>HJ, you need to raise your standards; this article is seriously flawed throughout.
So Victor, what's your point? I didn't write this article I was only the messenger.
Let me get this straight. You want me to raise my standards and go to work for Morgan Stanley? Is that correct?
>3/26/01 8:07 PM ET
Lucent's (LU:NYSE - news) much-hyped spinoff of Agere was supposed to be the light at the end of the tunnel for the troubled telecom supplier and its creditors. But delays and questionable demand for the offering have fueled doubts about the planned IPO and cast a shadow on Lucent's complicated relationship with lead underwriter Morgan Stanley Dean Witter (MWD:NYSE - news).
Morgan Stanley is holding $1.6 billion of Lucent's commercial paper as part of an unusual and somewhat awkward underwriting arrangement for Agere, Lucent's optical-networking unit. (Companies often use commercial paper to fund day-to-day operations) The debt, which is due this Thursday and was originally valued at $2.2 billion, was supposed to be swapped for 200 million Agere shares at the time of the offering.
But last Thursday, as the offering price was slashed yet again, Lucent canceled plans to swap equity for debt, leaving Morgan Stanley with the debt. It's highly unlikely that Morgan Stanley will get left holding that debt, but the idea behind the arrangement was that it would get fat underwriting fees. Now those fees are falling.
The offering's total dollar amount has fallen to a maximum of $4.2 billion from the originally estimated $7 billion, ensuring that the eagerly sought underwriting fees will be much lower than originally thought. They're now estimated to have dropped about $100 million to $160 million, according to published reports. That's bad news for Morgan Stanley, considering Wednesday's first-quarter profit report showing results down 30% from year-ago levels amid lower trading commissions and underwriting fees.
Morgan Stanley declined to comment on the issue.
Not surprisingly, some analysts have taken a dim view of the Agere deal. Carol Levenson, credit analyst at Gimme Credit, said in a newsletter: "Lucent has abandoned a debt-for-Agere-equity exchange arranged with Morgan Stanley that was supposed to raise enough cash to pay off the Lucent commercial paper MWD recently purchased (when nobody in their right minds would touch the stuff) in anticipation of a successful IPO." Levenson also called the IPO, which Lucent is pushing through for some badly needed cash, "an act of desperation." (Gimme Credit issues an advisory newsletter, but doesn't take positions in the companies it covers.)
The downturn in the stock market has pressured nearly all the brokers in recent quarters including Lehman Brothers (LEH:NYSE - news) and Bear Stearns (BSC:NYSE - news), which also recently reported earnings. Bear missed lowered estimates.
All of which helps explain why brokers are willing to contort their balance sheets and take on added risk in hopes of pocketing lucrative underwriting fees from clients. Morgan Stanley's initial take, before the IPO terms were revised, was said to be about $260 million. Considering that the IPO market has all but dried up in recent months and liquidity has fallen sharply from a year ago, maneuvering complicated transactions and such large debt loads is proving much more difficult than it was a year ago.
Lucent has even more reasons for wanting to forge ahead with the deal despite what's clearly a tough environment. "Judging from the IPO price, which has been lowered to $6 to $7 [from an initial range of $16 to $19], it appears that [Lucent] really [wants] to get the deal done," says Bill Densmore, director of telecom and a credit analyst at Fitch in Chicago. "It's important [for Lucent] to get some of the debt off their books." (Fitch rates debt and has no positions in the companies it covers.)
Morgan Stanley does have a way out of the debt, says Mark Constant, a brokerage analyst with Lehman Brothers. The firm can pass on the credit risk by opting not to renew the commercial paper when it comes due this Thursday. (Constant rates Morgan a buy, and his firm hasn't done underwriting for it.) In that event, Lucent would have to dip into some existing bank credit lines that were set up in February. "If they were to make such a choice, the bank lenders would then absorb the credit. Morgan Stanley gets its money back." That's good news for Morgan Stanley but not such a good sign for some of the exposed banks.
According to regulatory filings, Morgan Stanley still has the option to receive up to 90 million shares in the IPO with a value of $630 million, depending on sufficient demand. That constitutes less than half of the $1.6 billion of outstanding commercial paper debt, and given that the offering price has been cut twice, demand for the offering is clearly weak. |
