It’s a very rare thing over at Dealbreaker when a schadenfreude-fueled disaster that we predicted, witnessed, and delighted in turns out to have yet another mindbogglingly darkly comic layer that we get to unpack days later… so thank you, Uber and Morgan Stanley.
Uber’s underwriters, led by Morgan Stanley, were so worried the company’s initial public offering had run into trouble, they deployed a nuclear option ahead of the deal last week, so they could provide extra support for the stock, four people with knowledge of the move said.
This level of support, known as a “naked short,” is a technique that goes above and beyond the traditional help a new offering can get.
This is so inherently satirical that we are almost at a loss for snarky words.
But let’s just throw down a quick primer on what a “Naked Short” means in this case since most of you lawyer types are probably yelling “That’s illegal!” at your screen. At their most basic, naked shorts are basically a mechanism through which a trader can take a short position on shares of a stock that they don’t actually possess, and might have no intention of ever possessing. If the price associated with those shares does drop, then the naked shorter gets to pick up suddenly available shares at a discount, but if the stock appreciates, all hell breaks loose. Without one counterparty actually holding real stock, the actual trade is unlikely to clear because — in the most simplistic terms — suddenly there’s short action on more shares than what actually exist in the market, and somebody might have probably just done a crime. In that sense, naked shorts are illegal, but not if you’re a bank underwriting an IPO.
Somehow it’s still totally fine and legal for an underwriter to deploy a naked short on one of its own IPOs, which is weird, but pre-IPO the stock doesn’t actually exist, so the whole crux of the problem is kind of mitigated (and also there is always extra stock issued at an IPO that the underwriter can pick up super cheap and sell back into the market to support the stock price…but that’s a bit wonky). But not even a regulatory change could obfuscate the stark reality that an underwriter naked shorting one of its own IPOs is a tacit admission that it sincerely believes it has overvalued the company it’s selling to investment clients.
So looking back at what happened here, we find ourselves giggling at the balls it takes for Morgan Stanley to have pulled a move like this mere days before an IPO that was aiming for a valuation outside the logical parameters of space and time, but we are physically laughing very hard at the bagholders who gladly accepted their bags from MS with an apparent understanding that their investment bank was actively shorting the stock of an IPO that it was handling at the eleventh hour:
Some of the bankers tried to console market participants prior to the opening of trading by telling them that there would be additional support from the naked short, said one of the people, who asked not to be named discussing private conversations. The exact size of the naked short could not be learned, but it is expected to have been “fairly small,” two of the other people said.
Morgan Stanley does not look great here, but their clients look literally insane.
Sure, we get the premise that the long-term appeal is telling clients that they could buy back some super-hot Uber stock at a discount very quickly, but we would also argue that what kind of thinking is that in this scenario? Uber loses $3 billion a year! Where does the logical discount kick in? Summer 2027?
Uber’s appeal as a public company at this stage of its life has always been a mystery to us, yet even we are a little shocked that the bankers taking it to market were so sure it was priced to drop that they went through the trouble of building a naked short into the IPO and then sold that decision to investors as what we can only define as “Dipshit Insurance.”
It always felt like the post-mortem on the Uber IPO was going to yield some fun revelations, but this is almost too deliciously ridiculous.