Uber's First Wall Street Buy Rating
Goldman Sachs Group Inc. (GS.N) is missing out on leading the hottest IPO in years, Uber Technologies Inc. (UBER.N).
The consolation: A potential US$600-million windfall from a mere US$5-million wager that Goldman’s bankers made using the firm’s own money back in 2011, only a year after Uber had started offering rides.
How Goldman lost its edge with Uber, the signature startup of the decade, to Morgan Stanley (MS.N) is just the latest turn in a long-running rivalry. But how Goldman is managing to make a fortune all the same is a whole other story.
The situation leaves Goldman’s chastened bankers in the unusual position of rooting for their traditional nemesis. If Morgan Stanley pitches the stock well and wins a top-of-the-range price for Uber’s stock, Goldman stands to reap a staggering 12,000 per cent.
It was a long-shot bet that involved the firm’s most senior executives, some internal bickering and at least one skeptic — David Solomon, according to a person involved in the decision. He was initially unconvinced before ultimately backing the deal.
“I remember a lot of people thought this wasn’t a good investment — a short-lived, localized phenomenon,” said Gary Cohn, Goldman’s former president, referring to the decision to bet on Uber. “There were definitely people who weren’t buyers. I muscled the capital commitment through the firm.”
Cohn didn’t identify those opposed but said the disagreement was a sign of good due diligence. Goldman’s estimated US$600-million gain is based on the likely valuation of the 10 million shares it still holds, combined with profits it already realized on a sale of stock to SoftBank (SFTBY.PK).
In the years after the financial crisis, Solomon — then Goldman’s co-head of investment banking, and now the firm’s chief executive officer — championed the creation of a fund that drove the investment in Uber, according to Gregg Lemkau, who led the tech, media and telecom group at the time and now leads the firm’s investment banking division.
The fund held a dedicated pool of the bank’s own capital for dealmakers to deploy in promising startups. The idea: Plow the money into fledgling companies and hope their growth simultaneously brings in profits and burnishes the Wall Street firm’s credentials for investment banking mandates.
“David had the foresight to develop an investing platform for his bankers,” said Scott Stanford, a former Goldman Sachs banker who brought Uber to the attention of his bosses. “It’s a win-win for everyone.” Stanford is now with the venture-capital firm ACME (formerly Sherpa Capital), another early backer of Uber.
It was over meat pies and beers in a Dublin pub that Stanford first met Uber founder Travis Kalanick. At the time, Stanford was leading Goldman Sachs’s internet investment-banking practice and had previously secured investments in other companies, such as Facebook Inc. (FB.O) and LinkedIn Corp., from other corners of the bank.
Before long, he had become a trusted counsel to Uber. When the ride-hailing company launched a fundraising round in 2011, Stanford pushed for Goldman to chip in some money.
At Goldman, where rule-by-committee is the norm, there were a few unsure of putting the firm’s capital behind such an unproven company. Serendipity helped. One executive, former Chief Financial Officer David Viniar, told colleagues that the first he heard of Uber was from his daughter days before the investment came up for approval. She raved about a new app that brings cabs to your doorstep.
The investment was green-lit and bankers set about figuring out how to get closer to the company. Cohn was quick to build a rapport with Kalanick, taking a liking to the brash and pugnacious founder of the ride-hailing startup during frequent trips to Silicon Valley.
Other Goldman bankers on the ground like George Lee also courted the company, making sure Kalanick was at some of the firm’s marquee events, such as an annual confab for tech startups in Las Vegas.
By 2015, Uber was growing rapidly but needed more cash to fund its unprofitable operations, so Cohn spearheaded a US$1.6-billion deal that was largely marketed to his firm’s private-wealth clients. Meanwhile, Gautam Gupta, an up-and-coming Goldman banker, had moved to Uber and in the span of a few years climbed to CFO.
It was starting to look like Goldman had set out a virtual no trespassing sign for rivals. Among members of Kalanick’s inner circle, it was understood that when the company eventually went public, Goldman Sachs would bag the top role, according to people with knowledge of the situation.
“That would have been my view,” Cohn said. “I had a very, very strong relationship with that management team. I bear-hugged the relationship.”
For those watching then, Morgan Stanley didn’t appear much in the picture, despite soft overtures like a publicly touted decision to allow employees to expense Uber rides.
Yet a sequence of events starting around 2016 began to change that.
When Uber canvassed a group of banks for new borrowings, it was Morgan Stanley that came back with the most aggressive terms. At the time, much of Wall Street was grappling with diktats imposed by federal regulators on lending to risky companies.
Morgan Stanley proceeded anyway. Some bankers were frustrated with the rigid guidelines but decided to take the hit in favor of cultivating a promising client, people said. When authorities sent missives asking them to stay away, executives found more discreet ways to keep helping Uber -- like switching their role on debt deals to adviser instead of the lead arranger.
Then two other developments weakened Goldman’s grip: Weeks after the 2016 presidential election, Cohn left to join Donald Trump’s White House. The next year, Uber’s top management was swept out, following allegations of boorish behavior and toxic workplace culture.
Morgan Stanley kept edging into more conversations, private placements and debt deals. Michael Grimes, a top Morgan Stanley banker, even moonlighted as an Uber driver. And as one of Wall Street’s top underwriters of technology IPOs, Morgan Stanley was a safe pick for Uber’s board once it was ready to proceed with a sale.
A representative for Uber declined to comment.
In a regulatory filing this year, Morgan Stanley’s name appeared first -- lead left -- in the list of banks handling the deal. Then came Goldman Sachs.
That’s little consolation to Goldman’s tech bankers, who are constantly jousting with their longtime rival for the top spot on tech deals. Since becoming CEO, Solomon has focused on ways to make that happen. One of the bank’s top tech dealmakers, Kim Posnett, is still cultivating close ties with Uber’s new management, including CEO Dara Khosrowshahi.
Being the first bank listed on a stock offering doesn’t make future deals less competitive, Cohn said. Still, it’s a spot on the page that investment bankers pursue with zeal — and then tout for years.
“The types of people attracted to the banking world are competitive in nature,” Cohn said. “One of the measuring sticks for competition is lead left.”
With assistance from Eric Newcomer