6 ms·

Uber IPO underwriter so certain IPO was overpriced they shorted it themselves

101 points by fooey 7y ago

hacknat 7y ago
This is nutty. I believe abovethelaw that this is legal, I just don't understand how.
KasianFranks 7y ago
The float was also over sized at 290M shares while Lyft's was at 15M shares.
ggg2 7y ago
since the company has no profits and no prospect of making a profit (save from the wild claim that it is waiting for autonomous cars) what is the difference on sizing it on $1 or $50? both are overpriced in a pure analysis (i.e. ignoring market excitement)
- deminature 7y ago
  >since the company has no profits and no prospect of making a profit (save from the wild claim that it is waiting for autonomous cars) Really tired of reading this - its thoroughly debunked in the S1, which nobody seems to have read.
  - Marazan 7y ago
    It currently has no profits. This is unarguable. So you must be certain it has future profits. Where do these future profits come from?
  - liquidise 7y ago
    Can you specify which claim(s) you are tired of? As someone who has tracked the entire Uber S1 from a safe distance with popcorn instead of investment money, i'm legitimately curious.
  - mywittyname 7y ago
    The S1 does say: > We have incurred significant losses since inception, including in the United States and other major markets. We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability. > We have incurred significant losses since inception. We incurred operating losses of $4.0 billion and $3.0 billion in the years ended December 31, 2017 and 2018, and as of December 31, 2018, we had an accumulated deficit of $7.9 billion. We will need to generate and sustain increased revenue levels and decrease proportionate expenses in future periods to achieve profitability in many of our largest markets, including in the United States, and even if we do, we may not be able to maintain or increase profitability. We anticipate that we will continue to incur losses in the near term as a result of expected substantial increases in our operating expenses, as we continue to invest in order to: [...] So I can under why people keep saying that, even if it is a gross exaggeration. But Uber is clearly profitable, in the sense that they charge more for rides than said rides cost, but they do have a negative EBITA and are going into debt to fund necessary expansion. It's silly for people to claim they have no prospect of making money, but Uber is certainly a risky investment at this point.
    - Marazan 7y ago
      But Uber is clearly profitable, in the sense that they charge more for rides than said rides cost Cool, so if Uber had no employees, infrastructure or marketing costs it would make money?
- at-fates-hands 7y ago
  The underwriter sets the offering price based on the amount of capital the company wants to raise and the level of demand from investors. The opening price is set by supply and demand. Few investors can buy an IPO at the offering price, because most shares go to the underwriter’s best institutional clients, and some are reserved for the company’s “friends and family.” So most investors' only option is to buy in the open market when the shares start trading. The day an IPO is released, buy and sell orders pile up until they are balanced against each other, determining the opening price. If the demand for shares exceeds the supply, the shares open higher than the offering price; otherwise they open lower.
  - jahlove 7y ago
    > The opening price is set by supply and demand. Is it though, if the underwriter is using a naked short to put an artificial floor on the price of the stock?
- airstrike 7y ago
  Expectation of future profits, but you say > no prospect of making a profit which is an unsubstantiated claim.
ganeshkrishnan 7y ago
How did these "naked shorts" clear the trading floor if there was no one selling them? What is the real technicality here as "naked shorts" are not illegal per se.
- airstrike 7y ago
  MS as the underwriter sold more than 100% of the shares, which means it was effectively shorting. Also worth noting "naked shorts" and "naked shorting" are two different things... https://www.bloomberg.com/opinion/articles/2019-05-15/wework-separates-buildings-and-beer#footnote-5 https://www.bloomberg.com/opinion/articles/2019-05-15/wework...
  - ganeshkrishnan 7y ago
    Interesting tidbit. I was not aware of the difference
airstrike 7y ago
As always, I'll shamelessly advertise Matt Levine's column: https://www.bloomberg.com/opinion/articles/2019-05-15/wework-separates-buildings-and-beer https://www.bloomberg.com/opinion/articles/2019-05-15/wework... The second story is (again) on Uber and definitely worth the read if you want to understand more
- leroy_masochist 7y ago
  From Levine's story this morning: "If you were...inclined to be critical...you would characterize this as Uber’s underwriters talking up the stock to their investing clients, telling them that there was lots of demand at $45, and then pricing the deal there, while at the same time quietly betting their own money that the stock would fall immediately. They sold stock to their customers while betting against that stock, and then that bet turned out to be correct and they made many millions of dollars on it. I cannot stress enough that that was not the subjective experience of Uber’s bankers, who undoubtedly—for their own careers, for their relationships with investors and issuers, for their reputations as skilled bankers—wanted this deal to go differently. But it kind of is what happened, oops. At least they got the money."
neosat 7y ago
That's a very misleading headline. The 'short' in this case is the fact that Morgan Stanley had additional leverage in addition to the 15% Greenshoe option to stabilize the stock. Even a basic understanding of incentives (let alone stock shorting) shows the absurdity of the headline. If Morgan Stanley purposely overpriced the IPO and then shorted it - it would tarnish their reputation and future IPO prospects.
- neosat 7y ago
  from Matt Levine's article linked in another comment "In every deal, there’s an overallotment, which allows the underwriters to sell 115% of the available offering to investors, effectively opening a short position. The excess 15% can be purchased by the underwriters in the open market — covering the short position — to support the stock if it goes down. More colloquially, this is known as the “greenshoe.” But in rare cases, bankers will use a strategy called a “naked short,” which allows underwriters to sell shares in excess of that greenshoe portion and then buy them back in the open market to provide even more firepower in the event there is significant selling pressure."
- idlewords 7y ago
  The headline is entirely correct, and I don't understand your claim otherwise. No one is arguing that Morgan Stanley overpriced the IPO on purpose. They knew they had a dog on their hands and opened a short position in hopes of propping it up (though it didn't hurt to know that failing to do so would mean big profits).
  - Flammy 7y ago
    > They knew they had a dog on their hands and opened a short position in hopes of propping it up How does MS taking a short position help the stock? My (naive) understand is that a short would add more sellers, typically driving the price down.
    - spiantino 7y ago
      They went into the first day of trading >115% short so they could buy more in the open market. As they cover the short they are adding buying pressure, but if the stock is down from the offer price, also making a handsome profit on each share
yborg 7y ago
Wall Street firms don't have "customers", there are only marks.
csours 7y ago
I'm very happy with my impression that Uber has to sleep in the bed they made - but I think there will be plenty of friction and disappointment coming out of this IPO. Specifically, if Morgan Stanley had come up with, say $38 as the share price for IPO, Uber would have found a new bank for their IPO. Morgan Stanley (or Bank X) can provide different IPO services, but the bank is not really responsible for the stock price.
robocat 7y ago
Matt Levine (money stuff http://link.mail.bloombergbusiness.com/join/4wm/moneystuff-signup http://link.mail.bloombergbusiness.com/join/4wm/moneystuff-s... ) said: And yet more Uber Huh. Here’s Leslie Picker at CNBC: "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. In every deal, there’s an overallotment, which allows the underwriters to sell 115% of the available offering to investors, effectively opening a short position. The excess 15% can be purchased by the underwriters in the open market — covering the short position — to support the stock if it goes down. More colloquially, this is known as the “greenshoe.” But in rare cases, bankers will use a strategy called a “naked short,” which allows underwriters to sell shares in excess of that greenshoe portion and then buy them back in the open market to provide even more firepower in the event there is significant selling pressure. The naked short,[5], is a fully at-risk way to support the deal: The underwriters sell even more stock short at the deal price, and then buy it back in the open market if the stock goes down or up. If it goes down, they make money. If it goes up, they lose money. If it goes up a lot, they lose a lot of money. Most IPO stocks go up in their first few days, and many go up quite a lot. Underwriters generally price IPOs for a nice early pop. So naked shorts are fairly uncommon. Underwriters only go naked short on an IPO if they are pretty sure that it is a dud, one of the minority of offerings that will quickly trade below the IPO price. But it is hard to communicate that. While Morgan Stanley was deciding to go naked short the Uber IPO, it was also putting out happy noises about how much demand there was and about how the deal would be priced conservatively to ensure a nice pop. There is a fine line to walk here: None of those statements seem to have been untrue (surely the underwriters had at least three times as many orders as they had shares, which is actually not that great, and the deal was priced near the low end of the already conservative-seeming range), but the overall implication was that they were confident that the stock would go up. They were not confident that it would go up. In fact, they were so confident that it would go down that they put their own money at risk on that bet. But they didn’t lie to anyone. They were just marketing; the underwriters were doing what they could to make people excited about Uber’s stock, so that those people would want to buy the stock, so that it would go up in the aftermarket. An IPO is a sentiment-driven process, and the underwriters’ optimism or pessimism is contagious; if you want the deal to go well you have to say that it’s going well. Without lying, I mean. The worse it is going, the harder that is to do. On the other hand: "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." If you’re telling some people “buy as much as you can at $45, this deal is hot,” and telling other people (in “private conversations”) “this deal is a dog but at least we have a naked short,” then that is awkward.[6] The other awkward thing is of course that the underwriters made money on their naked short; the more the stock went down, the more money they made. (And the bigger their naked short was—the more sure they were that the stock would go down—the more money they made.) This is not the point of the trade; as far as Uber’s underwriters are concerned, the naked short was a noble and self-sacrificing effort, done at considerable risk to themselves, to stabilize the stock and protect the interests of their issuer and investor clients. But, yeah, they made money on it. Depending on how big the naked short was and when they covered it, it’s quite plausible that Uber’s underwriters made more in trading profits than their $106.2 million underwriting fees.[7] If you were … inclined to be critical … you would characterize this as Uber’s underwriters talking up the stock to their investing clients, telling them that there was lots of demand at $45, and then pricing the deal there, while at the same time quietly betting their own money that the stock would fall immediately. They sold stock to their customers while betting against that stock, and then that bet turned out to be correct and they made many millions of dollars on it. I cannot stress enough that that was not the subjective experience of Uber’s bankers, who undoubtedly—for their own careers, for their relationships with investors and issuers, for their reputations as skilled bankers—wanted this deal to go differently. But it kind of is what happened, oops. At least they got the money.
treis 7y ago
This doesn't make sense. Naked shorting a stock drives down the price in the market by increasing the supply of the stock. It in no way supports the price of the stock. In fact, it's the exact opposite. It's a bet that the price goes down below the IPO price. Sell today at the IPO price of $45 in the hopes that you can buy it for less than that before you have to return the share. More realistically, Morgan Stanley makes money as a middle man and just want to sell as many shares as they can.
- hmate9 7y ago
  Yes, they made money from the commissions as well as shorting the stock and later buying it back for cheaper.

101 points by fooey 7y ago

hacknat 7y ago

This is nutty. I believe abovethelaw that this is legal, I just don't understand how.

KasianFranks 7y ago

The float was also over sized at 290M shares while Lyft's was at 15M shares.

ggg2 7y ago

since the company has no profits and no prospect of making a profit (save from the wild claim that it is waiting for autonomous cars) what is the difference on sizing it on $1 or $50? both are overpriced in a pure analysis (i.e. ignoring market excitement)

deminature 7y ago
>since the company has no profits and no prospect of making a profit (save from the wild claim that it is waiting for autonomous cars) Really tired of reading this - its thoroughly debunked in the S1, which nobody seems to have read.
- Marazan 7y ago
  It currently has no profits. This is unarguable. So you must be certain it has future profits. Where do these future profits come from?
- liquidise 7y ago
  Can you specify which claim(s) you are tired of? As someone who has tracked the entire Uber S1 from a safe distance with popcorn instead of investment money, i'm legitimately curious.
- mywittyname 7y ago
  The S1 does say: > We have incurred significant losses since inception, including in the United States and other major markets. We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability. > We have incurred significant losses since inception. We incurred operating losses of $4.0 billion and $3.0 billion in the years ended December 31, 2017 and 2018, and as of December 31, 2018, we had an accumulated deficit of $7.9 billion. We will need to generate and sustain increased revenue levels and decrease proportionate expenses in future periods to achieve profitability in many of our largest markets, including in the United States, and even if we do, we may not be able to maintain or increase profitability. We anticipate that we will continue to incur losses in the near term as a result of expected substantial increases in our operating expenses, as we continue to invest in order to: [...] So I can under why people keep saying that, even if it is a gross exaggeration. But Uber is clearly profitable, in the sense that they charge more for rides than said rides cost, but they do have a negative EBITA and are going into debt to fund necessary expansion. It's silly for people to claim they have no prospect of making money, but Uber is certainly a risky investment at this point.
  - Marazan 7y ago
    But Uber is clearly profitable, in the sense that they charge more for rides than said rides cost Cool, so if Uber had no employees, infrastructure or marketing costs it would make money?
at-fates-hands 7y ago
The underwriter sets the offering price based on the amount of capital the company wants to raise and the level of demand from investors. The opening price is set by supply and demand. Few investors can buy an IPO at the offering price, because most shares go to the underwriter’s best institutional clients, and some are reserved for the company’s “friends and family.” So most investors' only option is to buy in the open market when the shares start trading. The day an IPO is released, buy and sell orders pile up until they are balanced against each other, determining the opening price. If the demand for shares exceeds the supply, the shares open higher than the offering price; otherwise they open lower.
- jahlove 7y ago
  > The opening price is set by supply and demand. Is it though, if the underwriter is using a naked short to put an artificial floor on the price of the stock?
airstrike 7y ago
Expectation of future profits, but you say > no prospect of making a profit which is an unsubstantiated claim.

ganeshkrishnan 7y ago

How did these "naked shorts" clear the trading floor if there was no one selling them? What is the real technicality here as "naked shorts" are not illegal per se.

airstrike 7y ago
MS as the underwriter sold more than 100% of the shares, which means it was effectively shorting. Also worth noting "naked shorts" and "naked shorting" are two different things... https://www.bloomberg.com/opinion/articles/2019-05-15/wework-separates-buildings-and-beer#footnote-5 https://www.bloomberg.com/opinion/articles/2019-05-15/wework...
- ganeshkrishnan 7y ago
  Interesting tidbit. I was not aware of the difference

airstrike 7y ago

As always, I'll shamelessly advertise Matt Levine's column: https://www.bloomberg.com/opinion/articles/2019-05-15/wework-separates-buildings-and-beer https://www.bloomberg.com/opinion/articles/2019-05-15/wework... The second story is (again) on Uber and definitely worth the read if you want to understand more

leroy_masochist 7y ago
From Levine's story this morning: "If you were...inclined to be critical...you would characterize this as Uber’s underwriters talking up the stock to their investing clients, telling them that there was lots of demand at $45, and then pricing the deal there, while at the same time quietly betting their own money that the stock would fall immediately. They sold stock to their customers while betting against that stock, and then that bet turned out to be correct and they made many millions of dollars on it. I cannot stress enough that that was not the subjective experience of Uber’s bankers, who undoubtedly—for their own careers, for their relationships with investors and issuers, for their reputations as skilled bankers—wanted this deal to go differently. But it kind of is what happened, oops. At least they got the money."

neosat 7y ago

That's a very misleading headline. The 'short' in this case is the fact that Morgan Stanley had additional leverage in addition to the 15% Greenshoe option to stabilize the stock. Even a basic understanding of incentives (let alone stock shorting) shows the absurdity of the headline. If Morgan Stanley purposely overpriced the IPO and then shorted it - it would tarnish their reputation and future IPO prospects.

neosat 7y ago
from Matt Levine's article linked in another comment "In every deal, there’s an overallotment, which allows the underwriters to sell 115% of the available offering to investors, effectively opening a short position. The excess 15% can be purchased by the underwriters in the open market — covering the short position — to support the stock if it goes down. More colloquially, this is known as the “greenshoe.” But in rare cases, bankers will use a strategy called a “naked short,” which allows underwriters to sell shares in excess of that greenshoe portion and then buy them back in the open market to provide even more firepower in the event there is significant selling pressure."
idlewords 7y ago
The headline is entirely correct, and I don't understand your claim otherwise. No one is arguing that Morgan Stanley overpriced the IPO on purpose. They knew they had a dog on their hands and opened a short position in hopes of propping it up (though it didn't hurt to know that failing to do so would mean big profits).
- Flammy 7y ago
  > They knew they had a dog on their hands and opened a short position in hopes of propping it up How does MS taking a short position help the stock? My (naive) understand is that a short would add more sellers, typically driving the price down.
  - spiantino 7y ago
    They went into the first day of trading >115% short so they could buy more in the open market. As they cover the short they are adding buying pressure, but if the stock is down from the offer price, also making a handsome profit on each share

yborg 7y ago

Wall Street firms don't have "customers", there are only marks.

csours 7y ago

I'm very happy with my impression that Uber has to sleep in the bed they made - but I think there will be plenty of friction and disappointment coming out of this IPO. Specifically, if Morgan Stanley had come up with, say $38 as the share price for IPO, Uber would have found a new bank for their IPO. Morgan Stanley (or Bank X) can provide different IPO services, but the bank is not really responsible for the stock price.

robocat 7y ago

Matt Levine (money stuff http://link.mail.bloombergbusiness.com/join/4wm/moneystuff-signup http://link.mail.bloombergbusiness.com/join/4wm/moneystuff-s... ) said: And yet more Uber Huh. Here’s Leslie Picker at CNBC: "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. In every deal, there’s an overallotment, which allows the underwriters to sell 115% of the available offering to investors, effectively opening a short position. The excess 15% can be purchased by the underwriters in the open market — covering the short position — to support the stock if it goes down. More colloquially, this is known as the “greenshoe.” But in rare cases, bankers will use a strategy called a “naked short,” which allows underwriters to sell shares in excess of that greenshoe portion and then buy them back in the open market to provide even more firepower in the event there is significant selling pressure. The naked short,[5], is a fully at-risk way to support the deal: The underwriters sell even more stock short at the deal price, and then buy it back in the open market if the stock goes down or up. If it goes down, they make money. If it goes up, they lose money. If it goes up a lot, they lose a lot of money. Most IPO stocks go up in their first few days, and many go up quite a lot. Underwriters generally price IPOs for a nice early pop. So naked shorts are fairly uncommon. Underwriters only go naked short on an IPO if they are pretty sure that it is a dud, one of the minority of offerings that will quickly trade below the IPO price. But it is hard to communicate that. While Morgan Stanley was deciding to go naked short the Uber IPO, it was also putting out happy noises about how much demand there was and about how the deal would be priced conservatively to ensure a nice pop. There is a fine line to walk here: None of those statements seem to have been untrue (surely the underwriters had at least three times as many orders as they had shares, which is actually not that great, and the deal was priced near the low end of the already conservative-seeming range), but the overall implication was that they were confident that the stock would go up. They were not confident that it would go up. In fact, they were so confident that it would go down that they put their own money at risk on that bet. But they didn’t lie to anyone. They were just marketing; the underwriters were doing what they could to make people excited about Uber’s stock, so that those people would want to buy the stock, so that it would go up in the aftermarket. An IPO is a sentiment-driven process, and the underwriters’ optimism or pessimism is contagious; if you want the deal to go well you have to say that it’s going well. Without lying, I mean. The worse it is going, the harder that is to do. On the other hand: "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." If you’re telling some people “buy as much as you can at $45, this deal is hot,” and telling other people (in “private conversations”) “this deal is a dog but at least we have a naked short,” then that is awkward.[6] The other awkward thing is of course that the underwriters made money on their naked short; the more the stock went down, the more money they made. (And the bigger their naked short was—the more sure they were that the stock would go down—the more money they made.) This is not the point of the trade; as far as Uber’s underwriters are concerned, the naked short was a noble and self-sacrificing effort, done at considerable risk to themselves, to stabilize the stock and protect the interests of their issuer and investor clients. But, yeah, they made money on it. Depending on how big the naked short was and when they covered it, it’s quite plausible that Uber’s underwriters made more in trading profits than their $106.2 million underwriting fees.[7] If you were … inclined to be critical … you would characterize this as Uber’s underwriters talking up the stock to their investing clients, telling them that there was lots of demand at $45, and then pricing the deal there, while at the same time quietly betting their own money that the stock would fall immediately. They sold stock to their customers while betting against that stock, and then that bet turned out to be correct and they made many millions of dollars on it. I cannot stress enough that that was not the subjective experience of Uber’s bankers, who undoubtedly—for their own careers, for their relationships with investors and issuers, for their reputations as skilled bankers—wanted this deal to go differently. But it kind of is what happened, oops. At least they got the money.

treis 7y ago

This doesn't make sense. Naked shorting a stock drives down the price in the market by increasing the supply of the stock. It in no way supports the price of the stock. In fact, it's the exact opposite. It's a bet that the price goes down below the IPO price. Sell today at the IPO price of $45 in the hopes that you can buy it for less than that before you have to return the share. More realistically, Morgan Stanley makes money as a middle man and just want to sell as many shares as they can.

hmate9 7y ago
Yes, they made money from the commissions as well as shorting the stock and later buying it back for cheaper.