Matt Levine, among others, has been writing about the extraordinary measures that the investment banks running Uber’s initial public offering took, in vain, to stop the stock from tumbling in its first few days on the stock market.
First, there was a not-extraordinary measure: the greenshoe, typical in IPOs, where for every 100 shares the going-public company sells to the underwriting banks running the IPO, the banks turn around and sell 115 shares to investors. Because the banks sell more shares than they buy, they end up with a short position in the company they’ve just taken public, which is a little weird. But company insiders give the banks an option to buy the additional 15 shares later, at a fixed price slightly below the IPO price, which protects the underwriting banks from losing money on their short position, which helps avoid a perverse incentive for the banks to be afraid that their client’s stock will go up.
they sold even more than 207 million shares of Uber in the initial offering, exceeding the sum of the 180 million shares they had bought from the company and the 27 million shares they had the option to buy at a fixed price. The excess over 207 million that the banks sold created what’s called a naked short position: Not only did the banks stand to make money on this position if Uber’s stock fell, they were going to lose money if the stock went up.
A lot of people have been observing that this doesn’t say great things about what the banks thought about their own IPO: Not only did they think they were going to need a lot of ammunition to prop the price up, they apparently weren’t concerned the stock would trade above the IPO price, which is usually what you want and expect to happen after an IPO.
still below the $45 offering price, has rebounded strongly over the last three days, rising out of “disaster” territory into “disappointment” territory. But in the long run, if Uber wants to keep its share price up, it will need something much more elusive than a good underwriting strategy: profits.
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