Back when investment banks were courting Uber Technologies for the right to serve as underwriters on its hotly anticipated initial public offering, a report surfaced that Morgan Stanley’s head technology banker was actually driving for the ride-sharing service as a side gig. Maybe Michael Grimes, head of global technology investment banking at Morgan Stanley, needed the extra cash, or it’s possible he really just likes to drive. More likely, Grimes knew the stunt would help his firm curry favor with a Silicon Valley start-up that carried a valuation of as much as $120 billion at the time.
Those must feel like heady days now to both Morgan Stanley and Uber. The Wall Street titan spearheaded Uber’s IPO earlier this month, and the stock landed on trading desks with a thud. Share prices essentially began dropping from the moment they went into circulation on May 10 at $45 per share, which works out to a valuation of about $75.5 billion. Through late trading on May 20, Uber’s stock price had fallen roughly 9% from when it went public.
To be fair, controversies have often overshadowed the excitement generated by Uber’s innovations since its founding nine years ago. They included allegations of a gnarly company culture and lax oversight of drivers, who have simultaneously been portrayed as victims of an exploitative business model.
Now, Uber’s flop is being treated as a cautionary tale for other unicorns, the approximately 350 private companies worldwide with valuations north of $1 billion. Bloomberg’s Nir Kaissar, for instance, argued that the company could have used the input of public markets earlier in its life cycle to address the shortcomings laid bare by its IPO. Additionally, Uber’s unimpressive debut may prove the investment community doesn’t have the stomach for high-flying IPOs right now.
But ultimately, the takeaways here may be more about investment banks than unicorns. After heading a consortium of banks that pocketed $106.2 million in fees from the offering, Morgan Stanley is drawing fire for its handling of the deal. Bloomberg reported that one investor with a “multibillion-dollar shop” said the banks sent mixed messages in the days leading up to the pricing of the offering. According to the source, the banks shifted between asking for guarantees that investors were on board with Uber for the long haul and dropping hints that stock owners could quickly flip their shares to retail investors for a tidy profit. Another major investor appeared to believe Morgan Stanley didn’t do enough to steady the stock price in the aftermath of Uber going to market.
Meanwhile, the situation on the ground during the IPO reflected an apparent miscalculation in the demand for Uber stock. Rather than flocking to buy more shares, big investors such as BlackRock Inc. held off on upping their equity stakes in a company that was already well capitalized with their money. Some even sought to sell off parts of their existing positions in conjunction with the IPO. As a result, high-dollar Morgan Stanley clients may take a bath on early investments in Uber.
Complicating matters even further, Uber competitor Lyft is threatening to sue Morgan Stanley over charges of short-selling chicanery. According to a report from the New York Post, Morgan Stanley marketed a product to pre-IPO Lyft investors that would enable them to short the stock to secure their gains from the offering. At issue are Lyft’s lock-up agreements with these investors.
If that sounds messy to you, imagine what some of the other unicorns might be thinking about the investment banking sector as a whole. It’s fair to wonder if more companies looking to go public might follow the lead of Slack and Spotify, bypassing underwriters altogether.