THE DAY AHEAD: Wit Capital paid steep price to be Goldman Sachs' pal

Larry Dignan
3 min read

Wit Capital Group Inc. (Nasdaq: WITC) is the most buzz-worthy of the Internet IPO bunch this week, but potential shareholders may want to consider the price it paid for its "increased stature" via its relationship with Goldman Sachs.

Wit, an online investment banker, priced its 7.6 million share offering at $9, the top of its range.

The IPO should do well. There's no doubt that Wit is an innovator. It coined the phrase e-dealer and has been the trendsetter when it comes to letting the little guy in on the clubby world of initial public offerings. Way back in 1996, Wit began forging ahead in uncharted territory by pushing the Securities and Exchange Commission to ponder e-offerings.

As a result, Wit has opened 41,000 accounts, participated in 70 IPOs and boasts 38 million page views a month.

But being a trendsetter may not gain you respect on Wall Street. And that's where Wit's relationship with Goldman Sachs comes in. Wit teamed with Goldman for stature that could rake in investment banking business and corporate clients.

Wit Capital-Goldman Sachs: Fair deal?

Sounds fair until you see how one-sided the Goldman-Wit relationship is. Goldman Sachs, which is a shareholder/partner of Wit, got a 16.7 percent interest in Wit with the option to grab 25 percent of the company if warrants are exercised.

This pact is hardly a case of Goldman taking Wit under its wing. It's more of a case of Wit paying heavily to be Goldman's pal. "Goldman Sachs and we agreed to cooperate, on a non-exclusive basis, with respect to portions of our respective investment banking businesses," said Wit in its regulatory filings.

The non-exclusive part is key.

Goldman can compete with Wit on certain business and is free to help any competitor to Wit such as E*Trade Group Inc. (Nasdaq: EGRP). Goldman also doesn't have to give Wit access to any shares of IPOs where Goldman is the lead underwriter. That stipulation is meaningful since one of Wit's biggest problems is getting enough shares to satisfy customer demand for IPOs.

In addition, Goldman has an observer on Wit board meetings who has access to confidential information. Wit, however, has no access to Goldman's online plans.

"Our relationship with Goldman Sachs is very recent and we cannot whether we will receive significant benefits from our association with them," the company said.

Goldman could even become a problem in the future. Wit will have to work with other underwriters to ensure a steady stream of IPO shares. Goldman could be a liability because other underwriters may be leery of Wit, which is in bed with Goldman. Goldman is a huge underwriter, but isn't the only one out there.

In addition, Wit has to get approval if any Goldman Sachs competitor wants to buy an equity stake of more than 5 percent. If equity stakes are the route to being allocated more IPO shares, Wit could be in trouble.

Pseudo.coms revisited

A number of people came to the defense of Comps.com and Mapquest.com, two companies that have .com in their corporate names but only about a third of sales related to the Internet.

The responses from the "Some companies don't deserve the .com" column either 1.) missed the whole point; or 2.) defended the companies who plopped a .com in their corporate names.

Here's the summary of the emails (profanity removed of course): Don't blame the companies that take advantage of idiot investors. Yes, some companies abuse the .com naming convention, but the buyer needs to be beware.

"The only people that will be hurt by what you misname "pseudo.coms" are the morons who think they can make sound investment decisions based solely on a company's name," wrote one reader, who was a hardly a fan of the column. "Those people deserve to lose every cent they're throwing away."

While buying a company based on a .com corporate name might be foolish, that doesn't excuse companies that change their names to reflect an Internet focus without the Internet revenue.