Uber underwriters deployed an unusual tactic, known as a 'naked short,' to provide extra support for the stock ahead of the IPO, four people with knowledge of the move said
Uber's underwriters, led by Morgan Stanley, were so worried the company's initial public offering had run into trouble, they deployed a nuclear option ahead of the deal last week, so they could provide extra support for the stock, four people with knowledge of the move said.
In every deal, there's an over-allotment, which allows the underwriters to sell 115 percent of the available offering to investors, effectively opening a short position. The excess 15 percent can be purchased by the underwriters in the open market — covering the short position — to support the stock if it goes down. More colloquially, this is known as the "greenshoe."
But there can be additional profit for the underwriters as well. If the stock goes down, the banks can generate millions of dollars in additional funds to put toward their fee pool by covering their short. That said, just because an underwriting syndicate has created a naked short doesn't mean that they're betting directionally on their clients to fail.
"A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering," Uber said in the filing.
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