As Morgan Stanley’s “Nuclear Option” Failed, Uber Stock Plunged

Uber’s underwriters, led by Morgan Stanley, were reportedly so worried that the company’s IPO was going to run into a brick wall, they deployed what CNBC is calling “a nuclear option” and shorted IPO stock naked beyond the traditional greenshoe. Of course, anyone in the industry would simply call this “selling to the dumb money ahead of an obviously overpriced IPO,” but we digress. 

Even funnier is the fact that the naked short is being spun as a tactic to “support the stock” in addition to the usual 15% that underwriters overallocate – because that’s what creating another synthetic offer always does, right? CNBC refers to the short as “a technique that goes above and beyond the traditional help a new offering can get.”

What they fail to say is that covering this short does provide support: but generally, at much lower prices. In essence, the tactic really only “helps” the underwriter sell shares outside of the greenshoe to willing participants. 

Uber’s official disclosure told the real tale, minus the PR spin:

“A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering.”

It’s a tactic that would only be employed in the case of an IPO that’s expected to fall and, after LYFT’s IPO, that writing was apparently already on the wall. 

Even funnier was when it was reported that the underwriters tried to console UBER bagholders market participants by telling them that “there would be additional support from the naked short”.

But, that’s not quite how it worked out. Uber fell about 18% during its first two sessions, despite the requirements of the naked short stating that underwriters must close out their position by purchasing shares in the open market.

 

Like any good short and despite the PR campaign that it helped support the stock, don’t get it wrong: Morgan Stanley stood to benefit on the naked short if the stock fell. Those profits are likely added to the underwriter’s fee pool when they cover. Profits from the naked short will likely contribute to a reported $100 million in fees from underwriting the deal.

Recall, naked shorting was supposedly outlawed after the financial crisis, but like any good strawman scapegoat, it has continued in the institutional investing world and is likely common practice with investment banks across asset classes and numerous types of securities. Naked short selling as part of a syndicate in an IPO is still legal, according to Securities and Exchange Commission rule.

So while Uber’s stock didn’t see as much of a collapse as it may have without the necessary covering (assuming it has taken place), it’s anything but a bid of confidence (pun intended) for the now-public Uber, from the people that know it best: its underwriters. 

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