Did Uber Win in China?

In all of the discussion lately about Uber in China, one topic that is not getting a lot of airplay is the way in which the outcome for Uber is being positioned. One person for whom I have a great deal of respect believes that Uber did great, that they wound up with exactly what they wanted in the first place, and that overall the outcome – as junior partner to Didi Chuxing in a combined business – is a victory for Uber.

As I mentioned in an earlier post, to me that seems a bit like spin. First, it is highly unlikely that this is the outcome Uber sought all along. Had it sought a minority stake in Didi, it could have (as Apple did recently) simply written a check, swapped stock, and agreed to work together globally. And it could have been done more quickly, easily, and with less of a drain on company attention and coffers.

Second, all that their efforts won them is a weak role in Didi, just another seat at the table with a group of powerful investors to whom Uber is a very small potato. Had they gone in with an offer early, they may well have saved everyone money and saved Didi from the need to turn to outside investors. Uber may well have ended up with a less diluted position.

Third, they sit with no better odds of a payoff now than before. Didi is a rapidly-growing company with a need for a huge war chest in order to secure its market position. Payback to investors will be some time down the line, and others will decide when and if Uber will ever see a dividend. Even if it does, the question will remain as to whether that dividend was a fair compensation for the price and a fair return to investors on the risk.

Finally, with its new A-List of global investors, Didi may well prove to be a more formidable rival outside of China in the long term than it might have been otherwise, especially if Uber had shown up at the beginning offering a strategic tie-up. Now Didi has international ambitions, and with an 85% market share at home in a much bigger market, will be in a better position to face Uber in other markets.

So did Uber win? Events will tell us, but probably not for some time. And that’s about the most you can say. From a removed perspective today, Uber is salvaging the most it can from a shipwreck, and pretending that it intended to be on the rocks all along won’t do much for the company’s credibility with the Street.

 

ngh

I’m not sure that Wall Street’s opinion of Uber is relevant to this discussion since they are still private and have not given any indication of filing for an IPO in the near future. A better question is will waving the white flag of defeat in China hamper their ability to raise further funds as needed? I would argue no, given their global scale, brand recognition, and recent acquisitions/investments in new technology still make them sexy to private placement investors.

David Wolf

You are correct: Uber is still private. However, there can be little doubt that its investors aspire for public status as a key part of their exit strategy. Further, even if it plans to remain privately held, there will be an ongoing need in the foreseeable future to raise capital, likely beyond the current pool of investors.

To illustrate my point, Uber currently has posted on its careers site an open position for head of capital markets and special projects in its investor relations team. That sounds to me like a company that is very concerned with the thinking on the Street.

David Wolf

To your second point, about whether waving the white flag in China will hamper their ability to raise funds in the future, I’d say that depends on how Uber’s retreat is read on the Street. If it is seen as “oh, well, this is China, they’re not alone, so no harm done,” then you are correct. If, however, the failure in China is seen as further proof that Uber has grown beyond Travis Kalanick’s ability to lead it, that will be a problem for Uber on the Street.

Either way, anyone conducting due diligence on Uber prior to private investment or IPO will need to place a value on the company’s holdings in Didi. Mr. Kalanick will doubtless argue that those holdings should be denominated at face value, i.e., a proportional fraction of Didi’s overall valuation. A wise investor will value them at much less given Uber’s effective status as a limited partner.