Uber’s debut on the public markets wasn’t exactly a disaster. But it sure was embarrassing.
Worse yet for the company and its executives, the IPO and its aftermath could prove costly in more ways than one.
The app-based taxi service went public Thursday night at $45 a share, which was near the low end of its expected range. The pricing gave the company an initial valuation of $75.5 billion — well below the $120 billion figure investment bankers were bandying about last fall.
That was bad enough. But things got worse when Uber’s stock hit the New York Stock Exchange on Friday. Its shares opened below their IPO price and stayed down all down day. They ended their first session of trading off $3.43, or nearly 8%, to close at $41.57.
It was an inauspicious beginning to one of the most highly anticipated IPOs in years.
As disappointing as it might have been, you can’t exactly call the offering a failure. After all, through the IPO, Uber raised $8.6 billion. For a company that’s been losing money hand over fist for years — and is likely to do so for years to come — those new funds are likely more than welcome.
And as much as the drop in Uber’s share price Friday may have given the company a black eye from a public-relations perspective, it suggested that the company milked its IPO for all it was worth and more. The institutional investors who purchased Uber shares on Thursday ended up paying more for the stock than everyday investors thought they were worth. That’s Uber’s gain — and the institutional investors’ loss.
Still, the celebrations at Uber’s San Francisco headquarters are likely going to be a bit more muted than might have been expected six months or so ago when that $120 billion valuation figure was being floated.
Part of the reason for that is the IPO raised significantly less money than the company could have under previous expectations. Given the 180 million shares Uber sold in the offering, it could have raised $12.8 billion if it actually had gone out with a $120 billion valuation. That would have put an extra $4.2 billion in its coffers. For a company that burned through more than $2 billion in cash from its operations and capital investments in each of the last two years, that’s an extra two years of life.
Even if it had just priced its IPO at $50 a share, which was the top of the range it forecast last month, the company would have raised $900 million more than its IPO actually brought in. Again, thinking in terms of its cash burn, that’s almost an extra half year of life.
But the IPO was disappointing and costly to more than just the company itself. For more than three years, Uber has been selling its stock in private offerings to investors including Softbank and Didi Chuxing for $48.77 a share. Those investments were all underwater at the IPO price and were even further below after the first day of trading.
Sure, there were plenty of investors who got into Uber at earlier dates who made plenty of money off the IPO. And late-stage venture investors generally expect much more limited returns than early-stage ones. But they almost certainly expected to see some immediate return when the company went public, rather than to see their investments be officially in the red.
The IPO was also likely personally frustrating for CEO Dara Khosrowshahi, because he has tens of millions dollars in compensation that are on the line. The company awarded him 1.75 million stock options last year that he’ll only get if the company is either acquired for $120 billion or sees its market capitalization hit that amount and stay at it for 90 consecutive days. Uber’s even farther from that target now than it was last night.
Some of Uber’s investors and insiders are likely going to be disappointed in the IPO for another reason. The stock the company sold in its public offering all came from Uber’s own coffers, it didn’t include any shares held by insiders or early investors.
Instead, insiders and early investors who wanted to sell shares as part of the offering did so by dedicating them to Uber’s overallotment pile, which solely consisted of their shares. The overallotment pile is the group of shares that the bankers underwriting an offering have an option to buy from the company at the IPO price if they feel there’s enough demand for them or to stabilize a company’s share price after the offering.
But, as Bloomberg’s Matt Levine laid out, the bankers don’t have to purchase those shares from the company, even if they’ve already committed to selling the same number to institutional investors. Instead, they can just go out and purchase the requisite number of shares on the open market if it makes financial sense to do so.
With Uber’s shares trading below their IPO price, that looks like it will be the case with the company’s overallotment. Uber’s bankers can buy the shares they need on the open market for less money than they’d pay for those in the overallotment pile. Assuming they do that, Uber’s insiders and investors are out of luck. Worse for them, they won’t be seeing a financial benefit from Uber going public for another six months, because they’ve all signed lock-up agreements that bar them from selling their shares outside of those they dedicated to the overallotment for that period of time.
Of course, it’s hard to feel too sorry for those insiders and early investors. Many of those who planned to sell are going to eventually see huge windfalls even if they can’t sell right away.
The same isn’t necessarily true for the majority of Uber’s rank-and-file employees. The company has gone from about 3,500 employees in August 2015 to more than 22,000 at the end of last year. For many of those employees, a significant portion of their compensation comes in the form of stock or options to purchase shares.
Uber granted 5.5 million options last year and 2.9 million the year before that. It handed out 64.7 million restricted shares last year and 41.2 million in 2017.
Many of those options and shares are now in danger of being underwater. The options Uber handed out in 2017 have an average strike price of $41.39, meaning that at the close of regular trading Friday each one was in the money by only 18 cents. The restricted shares it handed out that year each had a grant value of $40.75, meaning their barely worth more than when employees received them.
Employees are in better shape with the shares and options they got last year. The options have an average strike price of $33.45, while the restricted shares had a grant value of $36.73 per share. Still, Uber’s stock wouldn’t have to fall a whole lot for those too to be underwater.
In Silicon Valley, many workers who join startups consciously and often enthusiastically accept options and shares in lieu of higher salary. The bet is that their stock-based compensation will be worth much more than a cash salary — and will potentially make them very rich — when their companies go public.
But if Uber’s IPO price is any indication, its employees aren’t going to see anywhere near the kind of jackpot many were likely expecting when they signed on.
That could be more than just a disappointment for Uber workers. It could be a big problem for the company. Employees who don’t see the payoff they were expecting are likely to be more willing to consider offers from other companies. Uber could well see a big talent drain if it can’t get its stock price heading in the right direction.
So while Uber’s IPO wasn’t calamitous, it was a disappointment. And its effects could linger long after the closing bell sounded on its first day of trading.
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