Lead Underwriter Shorts Uber Pre-IPO… Over Valued?

On September 2018, Uber’s top executives were pitched by some of Wall Street’s biggest banks, Morgan Stanley and Goldman Sachs. The bankers came to a similar conclusion – Uber’s valuation was US$120 billion. Following that, Morgan Stanley was hired as lead underwriter; to make the US$120 billion valuation a reality. Today, Uber’s share price is trading at US$43, with a market capitalization of US$72.3 billion, slightly over half that US$120 billion and below its Series G share price of US$48.77.

How much of this was expected by their lead underwriter, Morgan Stanley? Bankers at Morgan Stanley were said to be worried that Uber’s IPO has run into trouble, they deployed an unusual tactic, known as a ‘naked-short’. It is used to provide extra support for the stock – and its use was suggested in Uber’s IPO prospectus.

What is a ‘naked-short’? In every deal, there is an overallotment, which allows underwriters to sell 115% of the available offerings to investors, effectively creating a short position. The excess 15% can be purchased by the underwriter in the open market to support the stock if it goes down. This is called a “greenshoe”. A naked short allows underwriters to sell shares in excess of that greenshoe portion and then buy them back in the open market, to provide more firepower if there is significant selling pressure.

However, heavy trading in the first two days made it difficult for the banks to support the stock price. Uber fell 18% in its first two days of trading, falling to around US$41 per share, or a market capitalization of around US$69 billion. Uber’s IPO lost more in dollar terms than any other American IPO since 1975.

Uber’s post IPO woes continues the trend set by ride-sharing rival Lyft, whose price fell 11.9% to US$69.01 on the second trading day. Today, Lyft trades at US$55.60, a 22.8% low as compared to its IPO price of $72.

The poor performance of Uber and Lyft brings a dose of reality to the IPO market for “Tech Unicorns”, possibly lowering valuations for some time. Uber’s IPO valuation of US$82.4 billion, almost 33% lower than the US$120 billion floated last year by investment bankers leads us to question the veracity of their valuations. Perhaps, a reality check on sky-high valuations was what the market needed, and now we have it.

Uber Stock’s Plunge Is Blemish on IPO Market [Wall Street Journal]

Uber underwriters worried about the IPO deployed unusual ‘naked short’ tactic to support the stock [CNBC]

Lyft shares fall below IPO price on second day of trading [Financial Times]

How the Promise of a $120 Billion Uber I.P.O. Evaporated [NY Times]