COMMENTARY--Here's a quiz on Lucent's Agere spin-off: What constituents can claim victory from the Agere initial public offering on Wednesday?
- a) Lucent, which eliminated $2.5 billion in debt in short order by spinning off Agere; b) Morgan Stanley, which showed you can force feed a 600 million-share IPO to Wall Street; c) Agere, a communications chip maker that's going public as many of its rivals issue profit warnings; d) Institutional investors, some of who unofficially boycotted the Agere deal until the price fell sharply to $6; e) Individual investors, who actually get a shot at a company at its offering price; f) None of the above.
If you picked "f," you would be correct. But it's almost a trick question. Although a lot of Wall Streeters are claiming victory because Agere managed to stay 2 cents above its offering price of $6 Wednesday, no entity can claim a complete win with this IPO. In fact, the Agere IPO is a muddled mess of partial victories. The whole episode shows how Wall Street interests can often conflict.
Here's the short version. Lucent only wanted to spin off Agere, its communications chip unit, because it needed to unload debt. Morgan Stanley wanted the underwriting work since there are no dot-com IPOs these days. Agere finds itself saddled with debt and has Lucent as its largest customer. Institutional investors own shares of Agere to placate Morgan Stanley. And individual investors are, as usual, at the bottom of the totem pole.
Talk about a muddled situation and diverging interests. Time for a closer look.
Lucent--If Lucent hadn't unraveled, chances are it wouldn't have spun off Agere amid a big restructuring effort. The Agere IPO was hatched out of desperation. Unfortunately for Lucent, the market malaise derailed its plot to right its financial ship. In December, Lucent had hoped to sell Agere for $15 to $20 a share. The proceeds from the IPO would be used to pay down debt.
The higher Agere's valuation, the more debt Lucent could retire with Morgan Stanley. When the deal was valued between $12 and $14 a share, Morgan Stanley agreed to assume about $2.5 billion of Lucent's debt in exchange for 200 million shares.
That higher valuation was never realized as Agere's price range fell three times until the company was priced at $6. A profit warning from Agere coupled with the technology stock collapse whacked the price range. Under Lucent's original plan, the telecommunications equipment provider would have issued more Agere shares to retire debt. With Agere hitting the market at $6 a share, Lucent lost "an opportunity to improve its balance sheet," said Merrill Lynch analyst Michael Ching.
"Lucent got a partial victory, but it was diminished by having to lower Agere's price range," said Steven Levy, an analyst at Lehman Brothers.
Morgan Stanley--just how many bridges did this brokerage burn by pushing 600 million shares out to institutional investors, who were leery of Agere? Morgan Stanley has two clients--investment bankers and investors--and it's not hard to figure out that there was an imbalance between the two. Morgan Stanley also can't be thrilled that it had to cut Agere's price to push it public.
Under the revised terms of the Agere IPO, Morgan Stanley gets 90 million shares, but no extra debt in exchange. The investment bank already holds about $1.6 billion in Lucent debt. On the bright side, Morgan Stanley set itself up to get more underwriting work from Lucent, which is under pressure to sell more assets to pay down debt. Analysts, however, have one lingering question: How many shares did Morgan Stanley have to buy to keep Agere above its offering price Wednesday?
Agere--After you read the Agere (NYSE: AGR.A) regulatory filings, you get the impression that the timing could have been better. Agere warned about a fiscal 2001 loss in its final prospectus Wednesday. It also went public on a day when the market tanked. Meanwhile, companies in Agere's sector--PMC-Sierra (Nasdaq: PMCS), Conexant (Nasdaq: CNXT) and Vitesse Semiconductor (Nasdaq: VTSS)--all issued profit warnings this week.
"Agere's prospects are better as a standalone company," said Levy. "Unfortunately it doesn't matter in this macro economic environment. It's tough going public when you have deteriorating industry and company fundamentals."
Agere will also have $2.5 billion in debt to go along with its $3.6 billion in cash from the IPO. And Agere said revenue will be flat at $4.7 billion for the fiscal year ending Sept. 30. For the three months ending Dec. 31, Agere reported sales of $1.36 billion and a loss of $30 million. Even at the bargain basement offering price of $6, Agere may be overvalued, analysts said.
Meanwhile, Agere's parent is still a problem. Lucent, which accounted for more than 21 percent of Agere's sales, plans to distribute roughly 1 billion Agere shares by Sept. 31. That distribution will dilute the holdings of Agere shareholders, said Levy.
Investors--For once institutional and individual investors are on the same page. Under normal circumstances, individual investors usually don't get to buy a company at its IPO price because institutions get favorable treatment from underwriters. Could this be a bargain? Despite a lot of near-term issues--debt, share distribution, profit worries, an imploding telecommunications sector--Agere is a leader in its market.
The big issue for potential Agere shareholders is how long it'll take for the economic problems to clear, analysts said. Agere also needs to lessen its dependence on Lucent. A few years from now, Agere may be viewed as a great deal. But there's no rush to make a decision. Agere is likely to trade flat--if it's lucky--for a while, analysts said.
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