Investors raise questions over Morgan Stanley’s Uber valuation after shares drop

The Uber Technologies Inc. application is displayed in the App Store on an Apple Inc. iPhone in an arranged photograph taken in Arlington, Virginia, U.S. on Monday, April 29, 2019. Photographer: Andrew Harrer/Bloomberg

Morgan Stanley nabbed the biggest US initial public offering of the past five years. Now it gets to field the second-guessing after Uber Technologies Inc. tumbled 18% in its first two days of trading.

Across Wall Street, questions are flying: Why did bankers including Morgan Stanley’s suggest a $120 billion valuation last year that Uber couldn’t deliver? Did the syndicate led by the firm set the IPO’s price too aggressively? And did they steer too much stock to big investors who made hollow pledges to hold it long term?

“In retrospect, the underwriters should have done a better job at figuring how strong the true demand was,” said Jay Ritter, a professor at the University of Florida’s Warrington College of Business who specializes in IPOs. “But underwriters in general have a hard time finding out how much buy-and-hold demand there is, versus flippers.”

The debate over how well Morgan Stanley and other banks handled the marquee offering is complicated by a lot of bad luck, including the abrupt flareup last week in U.S.-China trade negotiations that drove markets down around the globe, as well as the recent dismal performance of Uber’s main rival, Lyft Inc. There’s also a broad, gnawing concern about Silicon Valley’s penchant for delaying public listings until startups achieve full size: Who’s left to buy?

Many top-tier investors already owned shares of Uber before last week, potentially curbing some appetite for the $8.1 billion of stock sold. Holders included clients of Morgan Stanley’s wealth management division, such as family offices that had opportunities to buy in privately, one person familiar with the matter said. Even some within Uber’s leadership began to view the round more as a “follow-on” investment than a fresh public offering, two people said.

Still, people with knowledge of the situation have said the order book was at least three times oversubscribed. Morgan Stanley, which is slated for about $41 million in fees from the deal, led the offering with Goldman Sachs Group Inc. and Bank of America Corp., which are sharing a total of about $32 million in fees.

A spokeswoman for Morgan Stanley declined to comment for this story.

One investor at a multibillion-dollar shop recalled other misgivings heading into the sale.

He said he grew suspicious days before the pricing because the syndicate of banks kept seeking reassurances that his firm wouldn’t flip the stock. Yet, the bankers also kept telegraphing there were ample retail investors hoping to buy in after the debut, which could cause the price to “pop” at least briefly, offering a chance for a quick and easy profit, the investor said. His firm ended up slashing its final order.

Uber shares climbed 0.6% to $37.33 at 10:12 a.m. in New York, leaving the shares 17% below the $45 IPO price.