Uber announced on Sunday that it had resolved the issues on its side necessary to proceed with a planned $10 billion investment by SoftBank. Keep in mind that it is still not certain that the deal will get done, although most observers seem to think the odds are now high. The deal closing is still contingent on enough current shareholders being willing to accept the price that SoftBank will offer for $9 billion, which would give SoftBank a reported 15% interest in the company. SoftBank will also buy $1 billion in new shares at a price that has been reported as the same price at its recent valuation, of $68-$69 billion.
The bizarre “new money valuation” has gone unchallenged in the press despite the fact that SoftBank has proposed buying the bulk of its shares at a 30+% discount to the last funding round. It’s particularly questionable given that, as a recent paper on unicorn valuations stressed, unicorns like Uber have valuations that are overstated by an average of 49%. The reason is that journalists accept uncritically venture capitalist blather about the value of the last financing. But pre-IPO venture-capital-funded companies don’t issue a single, fungible class of stock as public companies do. Each funding round has idiosyncratic voting rights and often economic rights too.
And there are reasons to doubt even the actual value of the SoftBank $1 billion of new money which is being presented as if it validates the last round of investment and thus will allow Uber to keep pretending it’s still worth than much….even with nine times as many shares being sold by insiders with superior knowledge at a vastly lower price.
While the terms for the $1 billion portion may have changed, some press reports indicated that the this portion would purchase a preferred stock. That gives it priority in bankruptcy. It could even be a cumulative preferred, so that payments accrue and have a specified priority if and when the business is profitable. If nothing else, “preferred” almost certainly means means this security has better economic rights than those received by investors in the last funding round. As a result, that means the valuation even on this $1 billion is at a discount to the last financing.
As someone who worked on Wall Street back when it was criminal only at the margin, it it bizarre to see a “down round” of funding occurring, with insiders planning to sell out on a significant basis, and the captured press treating this as business as usual. In my day, for an IPO, the very maximum insiders could cash out was 16%, pretty much the level SoftBank plans to buy, and then only if they were also raising a large amount of money for the current operation (meaning at least as much as the insider sale) and had a very good growth story to tell. Now one can say that this just means SoftBank is overeager or stupid. But insiders selling out on such a scale pre-IPO is not a good look, to put it mildly.
Finally, in his assessment of the significance of this announcement, Hubert Horan mentions Uber’s UK court loss in passing. I am remiss in not writing up this case in detail, but it is significant by virtue of London being Uber’s most (only?) profitable foreign market. This appellate court judgment would seem to destroy Uber’s business model in the UK permanently since this ruling, like the lower court one it affirmed, is very solid on the logic and recitation of facts, and it seems unlikely that this ruling would be overturned at the High Court, were it even willing to hear the case. Moreover, the appellate judge, Judge Eady, is apparently of the “a contract is a contract is a contract” school, yet threw out Uber’s argument, that all you had to do was look at the contract and see that the drivers could not possibly be employees (which among other things would entitle them to minimum wage once they had the app on within their authorized territory) because the contract said not (the drivers provided “transportation services”; Uber was a mere booking agent). From the opening section of the ruling:
In considering the ET’s [Employment Tribunal’s] findings, it was necessary to have regard to its Judgment as a whole. Doing so, it was apparent that they were neither inconsistent nor perverse. In particular, the ET had permissibly concluded there were obligations upon Uber drivers that they should accept trips offered by ULL and that they should not cancel trips once accepted (there being potential penalties for doing so). It was, further, no objection that the ET’s approach required the drivers not only to be in the relevant territory, with the app switched on, but also to be “able and willing to accept assignments”; that was consistent with Uber’s own description of a driver’s obligation when “on-duty”. These findings had informed the ET’s conclusions not just on worker status but also on working time and as to the approach to be taken to their rights to minimum wage. Inevitably the assessment it had carried out was fact- and context-specific. To the extent that drivers, in between accepting trips for ULL [Uber London Ltd], might hold themselves out as available to other PHV operators, the same analysis might not apply; hence the ET’s observation that it would be a matter of evidence in each case whether and for how long a driver remained ready and willing to accept trips for ULL.
If you skim the ruling, you can see the many ways Uber exercises control over the drivers, requires them to accept rides, and threatens to punish them if they seek to establish a relationship with a passenger by responding to a request to have their phone number or asking a rider for their number.
Clive flagged this part:
73. Having found that the terms on which Uber relied did not correspond with the reality of its relationship with the drivers, the ET considered itself free to disregard them; noting the unequal bargaining positions of the parties (in particular, many Uber drivers – a substantial proportion of whom did not speak English as their first language – would be unused to reading and interpreting dense legal documents couched in impenetrable prose), the ET saw this as:
“96. … an excellent illustration of the phenomenon of which Elias J (the presiding judge) warned in the Kalwak case of “armies of lawyers” contriving documents in their clients’ interests which simply misrepresent the true rights and obligations on both sides”
In any event, it is hard to see SoftBank not wanting a lower valuation in light of this loss…unless it had already assumed the appeal would fail.
Now to Hubert’s take:
Reports emerged Sunday afternoon of a “peace deal” among Uber board members that would allow a potential multi-billion dollar investment from Softbank to move a step closer to reality.
The broad outline of the proposed SoftBank investment haven’t changed since they were first announced (and discussed here at NC) back in July. Softbank is proposing to put $1 bn in new capital into Uber at a share price consistent with Uber’s claimed $68 billion venture capital valuation, and would buy a significant chunk (perhaps $9 bn) of existing shares at a much (25-30%) lower price, consistent with a $45-55bn valuation, that would give Softbank ownership of roughly 15% of the company.
Companies where outsiders want to buy $10bn worth of shares normally respond rapidly and enthusiastically, but this is Uber, so the process of getting to the point of saying the Board is now prepared to respond to Softbank’s interest took four months.
The central issue is how a SoftBank deal would affect the complicated dynamics of the ongoing battle between shareholders who were still supportive of, or openly hostile to Travis Kalanick. Each side held a bit of short-term leverage (Kalanick’s control of certain Board seats, Benchmark Capital’s lawsuit against Kalanick, various agreements to dilute the voting power of early investors) but everything boiled down to (not irrational) concerns that small and apparently unrelated changes in shareholdings could allow one of the factions to screw the other.
Sunday’s agreement merely established a short term truce—Benchmark agreed to put its lawsuit on hold pending a SoftBank deal, and Kalanick agreed to future limitations on his control of board seats. But none of the news stories on Sunday (or over the previous four months) shed any light on how a new SoftBank shareholding would affect this dynamic, or affect any of the strategic issues that the pro- and anti- Kalanick factions might be concerned with.
As the news stories make clear, even with this temporary truce, the SoftBank investment is not a done deal, although the probability of something happening is reasonably high. SoftBank has made it clear that if it doesn’t get the total shareholding it wants at a low enough price it will walk away. For most existing shareholders selling at the discounts SoftBank wants would lock in staggering profits, but it would also surrender voting rights that could be critical to future pro- and anti- Kalanick governance issues, and would signal that these investors recognized that the $68bn magnitude valuations they had been bragging about for years had always been unrealistic.
What the news stories fail to address is how SoftBank could ever earn returns on a multi-billion dollar investment along these lines, and how it might change Uber’s strategic priorities. Many observers in the US business media (and as far as can tell in the Japanese business media as well) treat Softbank as an obsessive (perhaps crazy) investor, willing to throw billions at companies who fit a tech/utopian/breakthrough narrative., and thus make no effort to explain Softbank’s interest in Uber in traditional ROI terms.
An alternative explanation, as discussed here at NC back in July, is that SoftBank is seeking to replace the “global domination” objective Uber once pursued. Softbank has major shareholdings in Uber’s competitors throughout Asia (Didi, Grab, Ola) and could hypothetically engineer an outcome where it has a major shareholding in the companies that emerge with a dominate share of ridesharing volumes in each major market, and gets each company to stop competing with the dominate player. Under this scenario, none of these companies have to be efficient or profitable, they merely have to be backed by such massive quantities of capital that they can drive more efficient companies out of business and establish a sustainable monopoly.
Sunday’s news stories totally ignored the longer term industry competitive issues, totally ignored Uber’s ongoing multi-billion-dollar losses and totally ignored whether any hypothetical Uber-SoftBank scenarios have a path to sustainable profitability. They even ignored the much bigger news from last week about Uber’s major judicial loss in the UK that dealt a major blow it its highly problematic business model. They even ignored, in a post Harvey Weinstein world, how a company that had been demonstrated to have a culture highly supportive of egregious sexual harassment could possibly justify fresh multi-billion dollar investments.