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April 30, 2001

Instinet's Life-Saving IPO?

By Colleen Marie O'Connor

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  • Instinet's Life-Saving IPO?

The upcoming share offering by the largest ECN in the U.S. may breath some life into the beleaguered IPO market.

That's what analysts are saying as Instinet Group provided more details on its earlier filing for an IPO.

Instinet's exposure with institutional investors could play well in the IPO market. The electronic communications network - Instinet dislikes that term since it sees itself as more than a conventional ECN - is hoping to raise $413 million. Share prices were set in the $11 to $14 range in its IPO filing on Nasdaq (proposed ticket symbol: INET).

The New York-based firm, owned since 1987 by London-based Reuters Group P.L.C., will offer 33.9 million shares, or 14 percent of common stock, which includes 4.4 million in over allotment. (Reuters will retain a substantial equity stake after the offering.)

The deal is co-managed by Credit Suisse First Boston and Bear Stearns and includes Deutsche Banc Alex. Brown, W.R. Hambrecht, J.P. Morgan, Merrill Lynch and Salomon Smith Barney. The IPO will be used to repay about $200 million of indebtedness to Reuters. The rest is for working capital and capital expenditures, the filing noted.

"They're in a perfect position to do [an IPO]," said Sang Lee, an analyst with Celent Communications in Cambridge, Mass. "[Instinet] has been around since before the term ECN was invented. And from the institutional side, Instinet dominates the institutional investor [base]."

Nine ECN platforms exist today, although a wave of consolidation similar to what happened in the technology sector as a whole, is expected. Altogether, these ECNs account for some 30 percent of Nasdaq share volume. Traditional market makers, whose demise was predicted with the early advances of ECNs, still account for the lion's share of Nasdaq volume. They continue to prosper.

ECNs, meanwhile, have aligned themselves with strong partners. Reuters rival Bloomberg L.P. operates Tradebook, and Datek Online Holding has a small ownership stake in the Island ECN. Archipelago touts E*Trade and Goldman Sachs as investors.

Registered with the SEC as a broker dealer, Instinet is a member of over 30 exchanges, both domestic and international. It provides brokerage services to its customers, charging bare-bones execution rates as an agent. It does not maintain inventories of securities.

About 30 years ago, Instinet was called the Institutional Networks Corp. and was used by money managers to trade listed stocks among themselves. Some customers used it to get started on a large block.

A buyer in the market might find a seller for a small portion of a block, then turn around and complete the full trade via telephone with the same selling counterparty. That meant Instinet did not act as an agent on the full trade. In response, it introduced anonymous trading, allowing it to capture more of the institutional block business.

With the advent of the Internet and broadened IT capabilities, Instinet has seen its business boom. A contributing factor was the introduction of the SEC's order handling rules which encouraged limit order trading on ECNs. Last year, Instinet had revenues of some $1 billion, with an estimated after-tax profit of $140 million. Profit increased by 18 percent in the first quarter of this year to $50 million while revenue jumped 24 percent to $431 million.