Uber Shareholder Drops Lawsuit Against Kalanick, Clearing Way For Softbank Investment

Tuesday’s meeting of the Uber Inc. board – the first following Kalanick’s unilateral decision to appoint former Xerox Corp. Chairwoman and CEO Ursula Burns and former Merrill Lynch Chairman and CEO John Thain – appears to have been a productive one.

Reuters is reporting that the board voted to move ahead with two issues, a change in governance rules, and an investment by Japan’s Softbank Group, which it was reported last month has been in talks to invest as much as $10 billion in the cash-burning ride-share giant.

To anyone who hasn’t been following the ongoing boardroom struggle between former Uber CEO Travis Kalanick, who was ousted after an investor revolt in June, and Benchmark Capital, these might seem like routine housekeeping matters.  

But in reality, they’re signs that two warring factions have agreed to put aside their differences - for now, at least - for the good of the company (not to mention their bank accounts). Benchmark has been trying to change the board"s rules to try and limit Kalanick"s power with the ultimate goal of ensuring he never returns as CEO. But today, Kalanick assented to the governance changes, albiet in a watered-down form. Meanwhile, Kalanick also gave his blessing to the Softbank deal, letting go of his reservations despite reports that Softbank had struck an agreement with Benchmark to do everything in its power to oppose Kalanick’s return as CEO as a condition of its investment, which should result in the Japanese company gaining control over at least one board seat.

Of course, by allowing both of these proposals to proceed, Kalanick is making some major concessions. What is he getting in return?

A lot, it turns out. In a separate report, Reuters said that Benchmark has agreed to drop its lawsuit alleging that Kalanick defrauded Uber’s investors. The lawsuit is related to how Kalanick managed to assert control over the two board seats to which he recently appointed Thain and Burns.

That’s a major win for Kalanick. And that"s not all. As Axios later clarified, the governance changes approved by the board will limit his power, but wouldn"t preclude the possibility of him ever returning to the helm the company.

But perhaps the most important outcome of this grand bargain is that it clears the path toward an IPO. As Axios noted, it’s the type of deal that leaves everybody feeling like a winner.

Here’s more on the governance proposal, courtesy of Axios:

What passed?

• Super-voting rights are gone, which means shareholders are all "one share, one vote." Note that only early employees actually have shares, whereas over 90% have restricted stock units (which don"t have any voting rights).


• The board will be expanded significantly, which means Kalanick would need support of a majority of independent directors to ever regain the CEO spot or be named chairman.


• If Uber doesn"t go public by two years from now, share transfer restrictions are lifted.

What didn"t pass:

• Eliminating any path to the CEO or chairman seat for Kalanick, although it"s now a much higher hurdle.

To be sure, just because Kalanick and Benchmark have put aside their differences (for now, at least) in the interest of guiding the company toward its inevitable public offering (an eventuality that holds substantial rewards for all parties involved) – doesn’t mean their plan will succeed. As we learned back in April, Uber is burning through an embarrassing amount of cash. And while an offering appears likely within the next 18 months, it could still be derailed by souring public sentiment, or the company’s disastrous finances.

In a statement addressing the meeting, Kalanick praised the board’s decisions, insisting that they were made in the best interest of the company.

travis kalanick statement pic.twitter.com/uXzLDYX0uJ

— ?_? (@MikeIsaac) October 3, 2017

And Uber"s statement, courtesy of Axios:

"Today, after welcoming its new directors Ursula Burns and John Thain, the Board voted unanimously to move forward with the proposed investment by SoftBank and with governance changes that would strengthen its independence and ensure equality among all shareholders.

SoftBank"s interest is an incredible vote of confidence in Uber"s business and long-term potential, and we look forward to finalizing the investment in the coming weeks."

* * *

One person familiar with the matter said that a group of investors led by SoftBank will be allowed to buy $1 billion to $1.25 billion of new Uber shares at a company valuation of $69 billion and 14% and 17% of the company"s stock from current investors at a discounted valuation.

Earlier media reports suggested Softbank would pay $1 billion at the $69 billion valuation, and $9 billion at a valuation closer to $50 billion.

However, while the prospects for the deal look promising, there’s still time for it to fall apart. If it does, how long before Kalanick’s relationship with Benchmark once again devolves into acrimony?

New Uber CEO's "Welcome Aboard" Gift: Another Federal Investigation

Little more than a day after Dara Khosrowshahi decided to accept the Uber board’s offer to become the embattled ride-share company’s new CEO – after the company’s top two candidates dropped out of the running - he received a welcome-aboard present that was just so…Uber.

Namely, a report in the Wall Street Journal claiming that the DOJ is in the “preliminary stages” of an investigation into whether Uber executives violated the Foreign Corrupt Practices Act by allegedly paying bribes to government officials. Based on what it finds, the Justice Department may or may not decide to open a full-fledged FCPA investigation into Uber.

According to WSJ, it’s unclear whether US authorities are focused on one country or examining activities in multiple countries where the company operates. But if we had to guess, we’d bet that any alleged wrongdoing probably happened in China, where bribery and corruption proliferate. Uber’s foray into the world’s No. 2 economy famously ended in defeat one year ago when it sold its China division to local rival Didi Chuxing in exchange for a stake in the combined company.

In his first public remarks since accepting the job, Khosowshahi described the chance to run the ride-hailing startup as a “once in a lifetime opportunity.” But like they say: be careful what you wish for. Because, as Khosrowshahi absorbs his first blows in the unceasing media assault on Uber, he’s probably thinking to himself that he didn’t realize just how good he had it at Expedia – where his 12-year tenure was unblemished by scandal.

To add another layer of irony: He hasn’t even left yet.

Here’s WSJ:

“Even before he takes the job as Uber Technologies Inc.’s new chief executive, fresh challenges confront Expedia Inc. CEO Dara Khosrowshahi, with news of a federal bribery probe into Uber and public disagreement over how the board’s decision to hire him unfolded.

News of the probe, reported by The Wall Street Journal on Tuesday, came after Mr. Khosrowshahi made his first public comments since being voted in as CEO by Uber directors on Sunday. He would succeed Travis Kalanick, the Uber co-founder who was pressured to resign in June following a series of scandals and amid infighting on the board. Mr. Khosrowshahi was selected over two more seasoned executives in Jeff Immelt, chairman of General Electric Co. and Meg Whitman, chief of Hewlett Packard Enterprise Co.”

Khosrowshahi played up his relationship with former CEO and Uber co-founder Travis Kalanick, telling WSJ that “there’s mutual respect” between the two tech titans. We hope, for Khosrowshahi’s sake, that he’s being polite, not naïve. Because anybody who’s been following the Uber saga probably suspects that Kalanick would drive a knife into his successor’s back in a heartbeat if it would hasten his return as CEO.

“Speaking with the Journal at Expedia’s headquarters Tuesday morning, Mr. Khosrowshahi said his contract with Uber still needs to be finalized, but indicated he would take the job. He said Mr. Kalanick would remain involved with Uber and described as “budding” his relationship with the ex-CEO. “I think there’s mutual respect there,” he said.

‘He’s the founder of the company, he’s an incredible visionary, so he will be involved with the company going forward,’ Mr. Khosrowshahi said. ‘Exactly how, exactly when, is something that’s really up to Travis and the board.’"

When asked about the controversy surrounding his selection as CEO – he was chosen after two more-experienced candidates, HP Enterprise’s Meg Whitman and recently retired former GE CEO Jeff Immelt, publicly withdrew their candidacies - Khosrowshahi defended his selection.

“Mr. Khosrowshahi declined to discuss the controversy around the CEO search, saying ‘there has been too much obsession with the process.’

Despite the drama at Uber, Mr. Khosrowshahi said the offer to run it was too good to pass up. ‘It took a couple of pokes to get me interested,’ he said, ‘but the opportunity at Uber is once in a lifetime.’”

He added that his “first priority” at Uber would be focusing on the company’s employees, who’ve been without a leader for nine weeks.

“That part of the business maybe hasn’t been focused on as much,” he said, “and that comes first for me.”

But as much as Khosrowshahi would like to shoot the breeze by the water cooler, we imagine he’ll soon be busy putting out fires as the federal government is in the middle of multiple investigations into the company’s alleged misdeeds.

As WSJ notes, Uber faces growing pressure from U.S. authorities. In addition to the preliminary bribery probe, the Justice Department is separately pursuing a criminal investigation into “Greyball,” a software tool employees used to evade law-enforcement officials. And earlier this month, Uber settled Federal Trade Commission charges that it didn’t offer sufficient privacy protections for its users. The company didn’t admit nor deny the allegations as part of the settlement.

Good luck with the new job, Dara. You’re going to need it.
 

Meet DiDi: China's Answer To Uber

For better or worse, just about everybody has heard of Uber. Over the last few years, the ride-haling company has grown to dominate the market in the U.S. and beyond, currently operating in over 400 cities around the globe - despite significant resistance and outright bans in some places. DiDi, on the other hand, is unlikely to be on your radar. Having bought out Uber"s operations in China last year, the company currently enjoys 95 percent market share in its home country.

As Statista"s Martin Armstrong notes, the infographic below shows if it were to come to a game of Top Trumps, DiDi wouldn"t be such a bad card to hold.

You will find more statistics at Statista

Founded in 2012, and working on the basis of almost $16 billion worth of funding, it has amassed 38.5 million monthly users (compared to Uber"s 40), is active in around 400 cities and is valued at $50 billion.

As illustrated in the Statista report "The Chinese Passenger Car Market Outlook", revenue from ride sharing in China is projected to see a CAGR of 32 percent from 2016 to 2021. Likewise, the number of users is expected to grow by 15 percent.

As Uber begins to falter and face stiffer competition from alternatives like Lyft, it might not be long before DiDi is the biggest ride hailing company in the world.

Uber's Massive Cash Burn Problem: 2016 Loss Set To Hit A Record $3 Billion

With a valuation of $68 billion as of December 2016 - more than GM and Twitter combined - Uber is, according to the WSJ"s Unicorn Database, the most valuable private company in the world.

And yet, despite its eye-popping valuation courtesy of a growth curve which until recently was truly unprecedented (at least until the company"s sudden withdrawals from China), Uber has a big problem: an unprecedented cash burn, which if not getting worse with every passing quarter, is certainly not getting better.

Back in August, Bloomberg reported that Uber"s first half loss was roughly $1.4 billion ($580MM in Q1 and well over $800MM in Q2) on just over $2 billion in revenue ($960MM in Q1 and $1.1BN in Q2): it was burning approximately $1.6 dollars in costs and overhead (mostly in the form of an ongoing attempt to price the competition out of business by subsidizing drivers using VC cash).

This follows a loss of $2 billion in 2015, and had, as of Q2, lost at least $4 billion in the history of the company. Of this, however, Uber reportedly lost at least $2 billion in China as a result of a failed attempt to penetrate the local market which it abandoned later in the summer, which while sapping growth potential in China, also supposedly stem losses associated with the Chinese market.

Furthermore, the H1 loss came at a time when its fortunes in the US were said to be changing, and the company vowed it was turning a profit in Q1, only to revert back to its money losing ways in Q2 and onward.

As Bloomberg said at the time, "It"s hard to find much of a precedent for Uber"s losses. Webvan and Kozmo.com—two now-defunct phantoms of the original dot-com boom—lost just over $1 billion combined in their short lifetimes. Amazon.com Inc. is famous for losing money while increasing its market value, but its biggest loss ever totaled $1.4 billion in 2000. Uber exceeded that number in 2015 and is on pace to do it again this year."

Fast forward three months, when overnight Bloomberg reported that Uber"s cash burn problems continued, and in the third quarter, Uber lost another $800 million, bringing its total loss for the first nine months of the year to "significantly more" than $2.2 billion. The good (and bad) news is that even as its cash burn grew, so did Uber"s revenue which rose even leaving the world"s most populous country, and is said to have generated about $3.76 billion in net revenue in the first nine months of 2016, or about $1.7 billion in Q3 revenue and, according to Bloomberg, is on track to exceed $5.5 billion this year. The problem - if only from a cash burn basis - is that when 2016 closes in ten days, Uber is also expected to have burned a record $3 billion.

Another problem, one which comes as less of a surprise, is that growth in Uber"s bookings - the total combined value of the fares that riders pay - is slowing down: these came in at $5.4 billion in the third quarter, an increase from $5 billion in the second quarter and $3.8 billion in the first. The slowdown in Uber"s bookings growth can at least partially be explained by the company"s decision to leave China. Uber said on Aug. 1 that it came to an agreement with Didi Chuxing to exit China in exchange for 17.5 percent of the Chinese company. As part of the deal, Didi invested $1 billion in Uber. Uber"s third-quarter financials don"t include the business in China, which were part of the previous quarterly results.

But the biggest problem is that despite the growth in revenues, Uber"s losses continue to gross in a proportional manner, suggesting that the company has little if any control over its bottom line: as noted above, in Q1 the loss was about $580 million and by Q2 it significantly exceeded $800 million, including China. That number is likely far higher.

Even in the U.S., Uber"s home market, the company continues to lose money. After turning a slight profit in the in the first quarter of this year, Uber lost $100 million in the U.S. in the second quarter. The loss increased in the third quarter, the person said. Lyft, Uber"s largest U.S. competitor, has promised investors that it will keep its losses below $150 million a quarter.

What does all of the above mean? During Uber"s Q2 presentation with investors, the company"s head of finance, Gautam Gupta said that subsidies for Uber"s drivers are responsible for the majority of the company"s losses globally. Which means that Uber continues to cut prices in an aggressive attempt to gain market share. While for now this plan has worked, and Uber has become a dominant player in most venues in which it operates (except, perhaps, the most important one of all China), this strategy only works as long as Uber has has to, literally, burn to capture market share (something which in the end backfired dramatically on Saudi Arabia in a similar experiment over the past two years), and as long as its investors are willing to keep writing equity checks to the company at ever higher valuations - a down round for Uber would be the beginning of the end.

For now, however, the company"s main competition - established taxi and transportation companies - are proving resilient, and despite the aggressive cost pressures from Uber, few have been bankrupted, and while the price of a Yellow Cab medallion has plunged from $1.3 million in 2014 to just $250,000 recently, New York City is still not only dominated by taxis, Uber still has a long way to go before it can get even close to catching up to its competition in terms of volume.

Meanwhile, Uber"s success will go on only as long as the company has blow billions in hopes it puts its competitors in bankruptcy before its cash runs out. Alas, a few more years like 2015, in which the company burned a whopping $3 billion despite a rising top-line, and Uber"s prospects are suddenly starting to look rather shaky. Meanwhile, the winner in this massive "deflationary" battle to the bottom is the consumer, for whom transportation prices have rarely been lower. So dear Venture Capitalists, please continue to fund Uber and subsidize deflation for consumers in at least this part of the economy: it"s clear that between the Fed and Trumpflation, there aren"t many such deflationary hiding spots left.