New Schwab, E*Trade IPO shows could overheat stock demand

More than 50 years after Bing Crosby and Bob Hope popularized the term in a series of movies, a couple of financial hoofers are about to go on the road to hawk IPOs.

This dynamic duo is far different, and for that matter, so is the road.

Online broker Charles Schwab Corp. announced in November that it would be taking its IPO show on the virtual road via the Internet, and now competitor E*Trade Group Inc. is looking to do something similar.

“We hope to jump on the bandwagon, too,” Henry Carter, the Palo Alto, Calif.-based online discounter’s chief compliance officer, told InvestmentNews.

But Mr. Carter and some analysts worry that the road shows will create even more demand for IPO stocks, which are already in short supply.

Road shows “may drive demand through the roof,” he says. “The fever, the emotional attachment to getting shares, could be exacerbated by the use of road shows…The emotions behind the demand will be intensified.”

At least one brokerage analyst agrees. “It’s a logical thing to do,” says Sheldon Grodsky, director of research at Grodsky Associates, a brokerage in South Orange, N.J. But he doesn’t think it will help Schwab’s business that much.

irrational exuberance?

“I don’t think it’s a big deal. If you say, `See how people buy IPOs,’ there’s little reason to believe that the slightest intelligent thought goes into what they’re buying. They’re getting their information from crazy people in chat rooms…They’re just buying it because it’s going to go bank tomorrow.”

Despite some concerns — heightened last week — that the heady market for tech and Internet stocks will crash at some point, the Securities and Exchange Commission in November approved Schwab’s plan to host the virtual road shows.

The SEC still has some issues to grapple with — including defining what a road show is, what liability should be assigned to information given at them and whether the information should be filed with the SEC.

“It makes sense to try to deal with road shows generally, both the old- style road shows and online road shows,” says Michael McAlevey, deputy director of the Division of Corporate Finance. “We just view it as it being time to deal with the issues by road shows through a rulemaking project.”

Schwab expects to start its road shows early this year for clients with at least $500,000 to invest or who make at least 24 trades a year. They’re clients who have what the San Francisco-based company calls its “Signature Services Gold” accounts.

Also included in the elite group will be the fee-based investment advisers who work with the company on a referral basis — and their customers. Together, that group makes up less than 20% of the company’s 6.3 million accounts.

Previously, such road shows were reserved for institutional customers, because the SEC prohibited retail investors from buying the risky stock offerings. The SEC considered individuals too unsophisticated to be subjected to sales pitches for IPOs.

Schwab’s permission to host road shows came in the form of an SEC “no-action letter.” That means the agency won’t take enforcement action against Schwab for conducting the online road shows with retail investors.

Schwab says it would eventually like to expand IPO offerings to all investors. Technically, the no-action letter applies only to Schwab and the deal the company outlined for the SEC.

But, E*Trade’s Mr. Carter says the SEC action essentially opens the door for his firm as well. “From a practical sense, if we follow the four corners of the Schwab proposal, we could do what they’re doing. We’re looking into our options.”

E*Trade has participated in more than 150 initial public offerings over the last 18 months, spokeswoman Sheri Arapov says.

It owns a 25% stake in online investment bank E*Offering, headed by Sandy Robertson, former chairman of Robertson Stephens, the investment bank now owned by FleetBoston Corp.

E*Trade receives half of all the shares that E*Offering takes public, and has relationships with securities firms, including Robertson Stephens and Goldman Sachs Group Inc., to offer some of the stock they manage.

“Our priority as far as IPOs are concerned is to really concentrate on bringing future companies on board, (and) delivering to our customers more offerings and a higher number of shares,” Ms. Arapov says.

Investment Bank next

Schwab not only is planning the road shows, but to increase its IPO participation it also is teaming up with fellow online brokers to form an investment bank.

The group includes TD Waterhouse Group Inc. and Ameritrade Holding Corp. as well as venture capital firms Kleiner Perkins Caulfield & Byers, Trident Capital and Benchmark Capital.

Schwab has been offering IPOs for three years in partnership with J.P. Morgan & Co., Credit Suisse First Boston and Hambrecht & Quist Group Inc., but those contracts are phasing out, says spokeswoman Marta von Loewenfeldt.

“The demand at Schwab at Day One has outstripped supply,” says Ms. von Loewenfeldt. “Even for our limited number of customers, if we had all of the companies’ shares we could have gotten rid of all of them, but we’re always given a small percentage.”

Schwab participated in 18 IPOs in 1997, 27 in 1998 and 84 in the first 11 months of last year, she adds. The company does not reveal how much its customers invested in them.