Morgan Stanley nabbed the biggest U.S. initial public offering of the past five years. Now it gets to field the second-guessing after Uber Technologies Inc. tumbled 18% in its first two days of trading.
Across Wall Street, questions are flying: Why did bankers including Morgan Stanley’s suggest a $120-billion valuation last year that Uber couldn’t deliver? Did the syndicate led by the firm set the IPO’s price too aggressively? And did they steer too much stock to big investors who made hollow pledges to hold it long term?
“In retrospect, the underwriters should have done a better job at figuring how strong the true demand was,” said Jay Ritter, a professor at the University of Florida’s Warrington College of Business who specializes in IPOs. “But underwriters in general have a hard time finding out how much buy-and-hold demand there is, versus flippers.”
Uber shares climbed 8% to $39.96 on Tuesday, still leaving them more than $5 below the $45 IPO price.
The debate over how well Morgan Stanley and other banks handled the marquee offering is complicated by a lot of bad luck, including the abrupt flareup last week in U.S.-China trade negotiations that drove markets down around the globe, as well as the recent dismal performance of Uber’s main rival, Lyft Inc. There’s also a broad, gnawing concern about Silicon Valley’s penchant for delaying public listings until start-ups achieve full size: Who’s left to buy?
Many top-tier investors already owned shares of Uber before last week, potentially curbing some appetite for the $8.1 billion of stock sold. Holders included clients of Morgan Stanley’s wealth management division, such as family offices that had opportunities to buy in privately, one person familiar with the matter said. Even some within Uber’s leadership began to view the round more as a “follow-on” investment than a fresh public offering, two people said.
Still, people with knowledge of the situation have said the order book was at least three times oversubscribed. Morgan Stanley, which is slated for about $41 million in fees from the deal, led the offering with Goldman Sachs Group Inc. and Bank of America Corp., which are sharing a total of about $32 million in fees.
A spokeswoman for Morgan Stanley declined to comment for this story.
One investor at a multibillion-dollar shop recalled other misgivings heading into the sale. He said he grew suspicious days before the pricing because the syndicate of banks kept seeking reassurances that his firm wouldn’t flip the stock. Yet, the bankers also kept telegraphing there were ample retail investors hoping to buy in after the debut, which could cause the price to “pop” at least briefly, offering a chance for a quick and easy profit, the investor said. His firm ended up slashing its final order.
Morgan Stanley has been trying to steady Uber’s price, according to people briefed on its efforts. As the lead underwriter and stabilization agent, Morgan Stanley has a right to sell additional shares via a so-called greenshoe option. Typically, banks can either get those shares from sellers in the IPO, or by snapping them up in the open market, which helps to support the price as it begins trading. It’s unclear to what degree Morgan Stanley has done so.
At least one of Uber’s largest investors, now in the red and speaking under the condition of anonymity, voiced frustration, suggesting the bank should have propped up the price more from the start. Yet that could have left the investment bank with less firepower to support the stock if it were to keep sliding in the days that followed.
Morgan Stanley has built a reputation for wresting megawatt technology IPOs from major rivals including Goldman Sachs Group Inc., which was listed second on Uber’s offering documents. Some credit the tenacity — and others the showmanship — of Morgan Stanley tech banker Michael Grimes and his equity capital markets counterpart Colin Stewart. Both are veterans of the industry, able to reassure clients, we’ve been here before.
Uber, perhaps the player whose opinion matters most, hasn’t faulted the bank. In a letter to employees, Chief Executive Officer Dara Khosrowshahi blamed the poor opening on the markets: “Obviously our stock did not trade as well as we had hoped post-IPO. Today is another tough day in the market, and I expect the same as it relates to our stock.”
Uber’s $45 stock price in the IPO gave the company a $75.5-billion valuation. A $120-billion market valuation would help Khosrowshahi and other executives unlock equity awards.
It’s possible that the early trading travails won’t last. Morgan Stanley has handled some of the most famous and infamous tech IPOs of all time — Facebook Inc., for example — that initially fell before fully emerging as once-in-a-generation companies.
Uber looks “kind of like what happened after Facebook,” said David Erickson, a finance professor at the University of Pennsylvania’s Wharton School. “The balloon got deflated on the first day.”