Uber: “Battle to the Death” in Benchmark/Kalanick Power Struggle

August 12, 2017
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Perhaps someone will blink, but at this juncture, the power struggle over Uber, the most richly valued venture capital investment, has taken an even more stunning turn, which is a very high bar given how much melodrama the ride-sharing company has managed to generate this year. There is now open warfare within the board, which one faction making a less-than-credible offer to buy out the venture capital firm, Benchmark, that toppled founder and former CEO Travis Kalanick.

Recall that on Thursday, Benchmark took the unheard-of step of suing Kalanick for fraud. The claims look pretty dubious, but the real point was assumed to be to check Kalanick’s efforts to sabotage the CEO search underway and get himself reinstated. The tech community was shocked, since a reputable VC suing a high profile founder is seen to be so anti-entrepreneur as to be disastrous for the VC’s reputation. 1

Moreover, a wee complication of the Benchmark suit is that litigation that is guaranteed to intensify infighting at an already-dived board and take time away from the priority of righting a badly listing corporate ship. It is the sort of thing that will make CEO candidates with any common sense run in the other direction. Of course, Benchmark’s assumption may have been that anyone interested in running Uber had to be so self deluded that this cage match would be seen as mere noise.

And indeed, things went off the rails on Friday. Board members aligned with Kalanick want Benchmark off the board. That’s impossible unless they get Benchmark to give up, as in sell, its stake. And despite this group making an offer to buy Benchmark out, no one with an operating brain cell thinks they can round up the money.

Axios, which has been the go-to site on this row, published the full text of the aggrieved letter to Benchmark:

As a group of shareholders of Uber Technologies, Inc. (the “Company”) we were surprised and distressed to learn through the media of the lawsuit brought by your firm against the Company, and its founder and former Chief Executive Officer Travis Kalanick.

Naturally, we share your concerns about the problems that the Company has confronted in recent months, but we are greatly concerned about the tactics employed by Benchmark to address them, which strike us as ethically dubious and, critically, value-destructive rather than value enhancing.

Specifically, we do not feel it was either prudent or necessary from the standpoint of shareholder value, to hold the company hostage to a public relations disaster by demanding Mr. Kalanick’s resignation, along with other concessions, on a few hours’ notice and within weeks of a personal tragedy, under threat of public scandal. Even less so your escalation of this fratricidal course – notwithstanding Mr. Kalanick’s resignation – through your recent lawsuit, which we fear will cost the company public goodwill, interfere with fundraising and impede the critical search for a new, world-class Chief Executive Officer. Benchmark has used false allegations from lawsuits like Waymo as a matter of fact and this and many actions has crossed the fiduciary line.

Benchmark’s investment of $27M is worth $8.4 billion today and you are suing the founder, the company and the employees who worked so hard to create such unprecedented value. We ask you to please consider the lives of these employees and allow them to continue to grow this company in peace and make it thrive. These actions do the opposite.

Accordingly, we would request that Benchmark help the Company realize its full potential by allowing the necessary work to be done in the Board Room rather than the Courtroom. To this end, at this point, in light of your suit against the Company, we believe it would be best, and hereby request, that Benchmark remove its representative from the Company’s Board and move promptly to divest itself of enough shares in the Company so as to cease to have Board appointment rights. We have investors ready to acquire these shares as soon as we receive communication from Benchmark that they are willing to withdraw their lawsuit and sell a minimum of 75% of their holdings.

We are also asking for a symbolic Board of Directors vote on this matter at today’s Board meeting to show how the Board of Directors stands on this lawsuit brought against the company, its founder and the 15,000 employees of Uber who have all worked so hard in concert to create the fastest growing company in history.

Many other shareholders share our views and will be adding their names in the days ahead. Any shareholders who want to join this letter and petition may email one of our signatories of this letter so that we can submit a final list of shareholders who support this request. Emails can be addressed to Shervin Pishevar at UberShareholderAlliance@gmail.com.

This is pretty comical. “Symbolic Board of Directors vote”? Having other shareholders sign too? It’s a whinge, except for the offer to buy Benchmark out but that is bluster.

Hurbert Horan confirms our reaction via e-mail:

I thought it would be tough to top the absurdity of Benchmark’s “We were shocked! shocked! to discover sexual harassment was taking place” argument in their lawsuit. Or the fact they’d agreed to the initial expansion of the Board based on a Kalanick’s verbal agreement to their proposal on how those three additional Board seats would be handled, and only just discovered that Kalanick had never signed the agreement.

But yes, it was topped within 24 hours. The rest of the Board has openly attacked Benchmark for not being sufficiently appreciative of the “unprecedented value” Kalanick had created. The letter attacking Benchmark (written by Shervin Pishevar and Ron Burkle) did not explain the why the difference between firing Kalanick (which they had all agreed on) and firing Kalanick and then complaining about his efforts to retake control (a la Steve Jobs) justified this major escalation of hostilities.

What’s especially interesting is that the Pishevar/Burkle letter not only demanded that Benchmark resign from the Board, but offered to buy them out, and acknowledged that their stake was now worth $8.4 billion (from an initial investment of $27 million).

Technically they’ve offered to buy 75% of Benchmark’s position (which would eliminate their rights to a Board seat), but that’s still $6.3 billion. I am sure Benchmark would accept this offer in a heartbeat. They’ve been battling with Kalanick for years over his refusal to let early investors cash out any of their original positions, and the effort to fire Kalanick was because they were freaking out about never getting their money out. This is why they were trying to bring SoftBank in, and were willing (according to some press reports) to take a 40% haircut in order to get their money out. Of course, having already been burned by Kalanick’s verbal promises, I’m sure that Benchmark will be careful to ensure the cash has been deposited in their accounts before agreeing to anything.

As I mentioned yesterday, this is a battle for control of Uber. Based on the positions stated in the last two days there is no possibility of compromise, and thus we appear to be set up for a battle to the death.

The first complication is where Pishevar and Burkle et. al. will find the $6.3 billion (or whatever) to buy Benchmark out. It would be madness to put one dollar into Uber at this point; the English language does not have words to describe the mental state of anyone who might be thinking about putting $6.3 billion into Uber at this point (none of which would contribute anything to the company’s future operations).

The second complication is the arithmetic implied by the Pishevar/Burkle letter – Benchmark contributed only 0.2% of Uber’s capital ($27M/$13B) but has 13% of equity ($8.7B/$68B) probably more if you count voting shares. This suggests that later investors put staggeringly larger sums in, for much smaller equity shares, and are facing much greater risk than Gurley and Pishevar of never seeing returns on the money they’ve put in. So there may be even more intra-Board warfare that hasn’t reached the surface yet.

The fact that Benchmark sued Kalanick would strongly suggest that Benchmark had concluded that that SoftBank won’t invest at all, or only at price the other big shareholders would deem to be too low. 2

And one also has to imagine that the board tearing itself apart in public isn’t conducive to a SoftBank investment.

But the only conceivable source of any meaningful dough is SoftBank. The Kalanick allies may hope that Benchmark, given the super low price at which it got in, would take a much lower valuation than the reported 40% discount if it got out largely or entirely (even if Uber were to somehow work out, any meaningful liquidity event is a ways away). SoftBank might shed normal investor qualms about not putting any new money in if the valuation was low enough (recall that one of the core rules of M&A is every problem can be solved by price).

But then you have also to solve the not-trivial problem of how to structure a deal so that a seriously knocked down valuation could be reported as being way way higher (see this recent paper on the valuation of unicorns and how reported valuations for funding rounds are always overstated, often by very large amounts).

Needless to say, this is an awful lot of ifs. And that’s before you get to yet another complication, per a Wall Street Journal commentor:

Tiberius Cross
A complete mess…..add in that multiple rounds of investment in Uber have been debt disguised as equity and you have a devaluation nightmare scenario.

In other words, it now looks like what was going to be an attenuated and bumpy ride downhill has instead become completely different, as in open warfare with no one in sight who could might negotiate a truce. The only profitable play on Uber right now looks to be shorting it on a prediction market, should someone get around to create a current valuation proxy. But even that bet would now be on the late side.
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1 One factor that might make Benchmark’s legal strategy more rational than it appears is if they have strong suspicions of more serious misconduct by Kalanick. If they think they can firm up the evidence in discovery, they can amend the filing and add charges.

2 Or that SoftBank was never interested at all but was politely listening to Uber’s pitch. Benchmark et al., with their finely honed deal instincts, knew that full well but played the “SoftBank is looking to invest” story to the max because it was important to getting a new CEO.

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