Orange County Business Journal

Walter Cruttenden III is set to bring initial public offerings to the masses. But Cruttenden’s 5-month-old online investment bank, Newport Beach-based E*Offering, is launching at a time when Internet stocks are going through a nasty tumble-and-dry cycle.

Wall Street’s recent volatility could affect Cruttenden’s access to IPO issuers who might suddenly get cold feet, as well as hurting the return on E*Offering investments. But Cruttenden is taking the roller-coaster ride in stride.

“(The recent correction is) very healthy; it brings realism to the marketplace,” said Cruttenden, an Orange County investment veteran who started bricks-and-mortar investment bank Cruttenden Roth in the early ’80s. “The markets can’t go up so fast.”

He added that it’s not enough of a drop to deter many companies’ IPO plans.

“Our phone is ringing off the hook,” he said.

E*Offering is targeting deals of $25 million to $100 million. The company will act like any investment bank albeit with an Internet focus providing research coverage, aftermarket trading support and merger-and-acquisition advisory services. Eventually, the company plans to underwrite private placements, convertible debt and straight debt.

To date, the company has been involved in a couple of deals: as a co-manager for InsWeb, an online insurance firm that has filed with SEC for upcoming IPO; and as the sole manager of a follow-up common stock offering of 4.45 million shares for First Sierra Financial, a business-to-business Internet bank.

“We’re in a quiet period for other deals,” said Cruttenden, who added that the firm is looking at two potential deals a day. “Half-a-dozen will hit in the late June to July period.”

E*Offering has grown to about 100 employees in the last three months. It beefed up its back office in March by acquiring securities firm Meridian Capital Group of Newport Beach (run by Cruttenden’s longtime associate Jeffrey Gottfredson) for $2.5 million in cash and stock. Meridian added 20 employees, including institutional salespeople, traders and bankers and also gave E*Offering the trading desks, back offices and licenses that it needs.

E*Offering was founded in January by Cruttenden, who serves as the company’s president and CEO. Its significant investors include Sandy Robertson, former chairman and founder of BancBoston Robertson Stephens, online broker E*Trade, which holds a 28 percent stake in E*Offering (it has an option to increase its ownership to 51 percent), and venture capitalist Frank Cutler, of the Cutler Group.

E*Offering’s full-service Web site was launched two weeks ago. It will be integrated with E*Trade’s site and will offer market and industry research, as well as alerts on IPOs.

Cruttenden looks to tap into the Internet boom by distributing up to 50 percent of the shares it is allocated in IPOs to online individual investors through E*Trade’s approximately 1 million investment accounts. From E*Offering’s wood-paneled offices on Campus Drive the only suggestion that the firm is an investment bank Cruttenden envisions a million people getting IPO prospectuses over the Internet, instead of the several thousand that do today.

The new bank plans to charge companies less than the 7 percent of gross funds typically levied by investment banks for IPOs, cutting costs by doing the road shows on the Web, processing investor orders by e-mail and saving on printing costs by electronically posting prospectuses.

Critics are skeptical that the fees can be lowered all that much. Much of the 7 percent is for the investment bank’s research analysts, critical to any company that is going public.

But it’s not the lower fees that Cruttenden is most excited about. “The press has grabbed onto this (lower fees),” he said. “But first on the list is how many more investors we can reach.”

He said that IPO deals are often underpriced (hence the huge first-day rises) because the shares are held by a few institutions. “By opening up IPOs to individual investors, we will be creating greater demand for the issue, and, therefore, more money to the issuer.”

Among the recent spate of poorly performing Internet IPOs are Barnesandnoble.com and Irvine-based Autobytel.com, each of which have recently traded below their offering price. But Cruttenden said his company will follow a wide range of companies, not just Internet offerings. And downturns won’t necessarily be a bad thing for E*Offering’s investors.

“If the market is down, companies might raise a little less (in an IPO), but the investors will get a better deal,” Cruttenden said. “The E*Trade investors are our lifeblood.”

Phil Leigh, Internet analyst with Raymond James, said the recent 20 percent correction in online issues won’t affect E*Offering. “If the market were to fall apart it would be a bad development for an investment bank that is just starting out,” Leigh said. “But we haven’t had that kind of drop for 12 years. It could happen, but I don’t anticipate it. E*Offering could handle another 25 percent (market) drop before it becomes a problem.”

Leigh believes that Sandy Robertson’s involvement with E*Offering gives the company instant credibility. “His experience in building up Robertson Stephens will be critical for E*Offering,” Leigh said. “They’ll be able to hire analysts based on his involvement.”

Robertson is precluded from taking a management role at E*Offering until his non-compete agreement with BancBoston Robertson Stephens expires at the end of the year. Cutler said E*Offering “would have an office ready for him when the time comes.”

Cruttenden’s inspiration for E*Offering came as he began the surfing the ‘Net. In April 1998, he sold 18 percent of his stake in Cruttenden Roth for $6 million to William P. Foley II’s Fidelity National Financial. “I planned to take some time off and started messing around on the Internet,” he said.

Cruttenden, an avid chess player, said he started playing on Yahoo’s chess site “where there are 10,000 games going on at a time. I was playing with people from Malaysia, Russia and Israel. And chatting with them between moves.

“It just struck me that I wanted to apply this power to the securities business.”

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