Anyone who has been in the business of selling high end (or even not so high end) wares knows that creating the perception that what you have on offer is desired by other can make the sale. And Uber seems to have done a great job of spinning a tale that there is keen investor interest via a New York Times story titled, Uber Board Considers 3 Investment Offers to Buy Company’s Shares by Mike Issac and Kate Benninger. If the story weren’t so patently one-sided, it might even seem plausible.
We’ll get to the details in due course, but let’s make the most important observation firt. There is no evidence that there is an “offer” to buy Uber shares, let alone three offers. The normal process would be a non-binding letter of intent, specifying a price or price range. If that outline is acceptable to the seller, then they proceed to due diligence and negotiation of more definitive terms.
The article tries to convey the idea that a process like that is underway by saying the board has authorized due diligence. But in its last round of fundraising, Uber refused to include basic information such as revenues and net income. JP Morgan and Deutsche Bank decided to risk alienating Uber in an IPO by refusing to flog this document to their high net worth clients. That means that the supposed “due diligence” may consist of providing basic financial information, as opposed to what most people would understand “due diligence” to consist of (e.g., reading board minutes, access to a data room).
Uber is strongly motivated to make it appear that investors are interested in the company’s shares. In the midst of a stunning reversal, the ride-sharing company has gone from being perceived as a predestined winner to reeling from scandal to scandal. Among its many tsuris, it has suffered a mass exodus of senior “talent” and is now in the midst of a cage match between the investors that ousted CEO Travis Kalanick, and Kalanick’s allies on the board. The venture capital community, and Corporate America generally, has never seen a fight this ugly carried out in public.
So the strategy of the Kalanick allies is to make it appear that they have the upper hand, when the last actual win was scored by the Benchmark side in getting Kalanick booted. And Benchmark also seems to have checked Kalanick’s effort to return though their lawsuit filed last Thursday accusing him of fraud.
Kalanick backers, led by Shervin Pishevar, have claimed they can buy Benchmark out. The comical bit is that the tone of a letter signed by Pishevar and two other Uber shareholders released on Friday is they can force Benchmark to sell. If they can actually come up with a price that Benchmark would accept, from Benchmark’s perspective, it would be like throwing Br’er Rabbit in the briar patch.
As those who have been following the Uber slugfest know, Benchmark’s beef with Kalanick was he wanted to put off a liquidity event as long as possible. Aside from the general tendency of venture capitalists to want their money back sooner rather than later, Benchmark may have understood by virtue of not having imbibed the Kalanick Kool-Aid that Uber was never going to be profitable, and once word got out, its sky-high valuation would become a thing of the past.
So in theory this isn’t nuts, except there is no reason to believe the Kalanick side can pull this off, as in deliver a price high enough that Benchmark will accept for enough shares (which is apparently 75% of Benchmark’s stake) to get Benchmark off the board. Even though Benchmark got in at a bargain basement price, and may understand that Uber’s valuation is on a slippery downhill slope with little prospect of recovery, they may still suffer from the cognitive bias of anchoring, and thus may not buy the premise that getting out at what would look like a ginormous discount would look like like a brilliant trade 18 months down the road.
Shorter: there’s no sign in the press so far that Benchmark is on board with the plan that the Kalanick faction has cooked up. That could just be simple “show me the money,” keeping a poker face, or anticipating that even if Pishevar and his allies manage to find some
chumps interested parties, it will fall vastly short of what is needed to buy Benchmark out.
But the Kalanick faction has every reason to take any and every thin shred of interest and try to paint it as proof that their scheme is moving forward. The fact that Pishevar & Co. leaked their letter to the Benchmark side on Friday and then planted a story that is running in the Monday edition of the New York Times smacks of an over-eager effort to create the perception of momentum.
Our Uber expert, Hubert Horan, dissects the New York Times report in more detail. In short form, the story again flogs the idea that SoftBank might be interested and also claims that Pishevar and his buddies really do have investors who want to make a bid rich enough to take Benchmark out. That claim that didn’t seem credible last Friday and nothing has been offered to make that seem more credible now.
Here is the one new bit of new news on the investor “interest” front:
More recently, an investor coalition led by Dragoneer, which includes the private equity firm General Atlantic and others, has emerged with a deal that would protect Uber’s valuation. The proposal incudes a small purchase of new shares at the current valuation, but the bulk of the investment would come through buying out existing shareholders at a discount via a so-called Dutch auction — an auction that begins with a high price that declines until a buyer says yes.
Folks, aside from Dragoneer says it willing to buy an itty bitty stake at Uber’s current valuation in order to kick the tires, this is not an “offer”. There is no way the shareholders would agree to a classic Dutch auction, where the sellers agree to tender a certain number of shares and the Dutch auction determines the price. Any offers to sell by Uber shareholders would be subject to a reserve price. There’s no guarantee that there would be any overlap between the Dragoneer bids and any shareholder offers. And even that “offer” to buy a smidge at the current valuation is probably contingent on hitting a minimum level of investment in the Dutch auction. So the Dragonner scheme is just another way to explore price.
And as important from the Kalanick side, even if the Dragoneer scheme were to move forward, there is no reason to think anywhere enough of Benchmark shares would be tendered and sold to get Benchmark off the board. A Dutch auction process means that everyone who tenders shares at a certain price gets bought out pro-rata. For instance, if Benchmark tendered say a 0.5% interest at x price and other investors collectively tendered another 0.5%, and the offers to sell were 2x what the investors were willing to buy at that price, the sellers would get only 50% of their offers purchased.
On top of that, each round of investment had different terms, so it’s even harder to imagine how anyone could construct a “Dutch auction” when you are not dealing with fungible common shares, but a dog’s breakfast of different classes of equity securities.
We will now turn the mike over to Hubert Horan:
The article fails to make it clear that none of the proposals will do anything to strengthen the finances of the company. In the case of the two of the proposals had been widely reported before (Benchmark’s potential sale of its shares to Masayoshi Son of SoftBank and the Shervin Pishevar-led demand that Benchmark sell at least 75% of its shares) the article fails to explain whether either has been converted from informal discussions into a formal offer. The only “news” that hadn’t been previously reported in the press was the interest of Dragoneer Investment Group in buying existing shares, but there was no indication of whether this was comparable in magnitude to the Softbank/Pishevar ideas (where perhaps 10% of all shares would change hands) or something much smaller.
Issac’s story fails to address any of the obvious issues with each proposal. All reports about Softbank had come from Benchmark, who was anxious to liquidate its position and was highly motivated to both create the appearance of outside interest. SoftBank’s interest in taking a 10% Uber shareholding made little sense given its shareholdings in major Uber competitors in Asia and the process described was highly inconsistent with traditional Japanese M&A practices. There is still no evidence there is anything to Pishevar’s proposal beyond the two page memo released on Friday, no evidence he has access to the $6-$$7 billion to buy Uber shares at full price seems too ludicrous to take seriously.
While Issac notes that the individual parties were all motivated by “self-interest”, he fails to explain those interests in the context of the open battle for control of Uber’s currently dysfunctional Board and senior management. Benchmark’s private outreach to SoftBank, and the suit it filed against Travis Kalanick were designed to force two possible outcomes favorable to Benchmark—locking in staggering profits ($8.4 billion on a $27 million investment if its position was completely liquidated), or a second-best but more feasible situation where Kalanick and his major allies were ousted, and early investors established Board control and could appoint a CEO empowered to make major changes to move rapidly towards an IPO.
Pishevar’s interests were the exact opposite of Benchmark’s (ensure Board control and the CEO decision remained in the hands of Kalanick allies). Issac’s story implies that Uber’s Board has begun to seriously evaluate these proposals but ignores the fact that moving forward on any of them requires resolving the ugly disagreements about Board control, strategic direction, and the type of new CEO/CFO/COO that should be selected.
Nor does Issac ever explain how a Board wracked by factional fighting and lawsuits could ever come to agreement about any of these proposals. Any Softbank/Pishevar type deal that gives Benchmark massive profits would likely trigger a strong reaction from later investors, who bought shares at much less favorable terms. It isn’t shocking that new sets of outsiders such as Dragoneer might suddenly emerge to see if there might be a way to profit from Uber’s turmoil and desperation but Issac’s story gives no indication whether Dragoneer is aligned with one of the Board factions or is merely a financial opportunist.
While there’s never been any problem with Issac’s pure factual reporting, and he broke a couple important stories as Uber’s problems mounted earlier this year, the underlying problem here (and in much of his past reporting) is the total disconnect between the events reported and the underlying economics of the company.
Issac tells NYT readers that all of these parties are interested in buying Uber shares because of its strong fundamentals. Uber “remains an attractive investment because it is the world’s biggest ride-hailing service and is growing fast.” While it may be buried late in the story, reporters at other outlets following Uber closely (Bloomberg, WSJ, Recode) duly note that it is extremely unprofitable. Issac’s reporting never mentions that Uber lost $2 billion in 2015 and $3 billion in 2016, has none of the scale/network economies that could rapidly cut losses, and has never produced any other plan that could credibly produce sustainable profits. As a result, Issac’s readers can’t see that Uber’s dreadful financial results, and concerns about eventually producing returns to investors may have contributed to Board turmoil, the desire to dump shares, and to outsiders poking around to see if shares can be picked up at bargain prices.
Issac’s story is also willfully misleading about critical Uber valuation issues where the story seems to cross the line between “weak/incomplete reporting” to “actively pushing a PR narrative on behalf of the company.” Uber has a “venture capital valuation” of $68 billion.
There’s a lot of PR and wishful thinking in any VC valuation, but any new funding event requires a revaluation, and any of these three proposals would trigger that, unless the new player (Softbank, Pishevar, Dragoneer) anted up cash per share consistent with the current $68 billion share price. Previous reporting about Softbank suggested they might buy Benchmark’s share at a 40% discount and Issac’s story suggests Dragoneer is interested in a “Dutch auction” that could lead to an even bigger discount. The story here would seem to be “new transactions being seriously reviewed by the Uber Board suggests all reports of company value for many years have been massively overstated”.
Instead Issac tells his readers that Uber’s $68 billion valuation won’t be threatened – even if new investors buy most shares at massive discounts, the valuation won’t change as long as they buy a few shares at the old price. Issac fails to explain how these accounting games would work, and fails to tell his readers why they should believe any future Uber claims that it might be still worth anything like $68 billion.
All of the various factions of Uber insiders have a huge interest in getting outsiders to ignore its terrible competitive economics and financial results and preserving the fiction that the company’s future prospects justify its staggering valuation. Those Uber insiders benefit from the perception that multiple parties are seriously interested in buying lots of Uber shares at high prices.
None of the facts presented in Issac’s story (or other sources) clearly support the claim that multiple outsiders are interested in putting sizable amounts of cash into stock purchases at anything other than huge discounts. All of the evidence at hand suggests Uber’s current valuation is wildly higher than what relevant investors actually think the company might be worth.
But for some reason, Issac wants his readers to believe the company’s “huge value/lots of investor interest/Board moving to a decision about the best proposal” narrative and ignore the ample evidence of a massive need for revaluation and the internal dysfunction blocking most paths forward.
And aside from that, Mrs. Lincoln, how was the play?