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Why Uber's disappointing IPO could haunt the company for years



Uber's public market debut was not exactly a disaster. But it was probably embarrassing.

Worse than the company and its leaders, the IPO and its demand could be costly in more ways than one.

The app-based taxi service was announced Thursday night at $ 45 per share, which was close to the low end of the expected range. The pricing gave the company an initial valuation of $ 75.5 billion – well under the $ 120 billion dollar invested bankers in the previous fall.

It was bad enough. But things got worse when Uber's stock hit the New York Stock Exchange on Friday. The shares opened during their listing price and stayed down all day. They finished their first session of trading at $ 3.43, or nearly 8%, to close at $ 41

.57.

It was an inauspicious beginning to one of the most anticipated IPOs this year.

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

As disappointing as it might have been, you can't just call the offer one error. After all, through IPO, Uber increased $ 8.6 billion. For a company that has lost money over the hand this year – and it's likely to do so in the coming years – the new funds are probably more than welcome.

And as much as the decline in Uber's share price Friday may have given the company a black eye from a public-relations perspective, it suggested that the company milk its IPO for everything it was worth and more. The institutional investors who bought Uber shares on Thursday ended up paying more for the shares than every day investors thought they were worth. It's Uber's gain – and the institutional investors' losses.

Uber raised less money as expected

Nevertheless, the celebration at Uber's headquarters in San Francisco is likely to be a little more subdued than might have been expected six months or so since when the $ 120 billion valuation rate was floated.

Part of the reason for this is that the stock exchange listing increased significantly less money than the company could have below previous expectations. Given the 180 million shares sold by Uber in the offer, it could have increased $ 12.8 billion if it had actually come out worth $ 120 billion. It would have given an extra $ 4.2 billion in their boxes. For a company that burns over $ 2 billion in cash from its operations and capital investment in each of the last two years, it's another two years of life.

Although it had only priced its $ 50 per share listing, which was the top of the range it was assuming last month, the company would have raised $ 900 million more than the IPO actually brought in. Again thinking in the form of his cash burn, it is almost an extra half of life.

But the IPO was disappointing and expensive for more than just the company itself. For over three years, Uber has sold its shares in private offerings to investors, including Softbank and Didi Chuxing for $ 48.77 per share. These investments were all under water at the market price and were even longer below the first trading day.

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Sure, there were many investors who entered Uber on previous dates, which made a lot of money on the IPO. And late-stage venture investors generally expect much more limited returns than early stages. But they almost certainly expected to see an immediate return when the company became public, rather than seeing its investments officially in red.

IPO probably disappointed insiders and early investors

IPO was also likely personally frustrating for CEO Dara Khosrowshahi because he has millions of dollars in compensation that is on the line. The company awarded him 1.75 million stock options last year, that he will only get if the company either acquired $ 120 billion or sees the market value hit that amount and stays on it for 90 days in need. Uber is even farther from that goal now than it was last night.

Some of Ubers' investors and insiders are likely to be disappointed in the listing for another reason. The stock the company sold in its public offering, all came from Uber's own funds, it did not contain shares held by insiders or early investors.

Instead, insiders and early investors who wanted to sell shares as part of the offer made it by dedicating them to Uber's overallotment pile, which consisted solely of their shares. The Generalotment mound is the group of shares that the banking companies have granted an offer, have the opportunity to buy from the company at the listing price if they feel that there is enough demand for them or to stabilize the company's share price after the offer.

But as Bloomberg's Matt Levine laid out, bankers must not buy these shares from the company, even though they have already committed to selling the same number to institutional investors. Instead, they can only go out and buy the required number of shares on the open market if it makes financial sense to do so.

With Uber's shares trading under the IPO price, it appears that this will be the case with the company's total comment. Uber's banks can buy the shares they need in the open market for less money than they would pay for them in the total lot. Assuming they do, Ubers insiders and investors are out of luck. Worse for them, they will not see a financial benefit to Uber coming public for another six months because they have all signed lock agreements that prevented them from selling their shares beyond those they dedicated to the total note for that period of time.

Of course, it is difficult to feel sorry for the insiders and early investors. Many of those who are planning to sell will eventually see big winds even though they can't sell right away.

Uber could see a talent drain

The same does not necessarily apply to the majority of Ubers rank and file employees. The company has moved from around 3500 employees in August 2015 to over 22,000 at the end of last year. For many of these employees, a significant part of the compensation comes in the form of shares or options to buy shares.

Uber gave 5.5 million options last year and 2.9 million the year before. It distributed 64.7 million shares last year and 41.2 million in 2017.

Many of these options and shares are now in danger of being under water. The options Uber provided in 2017 have an average strike price of $ 41.39, which means that at the end of the regular trading Friday every one was in the money with only 18 cents. The limited shares it foreclosed that year each had a grant value of $ 40.75, meaning they barely worth more than when employees received them.

This Wednesday, March 1, 2017, the photo shows a view of the Uber headquarters in San Francisco.
AP Photo / Eric Risberg

Employees are in better shape with the shares and options they received last year. The options have an average strike price of $ 33.45, while the limited stock had a grant value of $ 36.73 per share. Nevertheless, Uber's stock does not have to fall much for them too to be underwater.

In Silicon Valley, many workers accept consciously and often enthusiastically accept options and shares rather than higher wages. The rate is that their stock-based compensation will be worth much more than a cash salary – and will potentially make them extremely wealthy – when companies become public.

But if Uber's IPO price is any indication, the employees will not see anywhere near the kind of jackpot that many expected to expect when they signed in.

It may be more than just a disappointment for Uber workers. It can be a big problem for the company. Employees who do not see the payout they expected will probably be more willing to consider offers from other companies. Uber may well see a great talent drain if it can't get the stock price heading in the right direction.

So while Uber's IPO was not calamitous, it was a disappointment. And the effects can linger long after the closing bell sounded on its first trading day.


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