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April 30, 1999

Goldman Sach's Wit Stake

By Stephen Lacey

Goldman, Sachs & Co.'s $20 million investment in online securities firm

Wit Capital provides some window dressing in advance of Wit Capital's coming initial public offering.

The investment in the upstart, New York-based digital broker also amounts to an instant Internet strategy for Goldman Sachs. The white-show investment bank is stealing a march on many of its competitors, who seem clueless in digital commerce.

"When a company with the stature of Goldman invests in your company ahead of an IPO, it's huge," said Dan Burke, a senior analyst at Gomez Advisors, an Internet brokerage consultant. "It's one hell of an investment for Wit, and for the Internet- brokerage industry overall."


By taking a 22-percent stake in Wit Capital, the 130-year-old private partnership not only gains retail online distribution for its stock offerings, but also access to Wit Capital's technology infrastructure.

At the same time, Goldman Sachs avoids the problems that has hindered the Internet campaigns at retail giants such as Merrill Lynch & Co. and Salomon Smith Barney.

Until now, Goldman Sachs has confined its involvement with the Internet to minority investments in electronic communications networks.

These networks include the BRASS Utility, or BRUT, operated by Weehawken, N.J.-based Automated Securities Clearance Corp., and Archipelago, operated by Terra Nova Trading in Chicago.

"The [latest] investment allows Goldman to put a toe in the water and see how this could affect their distribution in the future," Burke said. "Goldman is essentially protecting its left flank by buying a call option with Wit."

The capital infusion, coming on the heels of a separate $25 million private-equity placement in March, expands Wit Capital's business model. It links the Internet brokerage with perhaps the most storied of Wall Street's traditional investment banks a prospect unlikely to sit well with many of the large retail houses.

"There's always the fear in the mind of retail brokers about how the Internet is going to affect their livelihood," said Peter Bardwick, chief financial officer at, the Internet-based financial-news provider. "By making a direct investment, Goldman was able to avoid some cultural headaches."

Retail Allocations

Allocating stock to retail investors in an IPO has now become a prerequisite for many Internet companies., for example, had two electronic managers, or e-managers, Wit Capital and Donaldson, Lufkin & Jenrette's DLJdirect.

"Internet distribution is our business," Bardwick said. "So it only makes sense that we would use the medium to distribute a part of our offering."

For issuers such as, another attraction of e-syndication is the ability to place stock directly in the hands of the company's most significant stakeholders, including customers, employees and suppliers.

"Clearly one of the benefits for Goldman Sachs is Wit's distribution capabilities," said one investment banker familiar with the deal.

Through its use of digital-affinity distribution, Wit Capital is able to open thousands of accounts for a prospective issuer's stakeholders. Due to their vested interest, such stockholders are seen as more likely than conventional customers to remain long-term investors.

Founded just three years ago, Wit Capital pioneered the e-manager role through its participation in the November 1998 offering from EarthWeb (Nasdaq:EWBX). The upstart investment bank has already had six IPOs in the first quarter, with six more offerings scheduled for the next three months.

Rapid Ascent

Perhaps the only person not shocked at Wit Capital's rapid ascent is Robert Lessin, the company's chairman, and former head of investment banking at Salomon Smith Barney.

Through his own early-stage investments, Lessin is generally credited with giving the firm's clients access to some of Wall Street's hottest IPOs.

Wit Capital's relationship with Goldman Sachs (which itself had a highly successful IPO on May 4) will not hurt its own proposed $80 million IPO, which is expected on the week of May 24 through lead manager Bear, Stearns & Co.

Stephen Lacey is managing editor of The IPO Reporter, a sister publication of Traders Magazine.