Schwab's New Net Message: "You've Got Ip Os!"
Charles Schwab & Co. has emerged as the giant of online trading, controlling some 30% of the market and half the assets in online accounts. Now, it's moving into investment banking to give its legions of investors a crack at initial public offerings. In a little-noticed deal on Dec. 4, Schwab for the first time served as a co-manager for the initial public offering of Select Comfort Corp., a Minneapolis air-mattress maker that handily sold 4 million shares at $17 each.
At first blush, the move hardly seems like big news. For a year, Schwab has been selling shares of IPOs to retail customers. It distributed chunks of offerings managed by Credit Suisse First Boston, Hambrecht & Quist, and J.P. Morgan. Rivals such as Fidelity, E*trade, and upstart Wit Capital also use the Internet to sell new issues to mom-and-pop investors. What's more, powerhouse Merrill Lynch & Co. will offer online-trading to some of its customers in early 1999, and Morgan Stanley Dean Witter is working on a similar plan.
So what's different now? For starters, as a co-manager, Schwab gets access to more shares of a given deal to sell to its IPO-hungry customers. "The interest in IPOs is overwhelming, and we've had a difficult time getting enough product to meet the demands," explains Schwab co-CEO David S. Pottruck.
Schwab has some novel ideas for the online IPO concept, too. One is to use database-marketing techniques to pitch issues to likely investors. Later in 1999, Schwab says, it will have the technology to sift through its 2.1 million online customer profiles and use the Web to aim IPOs at investors with particular types of stocks in their portfolios and particular interests. For instance, a medical-device company IPO might be offered to Schwab clients working in health care. "The great opportunity is to use what we know about investors," says Pottruck.
"MORE PROCEEDS." In the Select Comfort deal, lead-managed by high-tech investment bank Hambrecht & Quist, Schwab mailed more than 250,000 postcards to Select Comfort customers who also had accounts with the brokerage, inviting them to buy shares. Daniel J. McAthie, Select Comfort's chief operating officer and financial officer, says dozens of customers contacted the company. McAthie also says his deal raised more money than it might have because Schwab could gauge investors' interest. Says McAthie, "We got more proceeds."
Hambrecht & Quist CEO Daniel H. Case III says the performance of future joint offerings could get even better as his bank and Schwab learn more about mining client profiles. Case says they will also track what investors do with new issues in the aftermarket to get a better feel for long-term demand. That, he says, could enable companies to sell fewer shares at higher prices. "We can give companies a better deal and make IPOs available to the guy on the street," says Case, adding that Schwab will soon appear on the prospectuses of several other Hambrecht & Quist deals.
Rivals say Schwab could run into problems. Tom O'Connell, executive vice-president of Morgan Stanley's Discover Brokerage Direct, says that as a neophyte in the world of underwriting, Schwab may not have much appeal to new issuers. "As a newcomer to the IPO business, it's not clear Schwab will be able to get larger chunks of the best IPOs for its customers." Robert H. Lessin, CEO of Wit Capital, an Internet investment bank, says his firm, through partnerships with the likes of Quick & Reilly and Waterhouse, has access to at least as many online trading accounts as Schwab--and has co-managed some 45 deals, compared with Schwab's one.
But unlike Wit, Schwab owns its accounts and can use them to mine customer data more effectively. And analysts say Schwab's mammoth reach and its swift move to embrace the Net will make it hard to beat. "Schwab is like the America Online of financial services," says Goldman Sachs brokerage analyst Richard K. Strauss. "It's in a world of its own." Schwab can only hope it stays there.