Question

In May 2019, Uber went public on the New York Stock Exchange (NYSE), forming part of the wave of Silicon Valley “unicorns” which went public that year. Uber’s highly anticipated initial public offering (IPO) was the largest in 2019, offering 180 million shares at an offering price of $45 per share. Uber began trading at $42 per share on the NYSE on May 10. It had 1.68 billion shares outstanding after the IPO.

c. Some of Wall Street’s biggest banks, notably Morgan Stanley and Goldman Sachs, were the underwriters of Uber’s IPO. Assume that the underwriters charged an underwriting spread of 7 percent. What is the dollar amount Uber paid in underwriting spread?

(1 mark)

d. Assume that the post-IPO value of Uber is its fair market value. What is the total cost to Uber’s original (pre-IPO) investors of the equity offering due to market imperfections?

(1 mark)

e. A persistent puzzle about IPOs is that they are on average underpriced, as evidenced by an initial offer price below the closing price at the end of the first day of trading. Should you therefore invest all your savings in IPO stocks? Explain your answer fully.

f. Empirical evidence shows that the presence of venture capitalists in EGCs serves to lower total issuance costs and to maximize the net proceeds to the firm when it goes public (Megginson and Weiss, 1991). Explain the reason(s) for this finding. If these benefits can be derived from involving venture capitalists, why don’t all IPO firms do so (i.e., involve venture capitalists)?

Answer 1

Answer to C,

the underwriting commision is paid on the amount of shares underwritten contrcated thereto.i.e, the commision is predefined in the agreement of the underwritng, in the given question 180 Millions shares where issued @45/- per Share and agreed commision was 7%. So the Commision amount shall be

(180 Million * 45 ) *7% = 567 Million

I.e irrespective of the over subscription of the shares, commision shall be paid on the agreed terms of underwritten shares. Here we assume 100% of the shares were underwritten by Goldman sach & Morgan Stanly altogether.

Answer to D,

The differnce in the IPO amount and the Share price on the listing date shall be considered.

i.e, 45-42 =3 Per shares. *180 Million shares = 540 million

Answe to E,

The investors says, dont put all your eggs in one basket. the volatility of the stock depends on the Beta of the shares. So it is not advisable to ionvest all saving in one IPO or stock. even if the stock has has the hightes Beta.

Answer to F,

The high end cost is involved in the same procedural matters, there is risk over market sentiments of the stock price. venture capitalist are high end cash rich firms which can absorb the interest cost pertaining to the procedural of the IPO.