From Institutional Investor:
ALTHOUGH Facebook CEO Mark Zuckerberg says he’s out to change the world, he did nothing of the sort in February in launching the social media giant’s IPO. Instead of using the networking methods he’s advanced via the web to raise the money he told would-be investors he needs to conduct his social revolution, Zuckerberg chose the most antiquated, hidebound and expensive method: hiring five investment banks, including Morgan Stanley and Goldman Sachs Group.
Wall Street’s real rabble rouser is an ex-insider named Seth Merrin, a serial bomb thrower best known for blowing up the traditional system for equity trading. In the world of finance, Merrin makes Facebook’s 20-something founder look like a fogy — at least, he’s trying to.
In 1987, Merrin introduced the asset management world to the automated order management system. Created by his first firm, Merrin Financial, the OMS forever did away with once-ubiquitous paper trade tickets. Thirteen years later he founded Liquidnet Holdings and introduced buy-side firms to a new trading platform that could move large blocks of shares quickly and anonymously, providing a deep “dark pool” of liquidity.
Today, Merrin, who became head trader of Oppenheimer & Co.’s risk arbitrage group spin-out, Junction Partners, at age 23, is trying to do for equity underwriting what he did for trading. Now 51, he wants to overthrow the traditional capital-raising process by issuing shares of public companies and distributing them via Liquidnet’s network of 630 global buy-side-firm members — the kind of shareholders public companies covet. Yet the challenges he faces are even bigger than those he had to overcome in trading. Most of corporate America has yet to discover Liquidnet, and the part that has is squeamish about disrupting its relationship with banks — it values their analysts’ coverage — especially if that means participating in a largely untested process. Worse, perhaps, fewer and fewer companies are going public. Even Liquidnet’s own IPO, intended to demonstrate the efficacy of Merrin’s system, had to be shelved, contributing to an exodus of key people from the firm.
These obstacles are not lost on Merrin, who is pulling out the stops to overcome corporate resistance. He’s even trimming his sails a bit by focusing on the secondary market instead of IPOs, at least at the outset. And this is entirely in character.
The oddsmakers peg Merrin’s latest venture as a long shot, though they acknowledge that the approach has unique promise. “He’s leveraging the insight he has into the actual buy-side demand. That’s different from what anybody else is doing,” observes Richard Repetto, an analyst at Sandler O’Neill + Partners who covers equity-trading venues. Still, he says, “it’s no easy road. It’s not a layup.”
Market structure analyst Justin Schack at Rosenblatt Securities in New York agrees, citing the Facebook IPO: “One of the most revolutionary companies, with direct access to hundreds of millions of individual investors around the world, is going through the conventional process.” He adds: “I think IPOs are different. They’re special. I don’t see anybody breaking down the established order.”
Schack has a point. No outsider has yet succeeded in beating the big banks at their own game....MORE