INSIGHTS
MAY
16
COSTA’S CORNER
A little information can be a dangerous thing
As you can tell by now, this column is a mixed bag of opinions, advice and random facts. The idea behind the column is simple, put something out there that might be of some interest, put an opinion on it and see what comes back.
I also try to educate people as well. Some things seem to be complex and no matter who does the explaining, they still don’t make sense, Brexit for example.
This article will try to explain what happened with UBER mainly, but also Lyft. Since the UBER IPO took on epic proportions and so far, has failed to live up to expectations.
What went wrong?
Let’s look at the history of this IPO first and then unravel the mystery of the process and how, even with the smartest people in the World working on it, it still fell short.
UBER, as you know by now, is one of the true Unicorns of Silicon Valley. It took in round after round of funding from VC’s, private equity and mainline money managers as it expanded around the globe. It was a game changing technology company that basically reinvented personal transportation and it was growing at an amazing rate. Along with that growth came an amazing amount of losses but that didn’t matter, it was growing, people were throwing money at it and at some point, those people were going to cash in, BIG.
As that day approached, the bankers responsible for doing what is known as ”the roadshow” were gauging investor interest and had to come up with a price range where they believed the stock would start trading. Initially, there were some that thought the price could be as high as $90 a share but that was quickly dispelled and it eventually came down to $45 a share. Opening up at $42 and trading down since.
Did the bankers do a bad job in pricing the IPO is the first question I would ask myself? Honestly, to miss the target price by 8% is not a crime. It is not an exact science and rarely do all the buyers and all the sellers agree on one price so while opening down from the IPO price is not ideal, three dollars lower isn’t a bad job it’s just bad luck.
In years past, the bankers in such a high profile IPO would have created a syndicate bid that would have supported the stock price for the short term at the IPO price. This would have meant that Morgan Stanley and to some extent Goldman Sachs would have had to use their own money to support a slightly ill priced opening. Typically, the investment bankers would have a much more conservative opening and with the lower price, the need for that syndicate bid is reduced as well.
After Dodd-Frank, Investment bankers pulled back from that customary role because the risks to the regulators could be considered too high and that pretty much eliminated the true syndicate bid.
The bad luck part of the IPO was the timing. The day of the IPO the market tanked and the following day was even worse so it’s very hard to be successful in a market with such negative sentiment. As the market recovers, so will UBER to some extent.
The trouble with Lyft is a little different I believe. It’s losing money as well while it builds it’s model out and that is where the similarity ends.
Lyft listed its stock in typical tech fashion, two classes of shares, one voting, one non-voting. The voting shares are held by the founders and early backers and the non-voting shares are for the rest of us. I hate this arrangement and as an individual I will not ever buy stock in a company that operates this way. While me voting my 100 shares makes little difference, the institutional holders who could potentially have millions of shares have the same concerns. If an institutional holder cannot vote why would an institutional holder own the shares. Twenty years ago, most institutional holders kept quiet and followed managements’ lead but not anymore. They own the company and they want their voices to be heard. Setting up dual class shares goes against everything these big players believe in so the chances of them taking a stake in these companies is reduced and therefor my interest is as well.
I haven’t even touched on the point that both companies are losing billions of dollars a year and they have both said they do not know when they will turn a profit.
I will cover this point in a future article.
Staying put but will be reallocating some money within the sector.
50% Stocks
25% Fixed Income
25% Cash
As you can tell by now, this column is a mixed bag of opinions, advice and random facts. The idea behind the column is simple, put something out there that might be of some interest, put an opinion on it and see what comes back.
I also try to educate people as well. Some things seem to be complex and no matter who does the explaining, they still don’t make sense, Brexit for example.
This article will try to explain what happened with UBER mainly, but also Lyft. Since the UBER IPO took on epic proportions and so far, has failed to live up to expectations.
What went wrong?
Let’s look at the history of this IPO first and then unravel the mystery of the process and how, even with the smartest people in the World working on it, it still fell short.
UBER, as you know by now, is one of the true Unicorns of Silicon Valley. It took in round after round of funding from VC’s, private equity and mainline money managers as it expanded around the globe. It was a game changing technology company that basically reinvented personal transportation and it was growing at an amazing rate. Along with that growth came an amazing amount of losses but that didn’t matter, it was growing, people were throwing money at it and at some point, those people were going to cash in, BIG.
As that day approached, the bankers responsible for doing what is known as ”the roadshow” were gauging investor interest and had to come up with a price range where they believed the stock would start trading. Initially, there were some that thought the price could be as high as $90 a share but that was quickly dispelled and it eventually came down to $45 a share. Opening up at $42 and trading down since.
Did the bankers do a bad job in pricing the IPO is the first question I would ask myself? Honestly, to miss the target price by 8% is not a crime. It is not an exact science and rarely do all the buyers and all the sellers agree on one price so while opening down from the IPO price is not ideal, three dollars lower isn’t a bad job it’s just bad luck.
In years past, the bankers in such a high profile IPO would have created a syndicate bid that would have supported the stock price for the short term at the IPO price. This would have meant that Morgan Stanley and to some extent Goldman Sachs would have had to use their own money to support a slightly ill priced opening. Typically, the investment bankers would have a much more conservative opening and with the lower price, the need for that syndicate bid is reduced as well.
After Dodd-Frank, Investment bankers pulled back from that customary role because the risks to the regulators could be considered too high and that pretty much eliminated the true syndicate bid.
The bad luck part of the IPO was the timing. The day of the IPO the market tanked and the following day was even worse so it’s very hard to be successful in a market with such negative sentiment. As the market recovers, so will UBER to some extent.
The trouble with Lyft is a little different I believe. It’s losing money as well while it builds it’s model out and that is where the similarity ends.
Lyft listed its stock in typical tech fashion, two classes of shares, one voting, one non-voting. The voting shares are held by the founders and early backers and the non-voting shares are for the rest of us. I hate this arrangement and as an individual I will not ever buy stock in a company that operates this way. While me voting my 100 shares makes little difference, the institutional holders who could potentially have millions of shares have the same concerns. If an institutional holder cannot vote why would an institutional holder own the shares. Twenty years ago, most institutional holders kept quiet and followed managements’ lead but not anymore. They own the company and they want their voices to be heard. Setting up dual class shares goes against everything these big players believe in so the chances of them taking a stake in these companies is reduced and therefor my interest is as well.
I haven’t even touched on the point that both companies are losing billions of dollars a year and they have both said they do not know when they will turn a profit.
I will cover this point in a future article.
Staying put but will be reallocating some money within the sector.
50% Stocks
25% Fixed Income
25% Cash