Back-Seat Driver

Uber Has a Big Opportunity from the SoftBank Stock Sale

The valuation hit is a small price to pay if the Japanese company can bring some sense to the business.
Photographer: Chris J Ratcliffe/Bloomberg

Uber Technologies Inc. is taking a psychological blow now that a roster of company stockholders agreed to sell their shares at a steep discount. But the stock sale is the right thing to do both for the Uber stockholders and potentially for Uber itself if it takes advantage of the opportunity. 

Let's not gloss over the bad news, though. Yes, some of Uber's earliest employees and first investors will make a bundle by selling shares to SoftBank and other firms that are buying the slug of Uber shares. The stock sale won't work out so well for the company's more recent investors.

For example, Saudi Arabia's government investment fund spent billions of dollars to buy Uber shares less than two years ago. The fresh stock purchase led by SoftBank values the company at a significant discount to that implied valuation of $69 billion, which means the Saudis are now holding a losing investment. It's a downer for them, and for Uber, to take a big step back in valuation. 

Step Back

A proposed purchase of Uber shares from existing stockholders may value the startup at a 30% discount to its last private valuation

Source: Bloomberg News and other media reports

Note: The proposed Uber stock transaction also includes a potential $1 billion investment at a valuation of $69 billion.

Even with the short-term pain, the SoftBank stock sale could have far-reaching and welcome ripple effects. If the stock sale is finalized, Uber's former CEO Travis Kalanick will have less sway over the company because his shares will no longer include extra voting power. It's clear Kalanick did much harm to Uber -- as well as much good -- and the company is better off with Kalanick taking a diminished role. It's also time to revisit whether Kalanick should stay on Uber's board at all. 

The bigger opportunity is whether Uber with SoftBank's help can cut back on the profit-draining wars with rivals around the world. SoftBank Group Corp. will soon be a backer of many of the top on-demand ride companies worldwide, including in China, Southeast Asia, Brazil and India. It amounts to an all-or-nothing gamble by SoftBank on the future of rides on demand.

It's clear, though, that it will be tough for Uber, India's Ola, 99 in Brazil and other competitors to be financial winners as long as they are slashing fares and offering driver incentives to win market share from one another. As a shared investor with a lot at stake, SoftBank may have the power to begin to ease those wars. If that sounds like collusion ... I suppose it is. And it won't be great for people who became used to cheap rides. 

Skid Marks

Uber is the world's most valuable private technology company, but its valuation is set to shrink when SoftBank closes its stock transaction

Sources: CB Insights and Bloomberg News reporting

Uber has already fully retreated from China and Russia, two markets in which the U.S. startup had stiff competition. But while a further global retrenchment might ease Uber's whopping losses, it also would raise questions about whether the company can fulfill its grandest ambitions. Uber's valuation until now had been premised on the belief that its on-demand ride business would be successful in many pockets of the globe.

Still, Uber is at a turning point. The company and the transportation revolution it helped spark are maturing. That means Uber needs to become a real business, not one that relies on investors continuing to fund its losses into perpetuity. It needs to take a fresh look at its business and decide where the company can win and where it needs to cut its losses. 

Everyone knows this, including Uber executives and investors. If SoftBank can help Uber make the hard choices, then the psychological hit from a discounted valuation is a worthwhile trade-off. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shira Ovide in New York at sovide@bloomberg.net

    To contact the editor responsible for this story:
    Daniel Niemi at dniemi1@bloomberg.net

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