Wit Capital Buys SoundView (Fool Plate Special) November 1, 1999

An Investment Opinion

Wit Capital Buys SoundView

By Dave Marino-Nachison (TMF Braden)
November 1, 1999

Online investment banker Wit Capital Group Inc. (Nasdaq: WITC) moved to boost its research offerings and broaden its distribution channels today, announcing the purchase of private investment banking firm SoundView Technology Group.

Founded about 20 years ago as part of information technology research and consulting firm Gartner Group (NYSE: IT), SoundView -- which specializes in software, telecom, and other technology-related areas -- will cost Wit approximately $320 million in newly issued stock and options. The combined companies should boast a pretty strong breadth of expertise across the technology sector with Wit Capital bringing its Internet background to the table.

"We had to dramatically grow our content and product offerings," said Wit co-CEO Ron Readmond on a conference call this morning. "Our choices came down to buy versus build."

Investors liked the "buy" idea and bought themselves; shares of Wit rose nearly 30% in this morning's trading -- though Wit stock is still well off its post-IPO midsummer highs.

The idea behind the deal is that customers (Wit is geared toward individuals while SoundView focuses on institutions) and issuers (the companies that use Wit to offer shares to investors) alike will appreciate Wit's expanded research offerings, areas of expertise, and ability to raise capital.

Financial details of the deal were pretty slim, which is not surprising since SoundView is a private company. According to Wit, the company paid 16.8 times SoundView's trailing 12-month net income and 2.3 times its revenues for that period.

SoundView President and CEO Russ Crabs, who will join Wit's board and plans to stay active in operations as well, said his company's revenues for the first nine months of 1999 were about $100 million -- up from $60 million in 1997 and $84 million in 1998 -- with profits "well in excess of revenue growth."

Wit's revenues through the first nine months of the year were $27.6 million.

But although Readmond said the deal, seen closing in January, is expected to be "highly accretive" to Wit's earnings, he wasn't willing to get specific about when the combined companies might eventually turn a profit. Two analysts surveyed by First Call expect Wit will turn in its first profitable quarter and year in 2001.

"It is a matter of public record that Wit Capital has been improving its margins but still has not turned in a profitable quarter," said Readmond. "The combined entity accelerates our profitability... but the objective [is] to continue to build a world-class franchise. That will be our first priority over the next 12 months."

A replay of Wit's call will be available through midnight of Nov. 3 by dialing (800) 633-8284 and selecting reservation number 13446993. Wit deserves kudos for opening its conference call to media and investors, and for posting transcripts of its quarterly earnings calls -- including the question-and-answer portion -- online.

Related Links:
Wit Capital Web Page
Wit Capital Message Board
Merger Information Web Area