The New York Stock Exchange welcomes Reddit, Inc. (NYSE: RDDT) to celebrate its initial public offering. To honor the occasion, Snoo is ringing the Opening Bell®.
NYSE
Wall Street’s tech IPO bankers may finally have a reason to pop the champagne after a long drought was broken this week with the market debuts of Reddit and Astera Laboratories.
Although they occupy very different corners of the tech market, Reddit and Astera were the first notable venture-backed tech companies to go public in the US since Instacart and Clavio in September. Before that, there had been no significant deal since late 2021.
Morgan Stanley was the big winner among banks after taking the coveted top left spot in both IPOs. Goldman Sachs led just two major company-backed bids last year, meaning it’s been a long period of stagnation for Morgan Stanley. The bank was the leader in the IPOs HashiCorp and Samsara in December 2021
In the past two years, there have been a total of 15 tech IPOs, according to research provided by University of Florida Finance Professor Jay Ritter. That comes after a booming market in 2021 that saw 121 tech companies go public, the most since the dot-com bubble in 2000. Goldman Sachs and Morgan Stanley cut thousands of jobs last year, in part because of a slump in initial public offerings.
“Capital markets have been relatively quiet over the past few years,” said Eric Juergens, a partner at law firm Debevoise and Plimpton who focuses on capital markets and private equity. Investment banks “have certainly been active in pitching clients to IPOs and other transactions and positioning themselves to be there when the companies are finally ready,” he said.
Some market experts see last week’s action as a sign of things to come. New York Stock Exchange President Lynn Martin told CNBC Thursday at the opening of trading on Reddit that many companies are working to exit in the second quarter.
That would be welcome news for Morgan Stanley. The bank raised about $37 million in total fees as lead underwriter for the Astera and Reddit IPOs. That’s a drop in the bucket for the bank, which reported $12.9 billion in net income last quarter, mostly from wealth management. But it could be a sign of life at the investment banking unit, which saw revenue fall 46% over the two-year period from the fourth quarter of 2021 to the final three months of last year.
The 12 underwriters of Astera’s IPO this week collected $39.2 million in fees, with Morgan Stanley taking a third of the total, or about $12.9 million. Overlotment, or the greenshoe option, which allows underwriters to buy an additional 15 percent of the shares for customers, would add $5.9 million to the fees paid.
Astera sells data center connectivity chips to cloud infrastructure and artificial intelligence companies. The stock jumped 72% in its Nasdaq debut on Wednesday and continued to rally, gaining another 13% over the next two days, benefiting from investors’ seemingly insatiable appetite for all things AI.
“Everybody Was Watching”
Shares of the 19-year-old social media company jumped 48% in their first day of trading on the NYSE before falling 8.8% on Friday.
Lise Buyer, founder of IPO consultancy Class V Group, said the market is showing signs of thawing.
“The market’s warm reception to these IPOs will certainly help open the floodgates,” Bayer said. “Everybody was looking at them. Investors, boards of directors and management were encouraged by them.”
She added that bankers who have been waiting for action “should be pleased with this”.
Goldman Sachs, Morgan Stanley’s biggest rival, had the No. 2 IPO position on Reddit, taking in about 19% of the fee payout. The firm scored wins last year leading the IPOs of Instacart and Klaviyo, which brought in total fee revenue of about $35 million. When SoftBank took semiconductor design company Arm Holdings public last year, Barclays led the transaction involving Goldman Sachs and JP Morgan.
Arm Holdings CEO Renee Haas poses for a photo with members of management outside the Nasdaq MarketSite on September 14, 2023 in New York.
Michael M. Santiago | Getty Images
For investment banks, an IPO is often seen as just the beginning of a relationship with a company. The future may bring follow-on offerings, debt increases and acquisitions, all specialties of Wall Street’s leading firms.
Morgan Stanley is finding another way to attract additional potential business. In both the Reddit and Astera IPOs, a portion of the equity capital was set aside for so-called Direct Share Programs (DSPs), giving highly valued customers, business partners, or company insiders a chance to participate.
The model was previously hired by Airbnb, Rivian and Doximites, bringing power users or early customers into their IPOs. For Morgan Stanley, DSPs have the potential to attract new individual clients to the bank for wealth management and other services.
In Reddit’s case, the company said tens of thousands of Redditors participated in its DSP.
“The goal is just to get them into the deal,” Reddit CEO Steve Huffman said in an interview with CNBC on Thursday. “Just like any professional investor.”
https://www.cnbc.com/2024/03/23/big-week-for-tech-ipos-like-reddit-boosts-morgan-stanley-after-lull.html
