trade will then be able to offer its customers a wider range of services, including access to SoundView's research and participation through SoundView in IPOs.

One question that remains to be answered is how thoroughly Wit Capital will integrate E*Offering in respect to, for example, business models, fee structures and technologies. The enhanced relationship with E*Trade also complicates things for Wit Capital, which used to offer participation in IPOs to its customers on a first-come, first-serve basis. On what basis will E*Trade customers be allowed to participate?

Finally, this deal underscores the growing tangle of relationships in online financial services. For example, Softbank has a stake in E*Trade, which now has a closer relationship to Wit Capital. Goldman Sachs owns 22 percent of Wit Capital and is one of several partners in Archipelago, an electronic communication platform. It is difficult to tell how these relationships and indirect relationships will affect the online financial services market.

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