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Online or Not Online, Where to Trade, That is the question
Chapman, Spira & Carson - Disscusion

From: The Recorder/Cal Law,  Renee Deger
Date: 4/30/99
Time: 11:50:50 AM
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The real issue is, should you trade online and save a few bucks or should you talk to a warm and fuzzy broker and have him as a partner? The jury is out, but we are going to print a series of articles on the subject and invite your participation as well. The first one sets the stage. Robert A. Spira, Chapman Spira and Carson LLC

Separating the Online Wheat From the Chaff

Is Friedman Billings' Net venture for real?

By Renee Deger

April 29, 1999

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The Internet has dusted off more than a few has-beens.

Remember K-Tel International? It scored big in the 1970s hawking nostalgia records to the parents of TV-addicted 10-year-olds, but couldn't keep its momentum -- until it wised up to the ways of the Internet-addicted 1990s. The Minneapolis company twice last year announced some Internet-based sales strategies and saw its stock price nearly double each time before falling back, although still above prior values.

So, will what works for retro record retailers work for investment bankers?

That's the big question facing Arlington, Va.'s Friedman Billings Ramsey Group Inc., which last week announced the formation of an online brokerage offering individual investors access to initial public offerings.

Some of the whitest-shoe-wearing investment bankers are going online in pursuit of individual investors, who have flocked to the rock-bottom trading fees charged by Internet brokerage firms.

For example, tech-heavies like BancAmerica Robertson Stephens founder Sanford Robertson and William Hambrecht of Hambrecht & Quist have made online grabs alongside staid investment firms like New York's Goldman Sachs & Co.

So Friedman Billings is walking a well-traveled route.

Dubbing its service fbr.com, Friedman Billings is offering registered investors up to 20 percent of initial public offerings the firm underwrites as lead, although it hasn't led an IPO in some time and its relationships in the investment industry are fragile.

Friedman Billings is also planning to offer individuals access to a smorgasbord of instruments, like secondary offerings, private placements, and venture capital and hedge funds, usually reserved for institutions, said Suzanne Richardson, a managing director and co-founder.

The firm has been besieged by upwards of 1,000 individuals per day who are signing up for the right to participate in the new products, she added.

Richardson refused to reveal a time line for unrolling the services, adding that some, like private equity funds, are limited to accredited investors.

"We see the Internet as fundamentally changing investment banking services," said Richardson.

If Friedman Billings can pull it off, the increased securities work may benefit Brobeck, Phleger & Harrison's new Washington, D.C., office, where new partner hire Steven Reddick possesses strong investment banking ties, and Los Angeles' Gibson, Dunn & Crutcher, whose D.C. office likewise has worked on past Friedman Billings deals. Maybe even Cooley Godward could vie for some of the work now that they've gone east.

But now comes the hard part. While other investment banks lay claim to strong ties to ongoing cyber-ventures, fbr.com is still working on that part of the plan.

"It's a requirement that an investment bank is going to need to access online investors . . . [but] it's not as easy as just making the shares available," said Michael Gazala, a senior analyst with Forrester Research Inc. in Cambridge, Mass.

A number of traditional investment banks are going forward with more secure strategies.

BancAmerica Robertson Stephens and Hambrecht & Quist offer IPO stock through an affiliation with E*Trade Group. And Goldman Sachs, which has bumped Friedman off many a tech IPO, bought a chunk of online investment banking pioneer Wit Capital of New York.

Friedman Billings, by contrast, still has a long way to go to prove its online move is more than a last-ditch attempt to regain lost footing.

"[Friedman Billings] seems to make some pretty aggressive announcements before showing signs they're ready to follow through," said one online investment banker.

Snipers ding the underwriting boutique for a relatively weak research presence, which IPO candidates look for in a banker to ensure a strong aftermarket demand. They also point out that Friedman Billings faces a steep grade between its traditional channels and the retail market of online investors.

Friedman Billings is all too aware of the criticisms. For example, it followed up its Internet strategy news with press announcements showcasing a new research report on the troubled enterprise software sector and its author, David Hilal. The enterprise software sector has not performed well in the market lately, with several key players, such as SAP AG and PeopleSoft Inc., well off their highs -- creating a potential buying opportunity.

Richardson also said her firm's strengths, like real estate investment trusts, are coming back into vogue. And the firm has swelled its research team, which covers energy, financial and communications services, and technology.

Regardless of the prospects for a turnaround, there is little argument that Friedman Billings has seen better times. The bank rose quickly in stature for marshalling IPOs in the savings and loan restructuring and real estate sectors. But Friedman Billings suffered when those sectors fell from favor last year, and the bank has often been the ugly cousin to New York bankers when IPO candidates from the region's growing technology community stage beauty contests.

By launching fbr.com, Friedman Billings appears to be sending a signal that it has direct channels to the kinds of tech-friendly investors that have awarded huge values to Internet companies. It also may help foster relationships with other investment banks trying to access retail channels.

But the firm also draws critics for buying its own IPO candidates in the aftermarket to support the stocks. It also drew darts for its own IPO in 1997, in which co-founder and president W. Russell Ramsey sold off a chunk of his stake in the company.

In the current market, investors are quick to brush off red flags of all kinds, so it's not surprising that Friedman Billings harvested some short-term rewards for its move online. The company saw its stock rise nearly 50 percent last week.

Sounds like a broken record.

Copyright 1999 ALM IP, LLC -- American Lawyer Media. All rights reserved.


Last changed: March 17, 2000