Discover Customers Left Out on Morgan Stanley IPOs

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When

Morgan Stanley Dean Witter

acted as lead underwriter on the recent $400 million

Ziff-Davis

(ZD)

IPO, online traders were given a chance to buy a piece of the deal.

Just not through Morgan Stanley's own online trading firm,

Discover Brokerage Direct

.

Instead, online traders would've had to do business with the independent

Wit Capital

, which was part of the selling group.

Ironic?

Perhaps, but this is nothing new for Discover clients. You can't get a whit (not Wit) of Morgan Stanley research or underwritings through the online broker. Discover currently delivers research from

Zacks Investment Research

and

Thomson Financial

but doesn't offer any deal access.

Why has Morgan seemingly taken an arms-length approach to its only online child? On the surface, the synergies seem logical -- Morgan's got the product and Discover's got the novel Internet distribution channel. But it's not that simple. There are tensions involved in any full-service brokerage owning an online discounter.

For one, a firm the size and depth of Morgan Stanley doesn't really need to sell its offerings through the lower-priced Discover. (Discover, formerly

Lombard

, was purchased by Dean Witter, which then merged with Morgan Stanley.) Morgan's got a huge institutional sales force, its own high-net-worth brokers and Dean Witter's army of retail brokers.

"In the trickle-down theory of economics, who do you think is last to get access to that IPO or research?" asks

Bill Burnham

, electronic commerce analyst at

Piper Jaffray

. "Discover should have access to that tremendous wealth, but they can't get access because of politics and conflicts internally."

The biggest hurdle is likely Dean Witter's 10,000-member retail brokerage force. New issues and research from a powerhouse like Morgan Stanley are valuable (often rare) commodities among the retail set, and by no means would Morgan want to appear to be favoring Discover over Dean Witter. In forging any distribution arrangement with Discover, Morgan needs to step very carefully to avoid a revolt from its valuable commission brokers.

That's not to say Discover clients will never get access to the investment bank's treasures. Over a month ago,

TSC

reported that MSDW was considering offering its research through Discover. A Dean Witter spokesman and a Discover spokeswoman both declined to comment on any future offerings at the online firm.

"I do think that it will happen eventually. It's just a question of working out the timing and allocation of distribution so everybody's happy," says analyst Burnham. And in a big corporation -- with all the management layers and egos -- these things take can take time.

Meanwhile, other online brokerages have started offering new issues and research from big-name firms, making Discover's own situation all the more glaring.

DLJdirect's

high-end customers (those with $100,000 or more in an account) have access to deals that are lead-managed by its parent

Donaldson Lufkin & Jenrette

and to the investment bank's research.

E*Trade Group

has teamed up with

BancAmerica Robertson Stephens

to deliver new issues and research.

Fidelity Investments

has a relationship with

Salomon Smith Barney

, and

Charles Schwab

has deals with

Credit Suisse First Boston

,

Hambrecht & Quist

and

J.P. Morgan

to distribute pieces of new issues.

These perks certainly aren't the bread and butter of online brokerages, but they do give the firms a marketing hook as they attempt to gain market share and distance themselves from the price war. "It's a nice marketing point, and that's good because it's a marketing game," says Credit Suisse First Boston analyst James Marks.

All this partnering certainly won't give individual investors unlimited access to the white-hot IPOs you always read about. Those will continue to go to the most favored institutional and high-net-worth clients. "Individuals are deluding themselves if they think they'll get access to the hottest IPOs," says Burnham. "That's not the way the world works."

Retail investors may be able to get small pieces here and there of the latest deals through their online brokers, but don't expect a sea change in the way the Street does business. For example, the number of Ziff-Davis shares sold by Wit Capital was quite modest, and the stock is only trading around 17, about a buck and half above where it was priced. But some investors at least got what they wanted.