Think it's tough to put lipstick on a pig? Try putting it on Agere.

Investment bank

Morgan Stanley Dean Witter

(MWD)

is finding it has had to make some major adjustments to the effort to underwrite the

initial public offering of Agere, the chip and optical component maker slated to be spun off this week from

Lucent

(LU)

, right into the teeth of an ugly market.

Two people familiar with the deal say that depending on market conditions Morgan may reset pricing terms on Wednesday, dropping the range on Agere shares to $8 to $10 for a Thursday night pricing. That would be the second time the bank has moved to make the shares more palatable to investors by cutting the offering price, which was initially estimated at $16 to $19 a share. If Morgan can't float the deal successfully Thursday, it'll be put off until next week, possibly March 27. (

TheStreet.com

looked at the deal's struggles earlier this month as well.)

"It could go either way because of the market and because optical is so out of favor, but Morgan's trying to put this deal in good hands," says one trader at a New York hedge fund that will take an allocation of shares. "Morgan will price it lower because they want to make it work."

A Morgan Stanley spokeswoman declined to comment on the deal. Agere also declined to comment.

The Need

The firm has good reason to try to make the deal work. A stumbling IPO is always bad for the investment bank leading the deal, but Morgan has more on the line than the typical lead underwriter. As part of Lucent's recent debt package, the investment bank holds more than $2 billion of Lucent debt. It can swap that for Agere stock, which can then be sold on the open market, but only if the IPO goes through.

It also wouldn't mind the estimated $250 million underwriting fee in an otherwise dormant initial public offering market.

"Morgan Stanley is sweating bullets. There are big money managers saying they won't take this deal at any price," says an analyst at a competing investment bank. "People weren't going to pay $12 a share, especially in this market. Look at

Nortel

(NT)

, as

NT gets cut, you have to cut this thing

Agere."

That makes some tough going for Morgan. The firm's last big IPO hasn't exactly been a rip-roaring success.

KPMG Consulting

(KCIN)

, which came out at $18 in early February, ran to $24.25 its first day but since has dropped precipitously. It's trading around $13.63.

The Waiting

With Agere, a generally well-regarded company that's in a sector that has fallen swiftly out of favor, Morgan has waited out a miserable market and held off pricing the deal until the

Federal Reserve

cut interest rates Tuesday. If the deal flops, Morgan Stanley could shift blame to market conditions. Getting it done, though, could have further-reaching implications for the investment bank.

"For a major firm to be successful in this difficult market, it can breed bragging rights for when things are easier," says Michael Holland, manager of the

(HOLBX) - Get Report

Holland Balanced Fund and a former securities industry executive.

Whether those bragging rights hold up in the after market, where Agere could suffer the same short-term problem as last week's IPO sacrifice,

Loudcloud

(LDCL)

, is another question. Loudcloud priced at $6, moved only to $6.56 on its

opening day and promptly fell to $3.88. On Tuesday, it closed up 44 cents at $5.25.

That Morgan and several other major investment banks such as

Bear Stearns

(BSC)

and

Deutsche Banc Alex. Brown

are on the hook to Lucent for billions in debt, makes the deal a case study on the new math of balance-sheet leverage. "It's a preview of things to come. It's evidence that firms will use all of their resources to be competitive," says Holland, whose fund doesn't have a position in Lucent or Morgan Stanley.

Magnifying

With Morgan releasing earnings Wednesday morning, any weakness its shows from the previous quarter could be magnified by further setbacks to the Agere deal, especially because the underwriting calendar has been fallow for the past three months.

Lucent needs the deal to be pushed through as well. It recently borrowed $6.5 billion from several investment banks -- many of which are part of the underwriting syndicate. A spunoff Agere would take on $2.5 billion of that debt, keeping Lucent's credit rating from falling to the junk level.

For that to happen, though, it's up to Morgan Stanley to convince institutional investors that Agere's shares don't belong in the junkyard.