Once relegated to the kids' table at initial public offerings, on-line retail investors soon could be getting treatment currently reserved for institutions on new stock offerings, thanks in large part to pressure from corporate issuers.
Indeed, a recent alliance between discount brokerage powerhouses and venture capital firms to start an on-line investment bank appears aimed as much at addressing the demands of technology companies looking to sell themselves as those of potential investors looking to jump to the head of the buying line.
Technology companies looking to raise capital recognize the need to get in front of Internet-savvy retail investors who want to own their stock, said Daniel O. Leemon, chief strategy officer with Charles Schwab & Co., the San Francisco retail discount brokerage behemoth.
"That's where the demand is -- among the retail investors," said Mr. Leemon. "We've had Internet companies call us up and say, "Could you be in our deal?' " he said. In the past, Schwab has had to refer those issuers to other investment banks because it lacked underwriting capabilities.
That should change next year, if Schwab, T.D. Waterhouse Group Inc., and Ameritrade Holding Corp. together with three venture capital companies receive regulatory approval to form an on-line bank targeting technology and Internet-related companies. The investment bank -- to be created in conjunction with Kleiner Perkins Caufield & Byers, Trident Capital, and Benchmark Capital -- would have the ability to distribute IPO shares to some 4.5 million retail customers, or 50% of all on-line investors in the United States.
"It's a perfect match," said Jack R. McDonnell, president and chief executive officer of Omaha-based Ameritrade. Retail interest is strong enough in the technology sector that investors end up owning the stock anyway, even if they have to get in line behind institutions on an IPO, Mr. McDonnell said.
"Even before Internet trading came into vogue, our investors liked to hold technology stocks in their portfolios," said Frank J Petrilli, president and chief operating officer of TD Waterhouse.
Peter Davis, a partner with Cambridge Partners, a New York-based management consulting firm, questioned whether retail investors want get in on IPOs in order to make a quick killing by day-trading or flipping the stock.
Executives shrugged off that notion.
"We're not a day-trading firm. It's one of the misconceptions of the Internet business,'' said Ameritrade's Mr. McDonnell. In practice it's institutional investors who flip securities following IPOs, said Mr. McDonnell.
"In one fell swoop they've done something it took Merrill Lynch & Co. years to do," said Richard Spear, practice head of e-commerce capital markets at New York-based Oliver Wyman & Co. And the partnership has hired Scott Ryles, former head of Merrill's technology banking division, to be its chief executive.
Merrill Lynch and others have offered their retail customers access to IPOs for years and are now migrating to offering broad-based on-line trading capabilities.
"The writing's on the wall: In order to be able to compete you're going to have to offer these types of services," said Daniel Burke, an e-commerce analyst with Gomez Advisors, Lincoln, Mass.
Meanwhile, Schwab, T.D. Waterhouse, and Ameritrade will unwind existing agreements with outside investment banks that had given them access to IPOs in the past. However, Mr. Leemon said it is hoped those investment banks will want to do business with the new investment bank.
Among them is Hambrecht & Quist, the San Francisco technology boutique, which Chase Manhattan Corp. is acquiring. It has agreements with Schwab and Ameritrade.
David Krimm, a director of marketing for Hambrecht, said he could not comment on the existing agreement. However, at Chase -- which operates Brown & Co., an on-line broker with 100,000 accounts -- investors will have a chance to participate in IPOs once the deal closes later this year, said Dennis Kosovac, head of electronic businesses at Chase.
"Tech-savvy customers are already part of the Brown profile," said Mr. Kosovac.