Sure, Uber didn't leave any money on the table, but its IPO was nothing to celebrate and it could haunt the company and its execs for years to come (UBER)

Dara Khosrowshahi

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.

Read this:
Uber chose the worst possible week to have its IPO, and the bad
timing will cost it billions

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.

Uber raised less money that expected

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.

Uber

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 likely disappointed insiders and early investors

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.

Uber could see a talent drain

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.

Uber

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.

SEE ALSO: 3
reasons why Uber had such a ‘weird’ and terrible IPO, according to
a portfolio manager who wouldn’t buy the stock


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Source: FS – All – Economy – News
Sure, Uber didn't leave any money on the table, but its IPO was nothing to celebrate and it could haunt the company and its execs for years to come (UBER)