Roger McNamee, the prominent Silicon Valley investor, has dubbed the initial public offering of Uber—the most widely anticipated I.P.O. of the decade—a “train wreck,” while others have noted that investors who bought Uber stock at its I.P.O. price of $45 a share lost more money—$655 million—at the end of the first day of trading than any other I.P.O. in U.S. history.
But, as usual, guess who made a boatload of money at the expense of Uber’s I.P.O. investors? That’s right: the Wall Street underwriters, led by Morgan Stanley, Goldman Sachs, and Bank of America. Wall Street always finds a way to make money, of course, and the Uber I.P.O. was no exception.
First came the payoff for underwriting the 180 million shares the company sold to the underwriters at $45 per share. That raised $8.1 billion for Uber, of which, according to the final I.P.O. prospectus, Uber agreed to pay the Wall Street underwriters $106.2 million. Nearly 70 percent of this $106 million went to Morgan Stanley (as lead underwriter, the firm scooped up around $40 million of fees), Goldman Sachs hoovered up around $20 million in fees, and Bank of America made $10 million. In fairness to this trio of bankers, they probably have been trying to feed at the Uber trough for years and years without getting a payoff. And even this fee bonanza isn’t exactly robust by I.P.O. fee standards. Smaller I.P.O.s can earn underwriters 7 percent of the proceeds; but in this case Uber screwed down the underwriters to a 1.3 percent fee, albeit on one of the largest I.P.O.s in history.
Wall Street views I.P.O.s as a gigantic foot in the door to more business down the road. “In the internal underwriting materials, bankers show the I.P.O. as being a loss leader,” says one former Wall Street banker. “Just in terms of the amount of time and the credit that you have to offer to get it and all that stuff. It’s just not a ton of money.”
But, perversely, Wall Street managed to really hit the jackpot—to the tune of as much as another $200 million or so—in the days following the Uber I.P.O. as the stock cratered. Here’s why: as part of the I.P.O., Uber granted the underwriters another 15 percent of the offering, or 27 million shares, at the I.P.O. price of $45 per share. (On Wall Street, this option is referred to as the “greenshoe,” named after the company where it was first done generations ago.)
Since there was a lot of demand for the Uber I.P.O.—generated in large part by the Wall Street hype machine—not only had Morgan Stanley and Goldman Sachs sold the 180 million Uber shares they bought from the company, they also had pre-sold the 27 million additional “greenshoe” shares at $45 a share to the I.P.O. investors. What’s more, the investors who bought those 27 million additional shares at $45 each had already paid for them—meaning that the underwriters were sitting on a cash pile of $1.215 billion. This resulted in the underwriters being “short” the 27 million shares. In other words, they had the investors’ money but they still had yet to deliver them the Uber shares they had bought and paid for.
Where to find these 27 million shares that needed to be delivered? Morgan Stanley could have exercised its option from Uber and bought the shares from Uber at $45 per share and then delivered them to the investors who had bought them for $45 per share. Uber, no doubt, would have loved to have sold Morgan Stanley another 27 million shares at $45 per share, generating another $1.2 billion in proceeds.
But, wouldn’t you know it, there was another place where Morgan Stanley could turn to deliver those shares: the market. With the Uber I.P.O. a bust—trading as low as around $36 per share on May 13—to satisfy its obligation to deliver 27 million Uber shares, all Morgan Stanley had to do, and likely did (Morgan Stanley isn’t commenting), is go into the market and buy 27 million shares of Uber, at say $37 per share, at a total cost of $1 billion. Those shares would then be sold, as promised, to investors, for $45 per share.
That bit of Wall Street alchemy, assuming it happened that way, would have netted Morgan Stanley a cool $215 million. “If the stock’s down a couple of bucks, no one sort of really cares,” the former banker tells me. “When the stock is down this much, there is massive opportunity to make enormous profit and that’s a trade secret on Wall Street.”
So Wall Street wins big, as do many of the original Uber venture-capital investors, such as Benchmark and First Round Capital. Who loses in this situation? Anyone who bought in the I.P.O., of course. And that would include both retail and institutional investors. Other losers are the late-stage investors that bought Uber stake at valuations in excess of the $71.4 billion that Uber is trading at these days. Another unexpected loser is PayPal, which for unexplained reasons bought $500 million worth of the Uber I.P.O. at $45 per share. When the Uber stock was trading at around $36 per share, PayPal was sitting on a cool loss of around $100 million. Now that Uber has recovered to around $43 per share, PayPal’s loss has been trimmed to around $22 million. Ouch.