E*TRADE finally lands an IPO, but so what?: Its fees are similar and its reputation is yet to be established

E*TRADE finally lands an IPO, but so what?: Its fees are similar and its reputation is yet to be established
When E*Offering - the investment banking affiliate of on-line broker E*Trade Group Inc. - set up shop last January, many observers thought the firm posed a serious threat to Wall Street's lucrative initial public offering business.
OCT 18, 1999
After all, Newport Beach, Calif.-based E*Offering was breaking ranks with the big New York firms by pledging to compete on price. E*Offering was willing to trim the 7%-of-proceeds fee that has long been standard for all IPO underwritings. Ten months later, E*Offering has finally snared its first IPO: It will be the lead manager on a $150 million offering for Espernet.com Inc., a Manhattan-based roll-up of 43 Internet service providers. Yet the deal does not break any ground in terms of fees, raising questions about whether competing on price will ever be viable. According to Espernet's filing with the Securities and Exchange Commission, $10.5 million of the total it intends to raise will be paid to its investment bankers. That's an underwriting fee of 7%. Lower fees - not Tim Newell, head of corporate finance at E*Offering, declined to discuss Espernet, citing the SEC-mandated quiet period. He did say, however, that E*Offering will eventually lower its fees, but right now there is little incentive to do so, given the market conditions. "We are in a position to compete on price, but right now the market is not competing on price," says Mr. Newell. When the IPO market cools off and there are fewer companies in a position to go public, he believes, E*Offering will be able to win business by undercutting the fees of Goldman Sachs Group Inc., Credit Suisse First Boston and other top IPO underwriters. "We have lower operating costs because we're on the Internet model," Mr. Newell says. "We'll be in a position to compete on price in the future, whereas many of our traditional competitors that have higher overhead will not." Experts are skeptical. The advantage of hiring Goldman Sachs to underwrite an IPO lies largely in Goldman's sterling reputation. Investors are more willing to invest in a deal underwritten by a top firm, and that usually translates into a higher valuation for the company going public. "Ultimately, the value to the company of using a top-tier investment bank is greater than the amount you'd save on the fee by using a lesser-known firm," says Morrison & Foerster's Julie Ross, an IPO-advice lawyer. Sources familiar with the Espernet deal say the Internet service provider chose an all-Internet underwriting team - the co-managers are Web broker DLJdirect Inc. and on-line investment bank W.R. Hambrecht & Co. - because it wanted to make its stock easily available to its customers, many of whom invest on-line.

Day traders a concern

"It is common for us to generate orders for several million shares from on-line investors," says Mr. Newell, whose resume includes stints as a technology adviser to President Clinton and as an investment banker for Robertson Stephens & Co. "Off-line, that would take three weeks and a road show." But who buys into the Espernet deal and how they do it may show that speed can be a negative. While demand from retail investors can drive up the offering price of IPOs, most companies still prefer to sell the bulk of their shares to institutions. "If you're getting retail day-trading orders, that's a far cry from quality, blue-chip institutional investors who will hold the stock long-term and provide stability to the market," says Sean McDevitt, a former Goldman Sachs banker who is now a managing director at investment banking boutique Alterity Partners.

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