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Big week for tech IPOs Reddit, Astera strengthens Morgan Stanley after a long lull

The New York Stock Exchange welcomes Reddit, Inc. (NYSE: RDDT) in celebration of its IPO. To mark the occasion, Snoo rings the Opening Bell®.

NYSE

Wall Street’s tech IPO bankers may finally have a reason to pop the champagne after a lengthy drought ended this week with the market debuts of Reddit And Astera Labs.

Although Reddit and Astera occupy very different areas of the technology market, they have since become the first notable venture capital-backed technology companies to go public in the United States Instacart And Klaviyo in September. There had previously been no significant deal since the end of 2021.

Morgan Stanley was the big winner among banks, having secured the coveted front-left spot in both IPOs. Goldman Sachs led the only two major venture-backed offerings last year, meaning it’s been a long dry spell for Morgan Stanley. The bank was dependent on IPOs HashiCorp And Samsara in December 2021.

In the last two years there have only been a total of 15 tech IPOs Research provided by Jay Ritter, finance professor at the University of Florida. This comes after a booming market 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, partly due to a decline in initial public offerings.

“Capital markets have been relatively quiet in recent years,” said Eric Juergens, a partner at law firm Debevoise and Plimpton, which focuses on capital markets and private equity. Investment banks are “certainly active in recruiting clients for IPOs and other transactions and positioning themselves to be there when companies are finally ready,” he said.

Some market experts see last week’s developments as a sign of things to come. Lynn Martin, president of the New York Stock Exchange, told CNBC on Thursday at the opening of Reddit trading that many companies are working toward a second-quarter exit.

NYSE President Lynn Martin: Reddit's IPO was a

That would be welcome news for Morgan Stanley. As the main underwriter for the Astera and Reddit IPOs, the bank collected a total of around $37 million in fees. That’s a drop in the bucket for the bank, which reported net revenue of $12.9 billion last quarter, most of which came from wealth management. But it could be a sign of life in the investment banking division, which saw a 46% decline in revenue 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 collected $39.2 million in fees, with Morgan Stanley taking a third of the total, or about $12.9 million. The over-allotment, or greenshoe, option, which allows underwriters to purchase an additional 15% of shares for customers, would increase fees paid out by $5.9 million.

Astera sells data center connectivity chips to cloud and artificial intelligence infrastructure companies. The stock rose 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”

Arm Holdings CEO Rene Haas poses for a photo with executives in front of the Nasdaq MarketSite on September 14, 2023 in New York City.

Michael M. Santiago | Getty Images

For investment banks, the IPO is often viewed as just the beginning of the business relationship with a company. The future could bring follow-on issuances, debt raising and acquisitions, all of which are specialties of top Wall Street firms.

Morgan Stanley is finding another way to capture additional potential business. In both the Reddit and Astera IPOs, some of the equity was allocated to so-called directed share programs (DSPs) to give high-profile customers, business partners or company insiders the opportunity to participate.

The model was previously used by Airbnb, Rivian And Doximacy, thereby incorporating power users or early adopters into their IPOs. For Morgan Stanley, DSPs have the potential to attract new individual customers to the bank for wealth management and other services.

In Reddit’s case, the company said tens of thousands of Reddit users 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.”

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Reddit jumps 48% in NYSE debut after shares sell at peak prices

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