Wit Capitalizing on Goldman's Brotherly Affection

Goldman Sachs has a stake in the online investment bank, which is reaping the benefits with increased underwriting commitments and more stakes in Goldman-led deals.
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The assignment was simple: The investment bankers gathered on the conference call had to pick which firms would get in on an underwriting assignment.

The usual names came up, and then the banker from

Goldman Sachs

(GS) - Get Report

jumped in with an enthusiastic endorsement, says a rival banker who was on the recent call.

"You know who we should get in on this deal?" the Goldman banker asked. "You know who would be perfect for this deal?

Wit Capital


. Wit should be in on this."

Recalls the rival banker: "It was shameless. Inevitably, Goldman always mentions Wit."

Shameless or not, Goldman has played the dutiful big brother since purchasing what's now a 13% stake in Wit in April -- letting the kid follow him around and just hoping he won't do something embarrassing in front of the cool, bulge-bracket guys.

And that's no surprise given Goldman's investment. As one Goldman insider says, "I think it's a thing of feeding your family first."

But just the fact that Goldman considers Wit part of its family shows how things have changed on Wall Street. After all, Goldman's blue-tinted bloodlines run through people such as former Treasury Secretary

Robert Rubin

, while Wit is the

offspring of a microbrewery's 1996 Internet stock offering. Not exactly separated at birth.

Yet as individual investors clamored for Internet IPOs and issuers sought electronic distribution, Goldman, with almost no retail distribution, needed a quick fix. That's where Wit fit.

"Goldman has made investments as strategic hedges against structural change in the industry," says Dean Eberling, an analyst at

Putnam Lovell de Guardiola & Thornton

. "In this way, Wit as an investment is immaterial; but Wit is for Goldman a vision of how the investment banking business will evolve." Eberling's firm hasn't performed underwriting for Goldman or Wit.

A Goldman spokeswoman couldn't make anyone available to comment.

Since April, Goldman has brought Wit in on 22 of its 69 lead-managed IPOs and secondary offerings, more than any other Wall Street firm has given Wit. In the 18 months of Wit's existence prior to the Goldman investment, Goldman worked with Wit just five times.

Wit's allocation of underwriting commitment -- a general measure of how much an individual investment bank is involved in a stock offering -- has grown from the 1% or less range it saw as a perennial syndicate-row bottom dweller when it started in September 1997. Wit now is allocated an average of 3% to 4% of a deal's shares in its commitment. Wit's cut varies on Goldman-led deals from as much as 8% of the shares being offered to as little as 1% in recent deals.

"We're not just a little kid anymore," says Mark Loehr, Wit's head of investment banking, who adds that the firm routinely sees allocations of 400,000 or 500,000 shares.

Wit, however, plays down the Goldman connection.

"I think Wall Street is starting to respect the fact that issuers respect us," says Loehr. "And we have to prove it to Goldman Sachs first on every deal."

Goldman, meanwhile, will push the online firm only to the extent that it doesn't cut into Goldman's share of the pie, says Scott Sipprelle, president of independent research firm

Midtown Research


"There is always a scramble for underwriting dollars and, although alliances have been struck, there is a difference between giving someone exposure and giving them money," Sipprelle says.

With increased deal flow, however, hasn't come a corresponding decrease in Wit's red ink. For the six months ended June 30, Wit reported net losses of $7.7 million, compared with $3.2 million for the same period last year. Revenue increased to $15.2 million, up from $360,000 in the same period last year.

And despite the fact that Wit is starting to see more co-management roles -- 27 for the first nine months of this year, according to

Thomson Financial Securities Data

-- analysts are predicting more losses this quarter. The consensus of the two analysts who cover Wit is a third-quarter loss of 12 cents per share.

One equity chief at a major Wall Street firm says Wit may be riding the tailwind of the Goldman comet now, but argues that one day, Goldman is going to realize it can achieve this online vision by itself. "Goldman is going to do one of three things with Wit," he says. "Keep them like it is; buy them outright; or learn what they can from Wit, dump them and build a similar operation itself."