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March 1, 2001

Surfing for Investment Banking

By Colleen O'Connor

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  • Surfing for Investment Banking

Investment banks have been the toll-men of the capital markets roads for many years.

Companies and investors were in their hands. Not anymore. The advent of the Internet age is changing that. Many companies now ignore the toll booths. They have found their own paths to the market.

New players are challenging Wall Street. They include online IPO auctions, Internet roadshows and trading without a broker.

Investment banks face the risk that their superhighways to the markets stand to become the ones less traveled.

"New entrants and new business models are challenging the established tenants of the business. Investment banking is a business that has to change, or it will be forced to by secondary market dynamics," said Adam Singer, an e-investment banker with J.P. Morgan.

Singer believes the Internet should be seen as a tool for investment banks, which must have a solid IT business plan. "This is an opportunity for all of us to take advantage of," he said.

Traditional Barriers

With traditional barriers breaking down, investment banks must decide between sticking with existing Internet business or developing entirely new approaches to the Internet, Singer warned at a recent Internet investment banking conference.

Consider W.R. Hambrecht & Co. The firm, founded in 1998, adopted the Internet as a vital business tool. Although a new player in investment banking, the firm took an approach to the business that has attracted some praise. It helps that in recent times some information and research generated at investment banks is getting disseminated via Web-based channels. Data is bypassing the traditional investment banking routes.

"The Internet presented a huge opportunity...to reach out on the private equity deals," said Tim Opler, managing director at W.R. Hambrecht.

The firm has already hosted four Internet-based IPO auctions, using its "OpenIPO" platform. One such offering took place earlier this year, with the $26.4 million initial public offering of Peet's Coffee and Tea Inc. The bank's Internet auction of corporate bond issues, which is called "OpenBook", has given segments of bond trading new life. Opler outlined the details of the $300 million in bonds that the Dow Chemical Co. issued via the new platform, last August.

"Yes, the Internet has had a profound impact on capital markets...it's reducing search costs and improving information flow," he said. "In this auction, investors could see a real-time demand curve for the bonds."

However, there are some restrictions. Opler explained that the Securities and Exchange Commission does not want the OpenBook platform used with initial public offerings.

"Due to the way the securities laws in this country work, the SEC has made it clear that they don't want demand surges taking off," said Opler of the IPO market. He explained that, unlike bond trading, the SEC fears that investors could be shocked if they were suddenly able to see specific bids for a particular stock from a group of bidders.

So the OpenIPO platform utilized by W.R. Hambrecht is operated with sealed bids for stocks. Plans for a similar online securities auction deal with Freddie Mac are in the works, Opler noted.

Private Equity Outfit