
Uber IPO underwriter so certain IPO was overpriced they shorted it themselves - fooey
https://abovethelaw.com/2019/05/uber-ipo-underwriter-morgan-stanley-was-so-certain-that-it-overpriced-the-uber-ipo-it-shorted-uber-shares-right-before-the-ipo/
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neosat
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.

~~~
idlewords
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
> 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
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

~~~
robocat
> As they cover the short they are adding buying pressure

But the short added selling pressure.

Essentially as they cover the short, they are just removing the extra selling
pressure they created.

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airstrike
As always, I'll shamelessly advertise Matt Levine's column:

[https://www.bloomberg.com/opinion/articles/2019-05-15/wework...](https://www.bloomberg.com/opinion/articles/2019-05-15/wework-
separates-buildings-and-beer)

The second story is (again) on Uber and definitely worth the read if you want
to understand more

~~~
leroy_masochist
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."

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

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csours
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.

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robocat
Matt Levine (money stuff
[http://link.mail.bloombergbusiness.com/join/4wm/moneystuff-s...](http://link.mail.bloombergbusiness.com/join/4wm/moneystuff-
signup) ) 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.

~~~
snarf21
Thanks for this clear description. It _feels_ like in this case they made a
naked short out of fear but with a hedge. "As long as we don't lose more than
100M if it pops, we'd straddled the fence quite nicely. We make money either
way and have some ability to protect people buying it at $45." They don't want
to stop doing IPOs so this is the only perspective that makes sense to me.

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

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

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ganeshkrishnan
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
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...](https://www.bloomberg.com/opinion/articles/2019-05-15/wework-
separates-buildings-and-beer#footnote-5)

~~~
ganeshkrishnan
Interesting tidbit. I was not aware of the difference

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

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ggg2
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
>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.

~~~
mywittyname
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
_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?

