Schwab, TD Waterhouse, Ameritrade Bank on the 'Net

By Dave Marino-Nachison (TMF Braden)
November 15, 1999

Leading online brokerages Charles Schwab & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCH)") else Response.Write("(NYSE: SCH)") end if %>, TD Waterhouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWE)") else Response.Write("(NYSE: TWE)") end if %> and Ameritrade Holding Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMTD)") else Response.Write("(NYSE: AMTD)") end if %> today announced a deal to create a new online investment bank beginning early next year.

The as-yet-unnamed bank will be owned by the three aforementioned brokerages, its management and venture capital firms Kleiner Perkins Caufield & Byers, Trident Capital and Benchmark Capital, which are partners in the new business.

The new investment bank plans to focus on handling equity offerings for information technology and Internet companies; research offerings are also planned and private placement and strategic advisory services will probably be added in time as well. The effort will be headed by Scott Ryles, named CEO after quitting just weeks ago as managing director and head of technology investment banking at Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %>.

Investors in one of the three aforementioned online brokerages should probably applaud today's news, as the move stands to provide handy additional revenue streams to balance out the ups and downs associated with the metrics of the brokerage industry: Schwab was the only one of the three companies not to post a double-digit stock price gain today, perhaps because of its announcement that October asset growth slowed from September's figures.

But trading volumes at Schwab and online brokerages at large appear to be rallying after a disappointing Q3, the first for which sequential numbers moved backward.

The three brokerages hope their combined 4.5 million active accounts and approximately $750 billion in customer assets will help draw corporate underwriting business to their new bank; it's this lucrative business that makes financial services companies' customers and stockholders salivate because of the fees they can charge -- generally a percentage of the offering size -- and the stock gains reaped from distributions from the offerings.

Companies can also draw in new customers by making shares of high-profile offerings available to them at the offer price, in the case of initial public offerings (IPOs) often a source of eye-popping short-term gains (or, more accurately, the fantasy of such -- click here for a classic Fool on the Hill column discussing just that).

Wit Capital <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WITC)") else Response.Write("(Nasdaq: WITC)") end if %> and E*Trade <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> are among those already involved in online investment banking. Ryles and his compatriots hope their new company's large asset and customer base will help steer business away from those companies -- as well as traditional firms like Goldman Sachs <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GS)") else Response.Write("(NYSE: GS)") end if %>, Morgan Stanley Dean Witter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWD)") else Response.Write("(NYSE: MWD)") end if %>, and Merrill Lynch -- and into their coffers.

To do so, setting up that research component will be imperative since the distribution of research -- though underwriter "research" is something frequently derided here -- to investors and the media is seen as key with such investment bank/corporate relationships frequently much cozier than might best serve individuals looking for unbiased advice from their brokers.

That said, the increased availability of IPOs to individual investors, while not a surefire ticket to wealth, is still a welcome development as it does, as brokerage executives like to say, further "level the playing field" in terms of opportunity.

In related news, Schwab today said it plans to make Internet "road shows," the sessions during which prospective investment banking clients lay out their business to financial institutions, available to select retail customers who meet "certain trading experience or asset thresholds."

Related Links:
Fool on the Hill, 11/19/97: "Detecting Distressed IPOs"
Schwab Message Board