Uber Board Members Kiss and Make Up (for Now), but Long-Term Problems Remain

October 5, 2017

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Uber founder and ousted CEO Travis Kalanick end-ran other major Uber shareholders late last week by exercising his right to appoint two board members to fill vacant seats. That took place mere days prior to a scheduled board meeting that was to vote in major governance changes seen as necessary to cinch a hoped-for large share purchase by SoftBank. The trigger for Kalanick’s move was apparently terms that would reduce his rights, including barring him from ever being CEO again.

As was widely reported, the warring factions in the board have come to a truce. Per the Financial Times:

Everyone felt they got part of what they wanted with the new deal, which was approved late on Tuesday. However, the agreement all hinges on the success of the SoftBank-led investment, and the governance changes will only take effect upon the close of that deal.

Over the next two weeks, a group of investors including the SoftBank Vision Fund, Dragoneer and General Atlantic, will be working to find the right price for a massive tender offer, through which they will buy billions of dollars worth of Uber’s shares from existing shareholders at a discounted valuation.

All shareholders will be allowed to sell into the tender offer, including early investors, as well as early employees who may have hundreds of millions of dollars in Uber shares that they have not been able to liquidate. Some employees took to Twitter late on Tuesday to express their relief at finally being able to sell their shares.

But the challenge will be to find a price that attracts enough sellers, and is also palatable to the buyers. The SoftBank consortium says it must buy at least 14 per cent of Uber’s shares for the deal to go through, and a price that implies a $50bn valuation has been under discussion.

The paperwork to kick off the process was set to be signed on Wednesday, with the tender offer expected to be launched two weeks later. About three-quarters of the funds will come from SoftBank, and about one-quarter from the Dragoneer consortium, said people close to the deal.

The investors will also buy $1bn to $1.25bn of new Uber shares at a higher valuation of about $68bn for the company, in a face-saving move that will allow it to maintain the same eye-popping valuation at which it raised money last year.

Mind you, all this does is solve Uber’s most pressing issue, which was a power struggle in the board that was so serious that it threatened to tear the company apart. Uber still has its overarching problem of a lack of a path to profit at anything remotely approaching its current scale, let alone a reason to believe it has any hope of recovering years of massive subsidies to riders. Uber is a rare case of venture capitalists handing out money to large swathes of the great unwashed public.

Hubert Horan gave his assessment: “The news does change the near-term outlook for Uber, although not the long-term outlook.” Specifically:

1. The unresolvable Board level conflicts had the potential to block any and all near-term company decisions. Those seem to have been papered over in ways that give everyone breathing room for a while. Until yesterday it would have been impossible to make any Board or executive appointments or for the Board to even talk about a possible SoftBank investment without interim steps indicating a clear victory of Kalanick over Benchmark or vice versa. By approving six more Board seats, you’ve kicked that can a bit further down the road.

2. The next critical issue is whether SoftBank actually makes an offer along the lines discussed in the press, and whether the Board can reach agreement on it.

Several stories this week have emphasized that even with the governance changes, this isn’t a done deal. It would obviously be a huge PR win for Uber; the problem is the underlying conflict between early and later investors who paid wildly different amounts for their shares.

Yesterday’s changes eliminated disproportionate votes-per-share, but not the disparity between the original cost per share. I’m guessing that the “discounts” SoftBank would offer existing shareholders would suggest a valuation less that later round investors paid. Benchmark would still make a fortune if it sold at this discount, but it might force Fidelity or the Saudis to take big write-downs.

Kalanick had fought the original SoftBank deal that Benchmark initiated arguing that early shareholders should not be allowed to cash out on hugely profitable terms unless all other shareholders had the same opportunity. This was undoubtedly motivated by his hatred of Benchmark, but it is a valid point. I presume yesterday’s deal includes some arrangement that Benchmark and Kalanick could live with, but the press has ignored this issue, and so its unclear whether these later investors end up getting screwed.

Benchmark has said they would drop their lawsuit over Kalanick’s right to control board seats if a SoftBank deal happens; as yet no indication of whether Pishevar will drop his separate lawsuit about the reduction in their voting rights.

As discussed previously, returns to SoftBank would require some combination of (a) screaming discounts (b) a deal that could directly lead to exercising effective control of the Board before long, and (c) deals that allow SoftBank to totally eliminate Uber as a competitor in major Asian markets.

3. The other short term critical issue is the Waymo lawsuit, where Waymo finally got access to a major internal Uber study of the Otto acquisition, and won a delay in the case so they could amend their complaint based on that information.

Preliminary second/third had reports suggests that the new evidence adds lots of damning but circumstantial evidence supporting the claim that Uber and Kalanick actively conspired to “steal” the Otto team away from Waymo, but there are still no reports that evidence has emerged showing that Uber directly incorporated any Google IP into its driverless car program. If Waymo can’t produce that evidence, the legal risks to Uber become much smaller.

4. If Softbank happens and Waymo can’t produce the smoking gun, the press narrative will emerge that Uber has solved all its serious problems and is back on the path to glory. They won’t be – glory requires at an absolute minimum an IPO within the next 18 months at a valuation north of $50 billion. The numbers don’t add up today, and they won’t add up in 18 months, but it buys Uber an enormous amount of breathing room.

In a new story today, the Financial Times describes how Uber has had a hard time retaining drivers and is under pressure from competition with Lyft to improve its relations with them, which above all means improving their economic deal. Uber cut fares and thus payouts to drivers in early 2016. From Daily Beast:

A crowd of 600 drivers gathered outside the Uber office in Long Island City, Queens, to protest a 15 percent reduction in fares last month, which also means 15 percent lower wages. That pay cut is on top of Uber’s 20 percent slashing of fares in 2014. All things being equal, drivers who began less than two years ago have seen their pay tumble a whopping 35 percent….

Uber’s own statistics even back up the claim that drivers are getting screwed….

Uber also pointed out that any decrease in the overall fee paid by riders will affect their bottom line, too; the lower the total fare, the lower their commission, which is usually 20 percent to 25 percent.

Later stories revealed other ways in which drivers are cheated. For instance, Uber’s charges to riders are based on routing that is more costly than the one it tells drivers to take, which is also the one it uses to pay them.

The Financial Times article says that driver turnover is 50% a year. That is much lower than the figures reported by Naked Capitalism readers who have been Uber drivers. One said that only 4% of Uber drivers stick with it for more than a year. Of course, Uber and the drivers who’ve given us intel likely differ on how much driving is required to be considered to be a current Uber driver.

Needless to say, better treatment of Uber’s drivers means higher costs, which conflicts with the company’s pipe dream of a 2019 IPO.

From the Financial Times:

In the airport waiting lot in San Francisco, there’s one topic that always sets Uber drivers’ tongues wagging: where are the best spots to spend the night sleeping in the car.

There’s a McDonald’s just down the street that has a spacious parking lot, and drivers say they can stay there overnight, unbothered. For those doing bar runs, there’s a Safeway in the Castro district with room to park, although security guards there recently started cracking down on drivers sleeping in their vehicles. The parking lot of Planet Fitness, a gym, is also a popular spot, because drivers can easily take a shower in the morning….

But during Uber’s years of breakneck growth, the drivers were left behind. Lawsuit piled upon lawsuit, alleging that drivers were misclassified, or that their pay was not calculated correctly. Meanwhile lots of drivers voted with their feet: nearly half of Uber drivers in the US quit in less than a year, according to company statistics collected in 2013-2015. More and more have started driving for rival Lyft, which has been gaining market were sharing in the US, partly thanks to its pro-driver reputation…

Mr [Ronnie] Fernandez, who is looking for another job, says low pay is the drivers’ biggest problem. “If you compare all your costs, the gas you buy, the maintenance, the oil changes, you are not making money,” he says. Because Uber drivers are not employees, they are not entitled to San Francisco’s minimum wage of $14 an hour — and most say that, after costs, they are making less than that. Harry Campbell, who drives for Uber and Lyft and runs a consulting service, The Rideshare Guy, says: “The average driver doesn’t have a great sense of what their costs are.”

We’ve been saying for some time that Uber exploits drivers’ lack of understanding of their own economics, particularly the cost of wear and tear on their car. One Uber driver went through the math in comments and said the effective pay was below minimum wage unless your car was at least six years old, something Uber discourages.

How long Uber can keep this going is an open question. But even with a SoftBank investment, it is going to run out of road in the not-too-distant future.

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