The New York Stock Exchange welcomes Reddit, Inc. (NYSE: RDDT) to celebrate its initial public offering. To celebrate this occasion, Snow rings the opening bell®.
New York Stock Exchange
Wall Street tech IPO bankers may finally have a reason to pop the champagne after an extended drought ends this week with the market debuting… Reddit And Astera Laboratories.
Although Reddit and Astera occupy very different corners of the tech market, they were the first high-profile venture-backed tech companies to go public in the U.S. Since then Instacart And Clavio in September. Before that, there had been no major deal since late 2021.
Morgan Stanley It was the biggest winner among the banks, having captured the coveted lead in both IPOs. Goldman Sachs The firm has led just two large venture-backed offerings in the past year, meaning it's been a long drought for Morgan Stanley. The bank was leading the left in its IPOs Hashi Corp And Samsara In December 2021.
In the past two years, there have been only 15 technology IPOs, according to research by University of Florida finance professor Jay Ritter. That followed a market boom in 2021, when 121 technology companies went 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 decline in initial public offerings.
“Capital markets have been relatively quiet over the past couple of years,” said Eric Jurgens, a partner at law firm Debevoise and Plimpton who focuses on capital markets and private equity. Investment banks “certainly have been active in getting clients into IPOs and other transactions and positioning themselves when companies are finally ready,” he said.
Some market experts see last week's movement as a sign of what's to come. A lot of companies are working to exit in the second quarter, New York Stock Exchange President Len Martin told CNBC on Thursday, at the open of Reddit trading.
This would be good news for Morgan Stanley. The bank raised about $37 million in total fees as lead underwriter for Astera and Reddit's IPO. It's a drop in the bucket for the bank, which reported net revenue of $12.9 billion last quarter, most of it from wealth management. But it could be a sign of life for the investment banking unit, which saw revenues decline 46% over two years from the fourth quarter of 2021 to the final three months of last year.
The 12 underwriters in Astera's IPO this week raised $39.2 million in fees, with Morgan Stanley taking a third of the total, or about $12.9 million. The lump-sum allocation option, or green shoe 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 chipsets to cloud infrastructure and artificial intelligence companies. The stock rose 72% in its Nasdaq debut on Wednesday and continued to rise, rising another 13% over the next two days, capitalizing on investors' seemingly insatiable appetite for all things AI.
'Everyone was watching'
Reddit's long-awaited IPO came on Wednesday night, with shares hitting the open market on Thursday. Morgan Stanley received a $13 million fee in the deal and was expected to receive up to $5.6 million in fees on the green shoe option.
Shares of the 19-year-old social media company rose 48% on the first day of trading on the New York Stock Exchange, before falling 8.8% on Friday.
Liz Boyer, founder of IPO consulting firm Class V Group, said the market is showing signs of improvement.
“The warm market reception to these IPOs will certainly help open the floodgates,” the buyer said. “Everyone was watching these things. Investors, boards and management were encouraged by these actions.”
She added that bankers who had been waiting for action “should be happy about this.”
Goldman Sachs, Morgan Stanley's biggest competitor, took second place in Reddit's IPO, taking about 19% of the fee payout. The company scored wins last year as the lead in the initial public offerings of Instacart and Klaviyo, which brought in combined fee revenue of about $35 million. When SoftBank took semiconductor design company Arm Holdings public last year, Barclays The deal was led by Goldman Sachs and JP Morgan.
Arm Holdings CEO Rene Haas poses for a photo with members of leadership outside the Nasdaq MarketSite on September 14, 2023 in New York City.
Michael M. Santiago | Getty Images
For investment banks, an IPO is often viewed as just the beginning of the relationship with a company. The future could bring follow-on offerings, debt increases, and acquisitions, all of which are specialties of major Wall Street firms.
Morgan Stanley is finding another way to bring in more potential business. In both Reddit and Astera's IPOs, a portion of shares were set aside for so-called directed share programs (DSPs), giving high-value customers, business partners, or company insiders a chance to participate.
The model was previously used by Airbnb, Rivian And the approach, to bring power users or early customers to their IPOs. For Morgan Stanley, DSPs have the potential to attract new retail clients to the bank for wealth management and other services.
In the case of Reddit, the company said tens of thousands of Redditors participated in its DSP.
“The goal is just to sell them on the deal,” Reddit CEO Steve Huffman told CNBC in an interview on Thursday. “Just like any professional investor.”
