American History 1988
Chapter 223 - 217 Pricing

Chapter 223: Chapter 217 Pricing

"Well, Richard, I think we can have a more pleasant conversation this time?"

Dean didn’t mind the occasional tugging at his sports sweatshirt collar, it was clear that this attire did not relax him much.

"Of course, this time Morgan Stanley will do its utmost to present the most sincere proposal.

Look, among the famous investment banks on Wall Street, we are still the first to visit Byte Company."

In terms of initiative, Richard indeed acted much faster than his peers, just as when he first received the call from Arthur Locke.

He wasn’t sure if flying across the North American continent would yield any gains, but as long as there was business to be done, he came.

"Good, welcome to the West Coast again." Dean was very satisfied with their attitude; this was how an investment bank should serve its clients.

"I like the West Coast, I like the freedom of the sea breeze here." Richard spread his arms as if embracing everything he saw.

Having been on Wall Street for so many years, Richard understood one truth: everything was in service of business.

His ancestors arrived on the North American continent aboard the "Mayflower," and by tradition, his family was considered prominent in America.

He had a fondness for classicism, from the décor of his luxurious office to the cufflinks on his suit sleeves, everything in sight was exquisite.

But to get the chance to underwrite Byte Company’s IPO, Richard could completely abandon all that, even donning beach style, which he wouldn’t have glanced at before.

For those on Wall Street, when necessary, they could adapt their aesthetics to fit the client.

"OK, I’m glad to hear you say that." Dean briefly hugged him, "Let’s sit down and talk."

As cups of coffee were served, the atmosphere in the meeting room became a tad more relaxed.

"So, what suggestions does Morgan Stanley have for our IPO this time?" Taking a sip of coffee, Dean initiated the conversation.

"The purpose of an IPO is to raise funds for operating or expanding the company going public," said Richard, spreading his hands to the audience.

"So it depends on the amount Byte Company plans to finance and the percentage of equity you’re ready to release.

These are the crux of the issue, determining Byte Company’s valuation and stock pricing."

Upon hearing Richard’s questions, everyone exchanged glances, then all turned their attention to Dean.

"For this IPO, we plan to raise 100 million US Dollars and release 5% of the equity."

Dean confidently stated Byte Company’s goals, after having an internal discussion beforehand.

David Morgentaler’s knuckles turned white as he clutched his pipe, while Valentine slowly and carefully clipped his cigar with his head bowed.

Only Durell dared to look straight at Richard, with a calmness that seemed to say: Kid, think carefully before you answer.

As for Arthur Locke... well, he simply averted his gaze to avoid meeting Richard’s.

He was worried that Richard’s look might ask him, "Arthur, are all these people at Byte Company mad?"

Yes, Arthur Locke thought they were mad! This round of valuation was exactly double the initial quote from Morgan Stanley!

They had once sat together, unanimously criticizing Durell’s unrealistic 1.5 billion dollar valuation.

And yet, merely a week later, things went beyond anyone’s expectations.

"Oh my goodness!" Sure enough, Richard was left speechless upon hearing Dean’s intentions.

This was his second time here; he had prepared for Dean to drive a hard bargain.

But that certainly did not include doubling the valuation "directly" from the last one.

"This is insane, Dean! Raising 100 million US Dollars and releasing 5% equity means valuing Byte Company at 2 billion US Dollars!

Dean, believe me, you don’t understand what this means! It means reaching heights that Oracle, Lotus, Microsoft didn’t reach for several years after their own listings, no one will agree with this."

"Richard, Byte Company is worth the price," Dean argued, "You’ve seen how popular our IP telephony service is.

And the evaluations from your Wall Street analysts, isn’t that a recognition of Byte Company?

Most importantly, we’ve released our first-quarter financial report, 74 million US Dollars; you know what that means, Richard."

"Dean, listen to me," Richard tried to gesture with his hands, "The valuation greatly depends not on Byte Company, nor Morgan Stanley.

You can value yourself at 2 billion US Dollars, or even 10 billion US Dollars, but that’s meaningless.

The key is whether the market acknowledges it, whether the investors recognize such value.

If the valuation is too high, the stock price beyond what most can afford, then no one will be interested in Byte Company’s IPO.

What Morgan Stanley can do is to help price Byte Company’s stock near the threshold the market can accept.

Our commission is tied to Byte Company’s stock; we share the same interests in this regard.

So I hope you understand that we are partners, not negotiating competitors."

Richard was right in a sense; underwriters assist the company going public in pricing their shares.

Both parties hoped to successfully sell the issued stocks, that is, finding large investment institutions willing to take over.

For experienced underwriters such as Morgan Stanley, they would assess the potential of new stocks in advance.

Morgan Stanley internally has rough estimates of which clients would be interested in these new stocks and the range they are likely to accept.

When the price exceeds the warning value given by internal risk experts, Morgan Stanley would certainly consider carefully whether to underwrite the IPO stocks.

"But our mode of cooperation is through underwriting, and there is obviously a substantial profit margin difference," said the brave and inexperienced Marcus, challenging this point.

Underwriting, as the name implies, is an agreement between the underwriter and the listed company to buy all the issued shares at a fixed price.

The underwriter then sells these issued shares to the primary market, which includes major investment institutions or funds.

The price for resale is usually higher than the underwriting price, and the difference is the profit for the underwriter.

Marcus believes that Morgan Stanley is intentionally underpricing to obtain a higher spread and earn more profit.

Richard couldn’t help but laugh at this naïve question, "Come on, I guarantee with Morgan Stanley’s century-old reputation.

The price at which we underwrite and resell to the primary market will not fluctuate by more than 8%.

If the spread exceeds a certain ratio, we could even sign a compensation agreement.

Furthermore, the risk of underwriting is substantial, and we must earn a profit that matches this risk."

The reason underwriting is popular in the IPO process today is because it presents minimal risk for the issuer.

Once an agreement is signed with the underwriter, the listed company’s financing is virtually complete.

How the remaining stocks are issued, and finally to whom they are sold, is no longer much of an issue for the listed company.

Because even if they can’t sell, the underwriter will provide a safety net, and the financing money will still be received by the listed company.

Throughout the process, the risk of issuing stocks is transferred from the listed company to the underwriter.

Therefore, as the return for taking on high risk, the underwriters generally earn substantial profits from the price difference.

However, this return rate is generally limited to a certain range, like the 8% Richard just mentioned.

This rule stems from over a century of financial history on Wall Street, and the kind of huge price difference Marcus worries about is highly unlikely to occur.

Underwriters, when pricing, have two conflicting objectives.

First, as agents of the company, they want to raise the price of a given number of shares as much as possible.

At the same time, to protect their own company from losses and to maintain their market reputation.

The underwriter tries to ensure that all issued shares are sold within a relatively short period.

How can one sell all issued shares in such a short time? Of course, by setting a price that makes potential customers interested.

Put simply, too low a price hurts the interests of the listed company, while too high a price affects the underwriter’s reputation with investment institutions.

How to balance these two interests, how to price the stocks appropriately, is an art for Wall Street.

Because of these constraints, Morgan Stanley would not intentionally undervalue Byte Company.

After all, the range of the spread is broadly defined, and the higher the base price, the more Morgan Stanley earns.

8% of 1 US Dollar and 8% of 10 US Dollars, that’s two completely different concepts.

After hearing Richard’s explanation, Dean and the others finally had a more detailed understanding of the IPO pricing rules.

In fact, David Morgentaler, Durell, Valentine, and Arthur Locke all knew these rules.

As venture capitalists, they had participated in more than one IPO.

Even Valentine had a cooperation with Morgan Stanley last year when Cisco went public.

But who doesn’t want the stocks they own to be more valuable? Since Dean was willing to fight for a higher pricing, they were happy to oblige.

"Alright, Richard, what do you suggest?" It’s normal to haggle when doing business, and Dean now wants to hear Morgan Stanley’s proposal.

"The financing Byte Company wants to raise through the IPO is one hundred million US Dollars, right?" Richard had already started having his assistants calculate on the spot.

"Yes, we are implementing the ’Vision Plan,’ which requires a substantial sum," the company was going public, essentially to accelerate the pace of expansion.

With the financing money, whether it’s developing multiple projects at the same time or acquiring potential companies in the market, it’s a quick way to grow the company rapidly.

"Based on the market research done by Morgan Stanley, when the price of Byte Company’s stocks is around 14 US Dollars, our clients will have more interest.

We have also contacted major clients including Vanguard, Blackstone Group, Fidelity Investments, and Deutsche Bank; they can generally absorb between 5 to 8 million shares.

According to the calculations, the funds we need to raise are exactly within this range, so my suggestion is to take 14 US Dollars as the initial pricing benchmark."

Dean and Valentine looked at each other, then presented the bottom line they had agreed on beforehand, "But we don’t want to release too much equity, 6% is the maximum concession we can accept."

"7%!" Richard made a slight adjustment, "That would be more favorable for ensuring trading volume in the secondary market after listing."