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Big week for tech IPOs Reddit and Astera strengthen Morgan Stanley after prolonged lull

The New York Stock Exchange welcomes Reddit, Inc. (NYSE: RDDT) to celebrate its IPO. To honor the occasion, Snoo rings the Opening Bell®.

New York stock market

Wall Street’s tech IPO bankers may finally have a reason to break out the champagne after a long drought was broken this week with the market debut of Reddit And Astera Laboratories.

While occupying very different segments of the tech market, Reddit and Astera were the first notable venture-backed tech companies to go public in the United States since Instacart And Klaviyo in September. Before this, there had not been a significant agreement since the end of 2021.

Morgan Stanley was the big winner among the banks, having conquered the coveted left leader position in both IPOs. Goldman Sachs led the only two major venture-backed deals last year, meaning it’s been a long dry spell for Morgan Stanley. The bank led in IPOs for HashiCorp And samsara in December 2021.

Over the past two years, there have only been a total of 15 tech IPOs, according to research provided by Jay Ritter, professor of finance at the University of Florida. This follows a booming market in 2021, when 121 technology companies went public, the most since the dotcom bubble in 2000. Goldman Sachs and Morgan Stanley cut thousands of jobs last year, in part because of a slowdown in IPOs.

“The capital markets have been relatively quiet over the last couple of years,” said Eric Juergens, a partner at law firm Debevoise and Plimpton, who specializes in capital markets and private equity. Investment banks have “certainly been active in offering clients IPOs and other deals and positioning themselves to be there when 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 Chairman Lynn Martin told CNBC during the opening of trading on Reddit on Thursday that many companies are scrambling to exit in the second quarter.

This would be good news for Morgan Stanley. The bank collected about $37 million in total fees as the lead underwriter of the Astera and Reddit IPOs. It’s a drop in the ocean for the bank, which reported $12.9 billion of net revenue last quarter, largely driven by wealth management. But it could be a sign of life for the investment banking unit, which saw revenue fall 46% over a two-year period from the fourth quarter of 2021 to the last three months of last year.

The 12 subscribers on Astera IPO this week, $39.2 million was collected in fees, with Morgan Stanley taking a third of the total, or about $12.9 million. The over-allotment option, or over-allotment option, which allows underwriters to purchase an additional 15% of shares for clients, would add $5.9 million to the fees paid.

Astera sells data center connectivity chips to cloud infrastructure and artificial intelligence companies. The stock soared 72% in its Nasdaq debut on Wednesday and continued its rally, gaining another 13% over the next two days, benefiting from investors’ seemingly insatiable appetite for all things AI.

“Everyone was watching.”

from Reddit long-awaited IPO occurred Wednesday evening, with shares entering the open market on Thursday. Morgan Stanley earned $13 million in fees in the deal and is expected to earn up to $5.6 million in fees on the green shoe option.

Shares of the 19-year-old social media company jumped 48% on their first day of trading on the New York Stock Exchange, before falling 8.8% on Friday.

Lise Buyer, founder of IPO consultancy Class V Group, said the market was showing signs of thawing.

“A warm market reception for these IPOs will surely help open the floodgates,” Buyer said. “Everyone was watching them. Investors, boards and management were encouraged by it.”

She added that bankers who were waiting for measures “must be delighted”.

Goldman Sachs, Morgan Stanley’s biggest rival, was in second place during Reddit’s IPO, capturing about 19% of fees paid. The company scored victories last year as a leader in the IPOs of Instacart and Klaviyo, which generated combined revenue of about $35 million. When SoftBank took semiconductor design company Arm Holdings public last year, Barclays led the operation, with the participation of Goldman Sachs, and J.P. Morgan.

Rene Haas, CEO of Arm Holdings, 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, the IPO is often seen as just the beginning of the relationship with a company. The future could bring follow-on deals, debt raises and acquisitions, all of which are specialties of Wall Street’s biggest firms.

Morgan Stanley is finding another way to generate additional potential business. In the Reddit and Astera IPOs, a portion of the equity was set aside for so-called directed share programs (DSP), giving high-value customers, business partners or insiders a chance to participate.

The model was previously used by Airbnb, Rivien And Doximity, attracting experienced users or early customers in their IPOs. For Morgan Stanley, DSPs have the potential to attract new retail 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 on board with the deal,” Reddit CEO Steve Huffman told CNBC on Thursday. “Like any professional investor.”

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