Was the Uber IPO a Success?
It depends on who you ask. If you listen to the media, it was a failure. A successful initial public offering has to feel like July 4th fireworks. The stock opens 30% above the set IPO price and then finishes the day up 100%. That’s a newsworthy IPO that (according to the financial commentariat) deserves the uncorking of champagne.
In that kind of IPO, the underwriters, the brokerage firm(s) that brings the deal to the market, have lots to celebrate, too. They’ve used this IPO to butter up their best clients — the ones that bring them the most business.
See, the IPO market is not designed to actually benefit the shareholders of the IPO company. Where the stock trades at the opening has little to do with what the company is worth, and has everything to do with supply (insiders selling shares) and demand (mutual fund and hedge fund interest in the stock). That’s it. The underwriters’ job is to assess interest on both sides and set a price near equilibrium.
The conflicts inherent in this situation show Wall Street at its worst. The underwriters are supposed to represent the interests of their client, the IPO company (in fact, they get paid handsomely to do so). But there is a conflict between the one-time fee they receive from that company (plus, maybe, the fees they receive if the post-IPO company decides to seek their advice in future M&A activity) and the very predictable trading commissions that are trickling in every single day from their large brokerage clients.
To rig the IPO for the benefit of the brokerage clients, underwriters often create an imbalance between supply and demand by keeping the offering price significantly below the level where supply and demand indicate it will open. That way, the best clients get to own the stock for a few minutes or maybe a few hours before the stock jumps 30% or 100%; then they flip it for an astronomical annualized internal rate of return.
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I am the CEO at IMA, which is anything but your average investment firm. (Why? Get our company brochure here, or simply visit our website).
In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.”
I’ve written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (I’m working on a third - you can read a chapter from it, titled “The 6 Commandments of Value Investing” here).
And if you prefer listening, audio versions of my articles are published weekly at investor.fm.
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