While many investors expect to make rich profits off Uber Technology Inc.'s initial public offering, Goldman Sachs Group Inc. (GS) stands to reap a stratospheric gain, a 12,000% return on its investment. The investment bank is poised to take in $600 million after an initial $5 million investment in Uber that it made seven years ago, when the ride hailing firm was an unknown startup, per a detailed Bloomberg report. Even though Goldman Sachs lost the competition to lead the IPO offering to Morgan Stanley (MS), Goldman's return could surpass that of any other Uber investor.
Goldman's return depends on Morgan Stanley winning an IPO price at the top of the range for Uber's stock. To be sure, even if the price is lower than that, Goldman's return is still likely to be stratospheric, though less so.
How Uber Turned Into A Gold Mine For Goldman Sachs
- $5 million initial investment
- $600 million estimated gain*
- 12,000% return
Source: Bloomberg; Value based on sale of current shares and profit from earlier holdings
How Morgan Stanley Swooped in on Uber Deal
In 2011, just one year after the Silicon Valley company started offering rides, Goldman Sachs executive David Solomon -- now CEO of the bank - made a bet on Uber by using Goldman's own money, Bloomberg says. Solomon, then the co-head of investment banking, created of a fund that held a dedicated pool of the bank’s own capital for dealmakers to invest in high-growth startups. That same fund drove the investment in Uber.
Despite that early advantage, Goldman lost out to rival Morgan Stanley to handle the Uber IPO. While initially it looked like Goldman was a shoe-in to lead the offering, the tables started to turn in 2016, when Morgan Stanley stepped up with aggressive terms for a new round of lending to Uber despite regulatory pressure regarding banks' lending to “risky companies,” per Bloomberg.
Uber is offering shares at $44 to $50 each, per a regulatory filing, and is due to price its shares on Thursday. That values the deal as high as $91.5 billion on a fully diluted basis. Goldman's estimated $600 gain is based on the expected valuation of the 10 million shares it currently holds, as well as proceeds from its previous sale of stock to SoftBank.
Many bears have warned that Uber's stock could go south after the IPO, driven by various headwinds including its rising losses, competition from firms focusing on autonomous cars, including Alphabet Inc.’s (GOOGL) Waymo, and other concerns. Uber's costs may rise further as up to 60,000 Uber drivers have filed arbitration demands against the company, per Bloomberg. These factors mean Goldman may have to decide whether it sells its Uber stake soon to lock in fat returns - or keep them on the bet that Uber will bring even richer returns to come.