Lyft's IPO was a little awkward | Hacker News Reader

Lyft's IPO was a little awkward

bloomberg.com

41 pointsxrd11 comments

This is a really interesting read! This gives me a much better sense of how investment banks are actually involved in IPOs, and how you can essentially require banks to support certain prices of your IPO using legal agreements.

Also really emphasizes the role of having personal relationships with directors (not just a corporate relationship):

> The first lesson is that the only way for a bank to develop a relationship with a client is for human bankers to develop a relationship with human client executives and directors.

I still don't understand what Soros and Icahn did. Can someone give me a more basic understand or some kind of metaphor?

The loophole that Soros and Icahn used is like being able to say you never cheated on your wife because you did so (cheated on your girlfriend) before the wedding ceremony and not since.

I got that part, but I don't understand why Soros bought shorts on a stock that he just bought.

One possibility: he didn’t care about buying the stock, but instead wanted to get paid for making the transaction happen.

So he buys at 60 knowing he’s already sold at 70. Whereas Icahn sells at 60 because he can sell today rather than at whatever price it will be in 6 months.

Exactly. And as for why Icahn wants to sell -- well, he's a pre-IPO investor and might not want to stick around to settle for a public market price in 6 months when there is also possibly demand for Uber shares.

Both Icahn and Soros think that Lyft is going to lose value in the 6 months after the IPO. But Icahn can't sell for 6 months. So he calls Soros, Soros creates a short position in the stock for the amount that he's going to buy from Icahn - he can do that cheap because the stock is going to be around $72 dollars for the first few days of trading. He then buys Icahn's shares for $60. So Icahn got out at a reasonable price and Soros now created a short position at ~$70 and covered it using Icahn's shares for ~$60 giving himself a $10 profit per share with practically no risk despite the fact that he can't sell the shares he's long for 6 months. Icahn couldn't hold the short position because he's contractually obligated not to short the stock.

The very important point is he agreed the short BEFORE he bought the stock, because the sale from Icahn prohibited him from buying a short position for 6 months. He created a flat position that Icahn was contractually prohibited from creating.

Soros' position in the market doesn't necessarily express an opinion that Lyft is going to lose value. He is being paid by Icahn to facilitate the transaction, and so a reasonable goal, that he apparently pursued, is to minimize exposure while pocketing the transaction fees.

Icahn owned a bunch of Lyft stock before the IPO.

Lyft, as a company, issued new shares in an IPO. As is standard practice for an IPO in which the company issues new shares to raise money, Lyft required all of existing stockholders to agree not to sell stock on the public market for the next 6 months. So for 6 months, the shares trading under the "LYFT" ticket, will represent only those shares sold by Lyft to public market investors, and then passed on from one public market participant to another. After 6 months, all shares will be equal, and early investors and employees can sell their shares.

Icahn couldn't sell his shares on the public market. But he was allowed to sell shares in a private transaction (to an accredited investor, with all the usual qualifications for a private stock sale). The only relevant restriction Lyft imposed was that Icahn get his buyer to sign a similar agreement with Lyft, under which Soros can't sell those shares for the same six months.

The restriction is actually a little stronger than just not selling those pre-IPO shares. They also aren't allowed to engage in any financial maneuvering which in any way has some of the effect of selling pre-IPO shares.

But Soros didn't mind. By the time he bought the shares from Icahn and signed onto the agreement not to sell them, he'd already sold them! Well, he'd made what was effectively a binding agreement to sell that many shares of Lyft, at a price to be determined immediately after the IPO, but with the shares and money not changing hands until 6 months later! This is exactly what the lockup agreement prevent you from arranging once you have the shares.

The agreement Soros made was something like:

"I bet that Lyft stock will be lower in 6 months than it is next week. If it goes up I'll pay you 10 Million times the amount it goes up, and if it goes down then you pay me that instead. And the bank said sure, as long as you pay us a small fee upfront, win or lose."

So in six months, when the lockup ends, Soros will sell 10 million shares on the public market, and if that is above the post-IPO price, he'll pay the excess to the bank. If it is instead below the IPO price, the bank will pay him the difference. So he's effectively locked into the post-IPO price.

should be noted, this is an opinion piece not bloomberg per se

Levine is Bloomberg’s best writer, by far. Most entertaining, at least.

Reply on news.ycombinator.com