Some more Uber In a certain light, Uber Technologies Inc.'s valuation peaked last fall when investment bankers pitching to underwrite its initial public offering told Uber that it could be worth $120 billion when it went public. That was not a firm offer or anything, just a number that they wrote down in their pitchbooks, but at least it was a big number. By the time Uber actually filed to go public, the rumored valuation was down to $100 billion, and it launched the IPO late last month with a price range of $44 to $50 per share, or a market capitalization of up to $84 billion.[1] This was a little disappointing: Even the high end of this range was barely above the per-share valuation that Uber had gotten in its recent private funding rounds. But Uber's banks telegraphed that the range was meant to be conservative after competitor Lyft Inc.'s disappointing IPO, and anyway you can always raise the price range if demand is strong. Presumably the intention was to use the bargain pricing to get a lot of orders, build a strong book of demand, and then push the price range up. And then the banks rapidly put out noises about how there was plenty of demand for shares in that price range, and indeed, enough demand to price the IPO at the high end of the range. But, they hinted, they would not be raising the range: After Lyft Inc. raised its price range and saw its stock drop after the IPO, Uber wanted to be conservative and price within the range. Then it leaked that Uber would price not only in the range, but at the midpoint of the range. Then it actually priced towards the low end of the range; the IPO priced at $45 on Thursday evening. Then the stock cracked immediately and kept going down. It opened the next morning at $42, and never got above the IPO price; it closed at $41.57 on Friday, and fell below $40 this morning. Today's opening price was $38.79, for a market capitalization of about $65 billion. Since its (entirely hypothetical) peak in October, Uber has lost almost half its value. Oops. Pitching a high valuation and then launching at a conservative one to build demand is a standard part of the capital-markets playbook, but at some point it's supposed to turn around. Pitch at $120 billion and launch at $85 billion, fine, but then price at $90 billion and have it trade up to $110 billion on the first day. That's normal. The steady slide downward is a mistake. But the underwriters are not alone in getting it wrong. For years now, Uber's investors seem to have overestimated the value of its stock. "Apart from SoftBank, every new shareholder who bought Uber's IPO stock or purchased shares privately in the last three years is underwater on their investment," notes my colleague Shira Ovide. The going rate for Uber stock in private capital raises for the past three years has been $48.77 per share. In the public market, as of 11 a.m. today, it was less than $38. The public market is about 20% less optimistic about Uber than the private market was. Why? Part of it is timing; the broad market fell during the week leading up to Uber's IPO pricing, and IPOs are very sensitive to market conditions. This is not a particularly satisfying answer; the S&P 500 index was down about 2.4% between the beginning of Uber's roadshow and the time it priced, but it was up about 36.5% between December 2015, when Uber first sold shares for $48.77, and the IPO pricing. The stock market had a rough week but a decent three years; Uber has had a rough three years. Part of it might be structural differences between public and private markets. Private markets don't give you real-time value measures, and so they can inflate valuations: You raise money when demand is high, printing a high valuation, and then if demand cools you just don't raise more money and there's no evidence of a lower price. (In fact, when it was private, Uber did do a weird deal with SoftBank Group Corp. that sort of gave it a lower value than the $48.77 per share that it was getting in fundraising transactions.) If the stock trades all day, then you get a minute-by-minute account of sentiment, which is currently grim. Also, public markets have short sellers and private ones don't, which means that private companies' prices are set only by their enthusiasts while public companies' prices are set by their critics too. You shouldn't overestimate this—in the first few days after an IPO there isn't usually much short selling—but it has some effect. It's exacerbated in Uber's case by the fact that pretty much anyone who was enthusiastic about Uber was able to buy shares a long time ago: The shares have traded on secondary markets and been offered to mutual funds, hedge funds and rich individuals for years now, so there wasn't really anyone left to buy the new shares in the IPO. There wasn't enough new supply of enthusiasts rushing into Uber's stock to offset the critics. But there is also a long-running story about the unicorn economy in which venture capitalists are happy to throw money into unprofitable business models to chase growth, and public markets aren't. This is a popular stereotype, and of course not entirely true, but Uber's unhappy debut does tend to support it. I wrote recently: We have talked, a couple of times, about why the venture capitalists might care about growth and not profits, with possible answers including (1) they correctly believe that in the long run rapid growth will lead to monopoly profits, (2) they incorrectly believe that, (3) they are just nice or (4) they are trying to forestall socialist revolution by giving people cheap stuff. The underwater Uber IPO is a data point for option (2). For about three years—up to and including last Thursday—investors threw money at Uber, which it used to subsidize car rides, and none of those investors have gotten a return on their investment. Instead there have been cheap car rides. Maybe one day they'll get a return! But it's been a rough three years. Long-termism A stock exchange, in the modern usage, has two basic functions. One is, it's a stock exchange: It's where people (or algorithms) can come together to buy and sell stock. It has some mechanism for accepting and displaying orders, and for matching the orders together to make trades. The other is, it provides a seal of approval for public companies: It has listing standards that set requirements for corporate governance, things like director independence and shareholder approval of mergers, and only companies that abide by those rules can be listed on an exchange. It is sort of random and historically contingent that a stock exchange would set rules for how public companies should govern themselves, and these days it can feel pretty vestigial. Listing on one exchange instead of another doesn't matter all that much anymore—you can trade every listed stock on every exchange, not just the one where it's listed—and most of the 13 U.S. exchanges do not actually list any companies; the business is dominated by the New York Stock Exchange and Nasdaq. Still the listings matter. A stock that is not listed on any exchange is not quite fully public; it won't trade as much, and will have a hard time attracting investors. And to get listed, you need to follow the exchanges' rules. You could easily imagine a system that separated the exchange business from the credentialing business, in which stock exchanges did the business of matching orders with each other, and someone else—regulators, for instance, or an industry group of brokers or investors, or a third-party for-profit expert like a ratings agency or index provider—did the more-or-less unrelated work of deciding what sorts of companies can trade on the exchanges and what standards should apply to them. But, no, it's mostly the exchanges' business. Or you could imagine in which the exchanges competed to set different listing standards, with one exchange trying to attract listings by offering relatively pro-management rules while another set high, pro-shareholder standards and advertised to companies hoping to attract better investors at a higher valuation. For instance, one exchange could ban dual-class shares, which lots of investors hate. But, again, mostly no; the NYSE and Nasdaq listing standards are broadly pretty similar, and even IEX, the Investors' Exchange, which otherwise takes a very different approach from NYSE and Nasdaq, has pretty similar listing standards. But there is a … thing … called the Long-Term Stock Exchange. Here's its thing: One of the platform's unique, and potentially contentious, proposals is its focus on long-term voting rights: the idea is that shareholders will be granted more voting power the longer they own a stock. Steve Goldstein, an LTSE spokesman, said the exchange will also emphasize governance standards like sustainability, executive pay, and diversity. Other claims include that LTSE companies "wouldn't be allowed to link executive pay to quarterly earnings." We have talked about LTSE before. I am sort of skeptical both that "short-termism" is an actual problem of public markets, and that the way to solve it is with tenure voting, but that is just my opinion and there is no particular reason to impose it on anyone. Mostly I am fond of experimentation in finance, and so I like the idea of an exchange setting different listing standards from all the other exchanges. Maybe LTSE is right and this is a better approach, and it will prove that empirically by actually listing companies under its weird new rules and having those companies do well. Not yet, though. Last week the Securities and Exchange Commission approved LTSE's application to become a stock exchange, but without the new rules. Here's the SEC approval order, which says that "LTSE has proposed corporate governance standards in connection with securities to be listed and traded on LTSE that are substantially similar to the corporate governance listing standards of other exchanges." The SEC notes that the Council of Institutional Investors objected to approval of LTSE, because the CII doesn't like the LTSE's plan to give longer-term holders more votes, but the SEC discounted that objection because there is no such plan yet: CII stated that LTSE's Form 1 application "does not include any information about LTSE's reported plans to update its application to include time-phased voting rights as a core element of its proposed corporate governance listing standards." … With respect to the CII's concerns about time-phased voting rights, no such rights are proposed by LTSE in its Form 1 application. Once LTSE is registered as a national securities exchange, LTSE is required to file any changes to its rules as a proposed rule change under Section 19(b) of the Act and Rule 19b-4, and the public will be provided notice and given the opportunity to provide comments on any such proposed rule change. LTSE is still talking about long-term voting rights—"The exchange's next step is to submit its listing standards to the SEC," and "the precise rules are still being formulated"—but it hasn't gone to the SEC with them yet. By the way, CIII also objected to the LTSE's application because its listing standards will allow dual-class stock! CII stated that the corporate governance requirements in LTSE's Form 1 application (specifically, its "Voting Rights Policy") would "permit newly public companies to have multi-class structures with unequal voting rights in conflict with [CII's] membership approved policies supporting a one share, one vote structure" with "no sunsets on such structures." But every existing U.S. stock exchange allows dual-class stock, so this is a weird objection. ("The Voting Rights Policy, as set forth in LTSE's proposed listing standards, is consistent with the current voting rights provisions of NYSE and Nasdaq," says the SEC.) I mean, it's a perfectly sensible objection, really: Investors are not particularly clamoring for time-based voting rights, and they are particularly complaining about dual-class stock offerings, so it makes sense for an investor organization to say to a new exchange "hey what about getting rid of dual-class shares instead of doing whatever weird thing you are doing?" But that is not the SEC's problem. Elsewhere in long-termism Here's a story about stock indexes that are geared toward "long-term value creation," and that exclude famously long-term-focused companies like Berkshire Hathaway Inc. and Amazon.com Inc. because they don't fit the indexes' particular metrics: S&P LTVC screens a company for its measure of quality—using ROE, accruals (a way of gauging how reliably the accounts reflect true earnings) and leverage. Berkshire doesn't qualify, partially because ROE doesn't properly capture the returns from its vast stock portfolio. Amazon is ranked as among the worst companies on these measures—put in the bottom 100 of the S&P 500 for quality—arguably because it has prioritized profits in the future, not profits today. "Long-termism" and "short-termism" always strike me as sort of vague terms of complaint rather than as rigorous descriptions of any particular corporate approach, and if you sit down and try to measure a "long-term approach" statistically you will end up with some embarrassing outliers. Strong move Here's a profile of Lex Greensill, a supply-chain-finance innovator who worked at Morgan Stanley and Citigroup Inc. before striking out on his own, that contains this anecdote from his time at Citi: Some colleagues also held the view that Greensill was extravagant with expenses. In one incident in 2010, Greensill, after being stranded in Copenhagen overnight due to a cancelled flight, submitted an expense claim for new clothes for about £4,000, which the bank rejected, according to people familiar with the matter. Early on in my banking career, I bought a suit on a business trip to Brazil for lost-luggage reasons,[2] and I briefly considered trying to expense it, but I did not due to the shame. It did not cost anywhere close to 4,000 pounds. I suppose Greensill has fancier taste in clothes than I do. Also here's a weird reference, about an asset manager named Tim Haywood: Haywood oversaw more than $7bn in assets. He had a reputation among colleagues for taking on unusual, large bets. Some colleagues referred to him as "Paul Tibbets", after the pilot of the Enola Gay, the aeroplane from which an atomic bomb was dropped on Hiroshima, because he made large investments, according to people familiar with the matter. Wait … but … just … did the big bets blow up? Nicknaming someone after the pilot of the Enola Gay is a little bit obscure, and if the only basis for it just like "he does big things and the atomic bomb was big" then I am not sure I see the point. You gotta reserve "Paul Tibbets" for a guy who flies in, does one big trade, and flies out leaving a giant smoking wreckage. Anyway in addition to this excellent gossip, it's also a good article about the structured finance of supply chains. For instance: what? In 2016, GAM and Greensill launched the Luxembourg-domiciled GAM Greensill Supply Chain Finance fund. ... Lex Greensill was particularly close to Vodafone's treasurer, Neil Garrod, according to people familiar with the matter. Soon, Vodafone's payables made up a significant chunk of the underlying assets in the new fund, and Vodafone became a major investor in the fund too – the investment vehicle was nicknamed the "Vodafund" by some people working close to it. As of December 31, 2018, Vodafone had invested almost $1bn in the fund, according to people familiar with the matter. The fund recently had about $2.4bn in total assets under management. Vodafone gets financing by selling its payables to the fund, and then invests its cash in the fund? Why not just use the cash to, uh, pay the payables? Finance is amazing. Greensill just got an $800 million SoftBank Vision Fund investment. Oh man This is the good stuff right here: "I could invest $100 and get 100% return on it," Mr. Rogers said. When he first started trading options, he was blown away by the results. "Just looking at how powerful it was to make money … it was hard for me to sleep for a couple of days." "Consumer advocates say brokerage clients should be cautious when getting in on options," but the alternative view—that brokerage clients should be reckless when getting in on options—also has its adherents. I kind of want to start a glossy magazine called Overconfident Retail Trader Monthly. It would be full of profiles of smiling men saying things like "once I learned that I could borrow money to trade binary options on Dogecoin, I immediately mortgaged my house and liquidated my retirement savings to fund my account at the Panama CoinStealer Exchange, I have never felt so alive." Seriously, people moan all the time about all the science Ph.D.s who go to Wall Street to build trading systems instead of curing cancer or whatever, but what society really needs is a way to sublimate this sort of hobbyist energy into something more useful than retail options trading. I suppose the classical approach is to channel idle male recklessness into, um, war, but wouldn't it be nice to find something beneficial to do with Mr. Rogers' options-trading money? (Don't say Bitcoin mining.) Like we should be funding basic scientific research this way; there should be heavily advertised websites where you can take a wild uninformed gamble on pharmaceutical long shots or cold-fusion reactors or whatever. There is a deep pool of retail risk appetite that is just not being satisfied by index funds, or by Las Vegas for that matter; really we should be finding ways to harness it. Things happen How TPG Learned to Love Disruption. Fannie and Freddie Back More Mortgages of Those Deeply in Debt. Bitcoin Climbs Above $7,000 as Cryptocurrency Rally Extends. Meet Venezuela's jilted creditors. Goldman Sachs nears deal for wealth management group. Nasdaq Lawsuit Over Cybersecurity ETF Fees Goes to Trial. "We find that having acne is strongly positively associated with overall grade point average in high school, grades in high school English, history, math, and science, and the completion of a college degree." "Playwrights seem to internalize the costs of producing plays by downsizing the number of roles." T. Boone Pickens is selling a big table. Potamkin wedding. What is the opposite of guacamole? If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Now that Uber is a regular old public company, I am going to start describing its market capitalization (shares outstanding times price per share) instead of its fully diluted valuation (including options and restricted stock), which was more commonly used during and shortly after the IPO, and which is several billion dollars higher. [2] Yeah, I checked a bag; I realize this is an unforgivable move and I should have been fired for it, which is part of why I didn't submit a receipt. | 
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