Mutual Funds Cut Uber Valuation by as Much as 15%

Some major investors are finally feeling compelled to apply the scratch and dent markdown to Uber shares. Seven mutual funds own Uber shares, and more than half cut their price from the $48.77 per share price at which they’d held them since the fourth quarter of 2015, the last time Uber raised money.

The Wall Street Journal reported that Vanguard, Principal, and Hartford Funds cut the value of their shares by 15% as of June 30. T. Rowe Price lowered its Uber share price by 12%. Fidelity maintained its price and peculiarly, Blackrock increased its price to $53.88.

Having high profile investors repudiate the valuations that venture capitalists are touting is proof that the myth of Uber’s inevitable dominance of the ride sharing business, and that that would someone lead to ginormous profits is finally getting long-overdue scrutiny. Mind you, these investors can afford to cut their valuations because they got at lower prices, some at $15.51 a share.

Needless to say, the fact that sophisticated investors are already haircutting Uber’s shares is going to put a dent in its fundraising efforts. The Journal repeated the Uber party line about its fundraising effort with SoftBank:

Benchmark has been negotiating for months a potential deal with tech investor SoftBank Group Corp. to sell part of its stake at a discount to Uber’s last valuation, according to people familiar with the matter.

A negotiation of what is a simple sale of existing shares (as in the terms are already set) does not take months to negotiate. The longer talks like this go on, the less likely anything is to get done in the absence of a big development.

Remember that the original Bloomberg story on Benchmark’s efforts to sell shares made clear that SoftBank was in fact not very interested. From the story Uber Backers Discuss Stock Sale to SoftBank, Others:

Uber Technologies Inc. shareholders and its board, led by early backer Benchmark, have discussed selling some of their shares to SoftBank Group Corp. and other potential investors, people familiar with the matter said….

SoftBank, which recently launched a $93 billion technology fund, has no plans to invest in Uber, a person close to the Japanese company said.

Yet other outlets that picked up on the story that Bloomberg broke on July 25 took up Uber’s spin, with no evidence of any input from SoftBank to justify the pro-Uber hype. The Journal’s account, following close on the heels of the Bloomberg story, and based on only US sources, was headlined SoftBank Seeks Multibillion-Dollar Stake in Uber. Huh?

On August 7, the Journal headline was, “SoftBank Chief Says He Wants Stake in Uber or Lyft.” And what did CEO Masayoshi Son say at a press conference? ““We are interested in discussing with Uber. We are also interested in discussing with Lyft.” That is not the normal Japanese locution for negotiations that are underway. That is basically saying SoftBank was prepared to receive an approach.

Moreover, Son said his interest is self-driving car technology. If he or his due-diligence team were to take a hard look, they would presumably figure out that Google is suing Uber for stealing its key self-driving car technology, and without that, Uber doesn’t have much of value here.

Uber expert Hubert Horan pointed out that SoftBank still could conceivably have reason for taking a flier on Uber”

SoftBank may have figured out that Uber is desperate to conserve cash and is willing to abandon its losing investments in Asia for 20 cents on the dollar (let’s get Uber to stop competing with Grab and Ola following their abandonment of the Russian market)

SoftBank may have realized that Uber desperately needs new investment but any traditional Silicon Valley VC play would totally trash their valuation, and have approached Uber with an offer they can’t refuse (that would give them a big % of Uber for very little money but would maintain the fiction that they are worth $68 billion)

They are trying to set up an Uber-Lyft merger at some point in the future

However, the first two reasons would result in an investment in Uber, not in buying out current shareholders, which is the main object of this exercise.

Since then, the reports from the Uber side as to where SoftBank stands have kept shifting, to the degree that it looks like Benchmark and its allies can’t keep their story straight. On August 14, the New York Times reported that Uber was taking the “next step” to “move forward” with a supposed proposal from SoftBank to invest in Uber. Notice that discussion of SoftBank’s interest referred to investing in the company, not in buying out existing owners.

Implausibly, a mere three days later, the Wall Street Journal reported a very different deal:

The rancor among investors in Uber, which is valued at nearly $70 billion, comes as the company is weighing new funding of at least $1 billion from SoftBank Group Corp., as well as a potential deal to buy shares from Benchmark or other investors, according to a person familiar with the matter.

SoftBank is part of a consortium that includes Dragoneer Investment Group and General Atlantic, this person said. Other investors would likely be allowed to offer portions of their stake in the company as well, if the board decides to move forward with allowing the investment, this person said, who cautioned that such a deal may not be approved.

For those of you who have been keeping track, Dragoneer and General Atlantic had been mentioned only in that very same August 13 New York Times story as making a separate offer, and then only for existing shares. They appear to have surfaced late the previous week as a result of the Benchmark suit against deposed CEO Travis Kalanick. That unprecedented gambit then led the Kalnick side flog the not-credible idea that it could buy out 3/4 of Benchmark’s stake so as to get it off the board. Dragoneer, General Atlantic and unnamed others had surfaced as interested in a Dutch auction, an idea which we shredded as barmy.

The notion that SoftBank would team up with the other two investors on such short notice, particularly when they had such different agendas, seemed wildly implausible.

And $1 billion, particularly if it were shared among several investors, is far more modest than the “multibillion” interest touted at the end of July.

So as of today, roughly a week later, what do we read in the Journal?

Benchmark has been negotiating for months a potential deal with tech investor SoftBank Group Corp. to sell part of its stake at a discount to Uber’s last valuation, according to people familiar with the matter. Benchmark and SoftBank have declined to comment.

First, we don’t see any mention of other possible suitors. Second, we are told that Benchmark and SoftBank have been talking “for months,” which is far longer than the original Bloomberg story suggested. Recall also that other shareholders who hadn’t been informed of these talks were mighty upset. They’ll be even more upset if Benchmark’s efforts to unload some of its stake were going on longer than they had previously thought.

Uber defenders claim that SoftBank won’t ante up until a new CEO is installed, and the press dutifully hypes that Jeff Immelt is interested and is the board’s top pick.

Lambert published this take by Hubert in Water Cooler earlier this week and it is worth repeating:

As I’ve argued before, it would be staggering irrational for Immelt (or anyone with his type of background) to take the Uber job, regardless of the size of the compensation package he could demand. He certainly doesn’t need the money or the turmoil he’s going to have to deal with. This isn’t a Marissa Mayer situation where the entire world knew that Yahoo probably couldn’t survive. If Mayer had “saved” Yahoo she gets heralded as a miracle worker but when she failed everyone shrugged and said it was always hopeless and wouldn’t think it was because she screwed it up. The World thinks Uber is fundamentally a great (or near-great) company that’s faced unusually bad diversity/inclusiveness issues. If Immelt can take Uber public at $45 or more a share, it would actually be a stunning achievement, but most people would think that was going to happen at some point anyway. It is at least 99% likely things work out rather worse than that.

Of course people like Immelt irrationally take these kind of jobs all the time, especially when they’ve just been pushed out of an even more glamourous situation. But they have to have a staggeringly inflated view of their managerial brilliance, have to willfully ignore the financial and cultural issues in the new company, and have to believe that most corporate problems are ones of perception that a new PR campaign can quickly address.

One flashing red signal in [Kara] Swisher’s piece [at Recode] is that Immelt hasn’t even agreed to move to San Francisco full time. When Jack Dorsey refused to treat the Twitter CEO position as a challenge requiring full-time attention, lots of people throughout Silicon Valley (correctly) predicted Dorsey wouldn’t work out, and Uber’s problems are order of magnitude larger than Twitter’s were.

It is possible that Immelt sees this as a short-term gig – quickly perfume the pig and get the IPO done, cash out big time, and leave the real problems to the next team. This would get Benchmark to sign on the Great Compromise, and I’m sure it will become clear whether his compensation is tied to the IPO. Problem of course is there is no IPO without first releasing audited financial results and profit forecasts, which will never support a meaningful valuation.

As Lambert regularly says, pass the popcorn. Uber continues to hemorrhage cash, and with its valuation now under pressure, the warring factions on the board will be under even more pressure to sort out some type of resolution and raise more money. Time is now working against them in a much bigger way than before.

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