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Enron Mail |
Instinet IPO Soars On Debut
Mark Lewis, Forbes.com, 05.18.01, 1:30 PM ET NEW YORK - Any successful initial public offering is good news for Wall Street these days, but Instinet's debut was especially auspicious--not just for the moribund IPO market but for the electronic networks that are supposed to usher investors into the digital future. Instinet (nasdaq: INET - news - people) is Wall Street's oldest and largest electronic communications network (ECN), of the sort that matches buyers and sellers directly rather than forcing them to go through an intermediary. Instinet raised $464 million when it priced above its expected range at $14.50 per share. The stock opened this morning at $17 and was up 30%, to $18.19, in midday trading. That performance was a vindication for Instinet's corporate parent, Reuters Group (nasdaq: RTRSY - news - people), the London-based media and financial services giant, which retains 86% of the newly public ECN. Reuters had been criticized for taking Instinet public during a weak IPO market. [Full disclosure: The author of this piece is a former Reuters reporter, and Reuters' venture capital Greenhouse Fund is an investor in Forbes.com.] Since Reuters acquired Instinet in 1987, it and the other ECNs have evolved into a major threat to the established stock exchanges. Instinet's successful IPO could prompt similar moves by such rivals as Island and Archipelago. And it also bodes well for Nasdaq's plan to take itself public sometime next year. "The Instinet IPO further legitimizes electronic trading for the broad investment community," said TowerGroup analyst Robert Iati in a recent interview. TowerGroup is a research firm that studies the impact of technology on the financial services industry. When the Instinet IPO first was discussed several years ago, some observers expected it to establish a market valuation that would exceed the worth of Reuters itself. Those were the heady days of the Internet boom, when the new online brokerages, investment banks and ECNs seemed destined to triumph over Wall Street's old-fashioned ways. But the traditional broker-dealers, banks and stock exchanges have been adapting to the digital challenge, and, meanwhile, the stock market's swoon cut into online trading volumes. So nowadays, expectations for the ECNs are less exuberant. Instinet's IPO-established valuation of $3.5 billion is relatively modest, given that the parent company's current market cap is around $20 billion and that Instinet contributes about one-fifth of Reuters' revenues. Reuters has pulled back from plans to turn Instinet into a more retail-oriented operation. But the ECN's wholesale trading volumes remain robust. Instinet last year took in revenue of $1.2 billion and posted a divisional profit of $234 million. Reuters intends to maintain majority control of Instinet, which will be housed in the flashy new Reuters Building at Times Square. Now that it is public, Instinet can use its stock as currency to acquire other ECNs. Instinet already owns a stake in Archipelago, the Chicago-based ECN whose backers include Goldman Sachs (nyse: GS - news - people), Merrill Lynch (nyse: MER - news - people) and E*Trade Group (nyse: ET - news - people ). Another potential consolidation play is Island, a New York-based ECN backed by several private equity firms and by online brokerage Datek Online Holdings. Apart from acquisitions, Instinet also can use some of its IPO proceeds to continue upgrading its technology--a pressing need for all ECNs, which must remain competitive as the Nasdaq and the New York Stock Exchange become ever more adept at the electronic trading game. Finally, being a public company has a symbolic value for Instinet. This IPO sets a precedent by establishing an ECN as a high-profile player on Wall Street. That will boost the Instinet brand--and those of its rivals. This is the first ECN to go public, but it won't be the last.
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