Early Big Investors in Uber Undermined Market Debut -- WSJ

By Corrie Driebusch, Maureen Farrell and Juliet Chung 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 20, 2019).

Uber Technologies Inc. grew to be the nation's most valuable startup thanks to support from some of the biggest investors around. That support became a liability when the ride-hailing giant made its stock-market debut this month.

Some pre-IPO Uber shareholders including BlackRock Inc., the world's largest money manager, and prominent tech investor Tiger Global Management took a pass on buying more shares in the listing, content that they already owned plenty, people familiar with the matter said. Instead, they tried to sell stock before or as part of the initial public offering.

The investors' stance is emblematic of a wider lack of enthusiasm for the stock that has plagued Uber since it went public just over a week ago. After debuting below earlier expectations at $45 apiece, the shares fell sharply in their first two trading days and have yet to fully recover. They closed Friday at $41.91.

The much-hyped IPO, the biggest in five years, has so far been one of the most disappointing -- and has the rare distinction of falling in its first day of trading.

The market's tepid response stems in part from the fact that Uber was the most richly funded private tech company, raising about $20 billion in equity and debt. This meant many investors that companies typically count on to buy shares in their IPOs sat out Uber's because they already had plenty of exposure to the company.

Uber's stumble points up what could be a kink in the red-hot IPO market. Silicon Valley companies have been waiting longer and raising more before going public. That could mean some are past their prime in terms of growth and that investors like BlackRock that are increasingly investing before IPOs have more limited interest in buying new shares.

One concern flagged by some prospective investors in Uber, which was founded 10 years ago: While its revenue growth has stalled in recent quarters, its losses keep mounting, and came in at more than $3.7 billion in the 12 months ended in March.

Uber's shaky entrance onto the public stage is an unfortunate development for the company and its underwriting team led by Morgan Stanley, even as some people close to the offering argue that broader market skittishness played a big role, and as that recedes the stock should rebound.

Excitement about Uber's IPO had been building for years. Bankers raced to help the company raise capital with the expectation of multimillion-dollar IPO fees down the road. But leading up to the offering there were warning signs.

Smaller rival Lyft Inc.'s March debut soured quickly, and its shares were trading down by around 20% by the time it was Uber's turn. The weekend before Uber's IPO, President Trump tweeted a threat of higher tariffs on Chinese goods that he later followed up on, roiling stock markets around the world.

Still, the company and its underwriters didn't fully appreciate the extent to which investors were cool to the offering until hours after they showed up at the New York Stock Exchange to kick off trading May 10. In a surprise to those who believed the stock had been priced conservatively, it opened three dollars below the $45 IPO price set the night before. By the end of the following Monday, Uber, which last year was told by bankers at Morgan Stanley and Goldman Sachs Group Inc. that it could achieve a valuation of as much as $120 billion in an IPO, had a fully diluted market capitalization of about $68 billion.

Lack of support from key institutional shareholders like BlackRock loomed large, people close to the process said.

Multiple BlackRock funds had participated in a fundraising for Uber at a much lower valuation, and the firm decided it didn't need to buy more in the IPO, according to people familiar with the matter. BlackRock held about 9.8 million Uber shares, according to a regulatory filing, now worth about $410 million. Weeks before the IPO, when Uber was still discussing a valuation of $90 billion to $100 billion, BlackRock added its name to the list of potential sellers as part of the overallotment option, called a green shoe. This is an option intended to give bankers extra stock for ammunition to provide stability in the early days of trading. It aimed to sell 414,000 shares, according to the filing.

Another big investor that was trying to decrease its stake was Tiger Global, which offered up a slug of its Uber shares several weeks before the IPO, people familiar with the matter said. Tiger sold about 30% of its $400 million stake for $53 a share -- less than what the company was then expected to fetch. Tiger indicated to potential buyers that it was willing to take a big haircut to get some liquidity, the people said.

Despite the ominous signs, the mood was celebratory at a breakfast at the New York Stock Exchange for Uber's board and employees the day of the IPO. The group then descended to the floor of the exchange, where they rang the opening bell and awaited the stock's open.

The mood soon darkened. As orders came in, traders at Citadel Securities, Uber's designated market maker, and the team at Morgan Stanley tasked with stabilizing the stock on behalf of the underwriters realized they didn't have enough demand to open at $45 or higher. Just before noon, they opened the stock at $42 in an initial trade of more than 30 million shares. To help get to that level, Morgan Stanley had to buy stock right off the bat, people familiar with the matter said.

As part of the green shoe, the bank had discretion to sell 15% of the total offering size short, meaning it could borrow that stock to sell in the open market. If the shares dropped in the early days or weeks of trading the bank could buy them back to try to prop up the price. Any stock it didn't buy back it would purchase at the IPO price from shareholders including BlackRock.

As the day progressed, the stock's decline accelerated, even as the broader market turned positive. The stock ended its first trading day near session lows at $41.57. That night, Uber Chief Executive Dara Khosrowshahi and Chief Financial Officer Nelson Chai joined other executives, investors and employees gathered on the floor of the exchange. They were served McDonald's hamburgers in Uber Eats trays as well as other food and drinks. Mr. Khosrowshahi, clearly tired from the week, gave a brief speech congratulating the team and reminding them that the IPO day was simply the beginning of a new phase in the company's journey.

Write to Corrie Driebusch at [e-mail], Maureen Farrell at [e-mail] and Juliet Chung at [e-mail]

(END) Dow Jones Newswires

May 20, 2019 02:47 ET (06:47 GMT)

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