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Morgan Stanley investment bankers stand to harvest millions of dollars in fees for leading Uber Technologies Inc.’s IPO last week. Wealthy clients are facing big losses because of early investing policy.
This for sure can not be said for wealthy clients who believed in Morgan Stanley’s suggestions and invested in Uber’s IPO. Now it’s up to see will they stay faithful to the Wall Street giant.
It was 2016, when Morgan Stanley offered its elite clientele a chance to get in early on Uber’s eventual market listing as the investment bank privately raised money for the ride-hailing platform.
Just to remind you, last week, according to noted IPO watcher Jay Ritter of the University of Florida, on a dollar basis, investors who purchased the 180 million shares offered through the IPO at $45 per share collectively logged $618 million in paper losses Friday.
For their wealthy clients, Morgan Stanley provided exposure to Uber at a $48.77 share price. Their holdings would be convertible to Class A stock in the IPO. Morgan Stanley employees also got a chance to invest under similar terms.
The minimum investment was $250,000 and Morgan Stanley said clients could be charged up to 2% of the capital they committed to the fund. And the documents valued Uber at a hearty $62.5 billion, a level labeled “reasonable” given Uber’s competitive advantages and growth prospects.
Investors have been wary of the fact that Uber has never made a profit. They were also warned in its investment prospectus for the float that it may never do so. Last year it made an operating loss of $3bn.
The company then said:
“We have incurred significant losses since inception, including in the United States and other major markets. We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability.”
The listing also meant that a select group of early investors, including the Amazon boss, Jeff Bezos, and the drugs cheat cyclist Lance Armstrong, have made billions of dollars between them because the value of their investments has now been crystallized.
Some have also sold shares to new investors, cashing in on their investments, some of which were made when the company was valued at less than $1bn.
Of course, this could be just an anomaly. The first day of trade doesn’t necessarily determine the fate of stock and Uber could certainly still join the celebrated group of popular tech stocks, even with a tough ride out of the gate. Dara Khosrowshahi, Uber’s chief executive officer, said in an interview on the floor of the New York Stock Exchange that trade tensions between the U.S. and China played a role in the weak performance.
It Isn’t Over Yet
Co-founder of The Street, Jim Cramer, thinks that this, however, is not manipulation. He said:
“I’m mindful it’s the middle of the day. If Morgan Stanley uses my strategy of letting all the weak hands out and then coming in with a blitz of orders, then I think you’re going to say, well, you know, why didn’t Jim say buy it right then? This is now people have to understand and I haven’t done a lot of syndicate work. This is not manipulation.
You’re allowed to do certain things on a day like today, if you’re a broker that you typically couldn’t do and what they need to do is wait a little bit longer, make sure everybody who was worried is gone, and then boom. So I don’t want to say it’s over. It’s too early. I will say that that is the only part of the playbook that’s left and it must be done in order to make it so that we do not have a really ugly, ugly day.”
Despite Uber’s slow start, analysts at the Los Angeles based investment firm Wedbush said they expected its share price to rise in the longer term to $65, which would value the company at $118bn. They said:
“The brand loyalty of Uber is hard to dispute as the company continues to attract drivers and consumers illustrating an impressive formula to go after a $5.7tn opportunity globally on transportation which swells to $7-$8tn when including third-party food delivery and freight/logistics.”