Warren Buffett should buy Uber
If all goes according to plan, Uber should raise more than $5 billion in "venture capital" funding this year. It's a record haul that reflects the ride-sharing company's antipathy toward going public, despite billions of dollars in revenue, an exponential growth rate and a bull market that refuses to bear down.
And it's hard to blame Uber for staying private. Google didn't want to go public when it did. Neither did Facebook. But both had their hands forced by the 500-shareholder rule, which was subsequently eviscerated by the 2012 JOBS Act. Uber, on the other hand, has virtually no reason to make a move that inevitably leads to short-term earnings pressures and endless meetings with Greenwich hedge fund managers who think they know more about your business than you do.
Moreover, there is a good case to be made that Uber wouldn't be a good public company. Its CEO is combative even by Silicon Valley standards, and is almost certain to rub some Wall Street analysts the wrong way. Plus, Uber's endemic regulatory (or worse) controversies could play havoc with its stock price. Only traders with the strongest stomachs need apply.
Only trouble is that Uber must eventually provide liquidity for its shareholders (both outside investors and vested employees). These folks love a good rocket-ship ride as much as anyone, but eventually want their moon rocks. That's probably why the San Francisco-based company has begun tacitly planning for an IPO, as evidenced by the way in which it structured its ongoing private placement of convertible notes with wealthy Goldman Sachs clients.
But there is another way. Uber could remain private indefinitely by selling a control stake to Warren Buffett.
To be sure, Buffett could afford it. Berkshire Hathaway has a current market cap of $370 billion, including nearly $60 billion in cash. Uber currently is valued at only $40 billion, and isn't believed to have any debt on its books. Buffett could pay a slight premium, use some leverage and walk away with a 51% stake for much less cash than he currently has tied up in Wells Fargo.
There also is a compelling case to be made that $40 billion is a "value" price, no matter how wide our collective eyes bulged when we first read it. Remember, plenty of other experienced investors are buying in at this valuation expecting asset-light Uber to be worth at least $100 billion at IPO -- and many pundits called Fidelity nuts to invest at a $17 billion pre-money just six months ago (similar accusations were hurled at TPG and Google Ventures for giving it a $2 billion+ mark in the summer of 2013). Plus, Buffett could always insist on some special warrants that allow him to increase Berkshire's position as Uber matures and overcomes various regulatory hurdles.
More importantly, I think that Uber is a decent fit within Buffett's investment strategy. Here are four reasons why:
- It's a business Buffett could understand. For all of its tech trappings, Uber is essentially a transportation company that eventually wants to expand into a localized, on-demand logistics company. In fact, a company like Burger King is probably more data-intensive. Plus, just in case the tech thing still trips you up, remember that Buffett is the largest outside shareholder in IBM (IBM), with a 7.12% stake.
- Cash-flow rich: Uber is not some sort of SaaS business whose income statement is full of asterisks about future bookings. It's a wildly-profitable company that generates revenue with each and ever ride.
- Moat: To be sure, Uber is in a highly-competitive market. But it is by far the best capitalized of any competitor, has first-mover advantage in most of its markets and has begun to sign all sorts of "preferred use" corporate partnerships. Plus, if you believe the long-term plan, it is the only on-demand ride company out there that currently has a large enough footprint (in terms of both geography and data) to pull off local delivery on a mass scale.
- Management rationality: This is a tricky one, given Kalanick's antagonistic stance and its consequences in terms of both regulation and PR. Ultimately, however, it seems that Kalanick has made a conscious choice that the only way for a company like Uber to succeed is by being brash, even if that means sometimes crossing the line of decency. While it has generated all sorts of unpleasant headlines, the business itself hasn't seemed to suffer, and Buffett can easily shake off some media darts (see Burger King to Canada or the horribleness at Heinz). Coldly-calculating seems to be fine in Omaha, so long as the math checks out.
The one area where I could see Buffett having a real problem, however, is transparency. All sorts of existing Uber investors privately gripe about their lack of visibility into company financials and strategy, and word is that Uber wasn't even too forthcoming when pitching its convertible note deal to Wall Street banks (Goldman wasn't the only one approached).
But no current shareholder has company control, which can allow them to be easily excluded from the inner circle. Highly unlikely that happens with Buffett, both because of his legal rights and his grandfatherly gravitas. Moreover, one possible reason for Uber's reticence to share information is concern over leaks -- something which is much less likely when dealing with a single outside shareholder. Plus, any debt could be structured as Rule 144a for life, thus keeping underlying information private.
Remember, Uber would have all sorts of incentive to open the kimono to Buffett, because he'd be the one "saving" them from having to go public. Yes there are other theoretical buyers -- Amazon (AMZN) and existing Uber shareholder Google (GOOG) come to kind, given their local delivery aspirations -- but neither one of them is likely to give Kalanick much rope.
Today's successful startups almost never remain private and operationally independent. But Uber has been the exception to so many other rules, why not one more? Make the call Warren. Even if it sounds ridiculous at first blush.
THE BIG DEAL
• LendingClub Corp., a San Francisco-based peer-to-peer lending marketplace, raised $866 million in its IPO. It priced 57.7 million shares at $15 per share (above range), for an initial market cap of approximately $5.4 billion. It will trade on the NYSE under ticker symbol LC, with Morgan Stanley and Goldman Sachs are serving as co-lead underwriters.
LendingClub reports a $16 million net loss on $87 million in revenue for the first half of 2014, compared to $1.7 million in net income on $37 million in revenue for the year-earlier period. It has raised nearly $400 million in VC funding from such firms as Norwest Venture Partners (16.5% pre-IPO stake), Canaan Partners (15.9%), Foundation Capital (12.8%), and Morgenthaler Venture Partners (9.2%).
I spoke this morning with early LendingClub investor and board member Rebecca Lynn (of Morgenthaler/Canvas Ventures), who said the following about her original investment thesis: “It was Q1 2009 and banks were completely frozen. Even credit-worthy prime buyers couldn’t get loans. We felt that the banks would still be asleep for a few years, so LendingClub would have a great window to get off the ground… And that proved to be right.” www.lendingclub.com
VENTURE CAPITAL DEALS
• Huddle Inc., an enterprise cloud collaboration company with offices in London and San Francisco, has raised $51 million in Series D funding. TechCrunch reports that the round values Huddle at between $250 million and $300 million. Zouk Capital led the round, and was joined by Hermes GPE Environmental Innovation Fund and return backers Matrix Partners, Jafco Ventures, DAG Ventures and Eden Ventures. Read more.
• Infer Inc., a Palo Alto, Calif.-based provider of predictive applications designed to help companies win customers, has raised $25 million in Series B funding led by existing investor Redpoint Ventures. www.infer.com
• Kamcord Inc., a mobile gaming broadcast network (i.e., Twitch for mobile), has raised $15 million in new VC funding at around a $100 million valuation, according to the WSJ. Listed Japanese gaming company GungHo Online Entertainment Inc. led the round, and was joined by Wargaming.Net LLP and return backers Tencent Holdings and TransLink Capital. Read more.
• OutboundEngine, an Austin, Texas-based social marketing platform, has raised $11 million in Series B funding. Silverton Partners led the round, and was joined by Noro-Moseley Partners, Harmony Partners, Altos Ventures and Capital Factory. www.outboundengine.com
• UNIFi Software, a San Francisco-based data integration solution for the enterprise, has raised $4.45 million in seed funding. Canaan Partners led the round, and was joined by Omaha Capital. www.unifiyourdata.com
• Exco InTouch, a UK-based provider of electronic patient reported outcomes and patient engagement software, has raised £3.2 million in VC funding led by Albion Ventures. www.excointouch.com
• UpCounsel, an online marketplace that helps entrepreneurs and small businesses find full-service law firms, has raised $2.4 million in new seed funding co-led by Metamorphic Ventures and Crosslink Capital. www.upcounsel.com
PRIVATE EQUITY DEALS
• Emcore Corp. (Nasdaw: EMKR) has sold its space photovoltaics business to SolAero Technologies Corp., a portfolio company of Veritas Capital. The deal was valued at $150 million in cash. www.emcore.com
• Pretium Packaging, a portfolio company of Genstar Capital, has acquired Tri-Delta Plastics, a Hillsborough, N.J.-based maker of rigid packaging products to the food, healthcare and household chemicals end markets. No financial terms were disclosed. www.pretiumpkg.com
• There is no IPO news this morning, besides our lead item about LendingClub.
• Arle Capital Partners has hired Morgan Stanley to find a buyer for Spanish leisure-park operator Parques Reunidos Servicios Centrales SA, according to Bloomberg. The deal could be valued at upwards of €2 billion, with likely suitors including Advent International, Cinven and Permira Advisors. Read more.
• Datto Inc., a Norwalk, Conn.-based provider of backup and disaster recovery services, has acquired Backupify, a Cambridge, Mass.-based provider of online backup services for cloud application data. No financial terms were disclosed. Datto is backed by General Catalyst Partners, while Backupify had raised nearly $20 million from General Catalyst, Symantec Corp., Avalon Ventures and Lowercase Capital. www.backupify.com
• Frazier Healthcare and New Enterprise Associates have hired Moelis & Co. to find a buyer for DSI Renal, a Nashville, Tenn.-based provider of dialysis care, according to the WSJ. The deal could be worth around $1 billion, including debt. Read more.
• H.I.G. Capital has hired Piper Jaffray to find a buyer for Winnipeg-based packaged ice company Arctic Glacier Holdings Inc. for around $600 million, according to the WSJ. H.I.G. bought the company in 2012 for $434.5 million. Read more.
• MBK Partners and Macquarie Group have hired Goldman Sachs to review options for their control stake in South Korean cable television operator C&M Co., according to Bloomberg. They may seek a buyer at a $3 billion valuation. Read more.
• Hilton Worldwide (NYSE: HLT) is in talks to buy four properties from The Blackstone Group and other owners in order to defer tax payments from its $1.95 billion sale of the Waldorf Astoria, according to Bloomberg. Blackstone currently holds around a 55% stake in Hilton. Read more.
• Politico and Axel Springer have partnered to acquire Brussels-based European Voice, which will be rebranded as Politico’s European affiliate. No financial terms were disclosed. www.politico.com
• SolutionsIQ Corp., a Redmond, Wash.–based provider of for enterprise Agile transformation services, has acquired BigVisible Solutions, a Boston-based Agile consultancy. No financial terms were disclosed. www.solutionsiq.com
• Starboard Capital has accumulated around a 6% stake in office supplies retailer Staples Inc. (Nasdaq: SPLS), according to the NYT. Starboard also has increased its stake in Staples rival Office Depot (Nasdaq: ODP) from 8.6% to 10%. Read more.
FIRMS & FUNDS
• DBL Investors, a San Francisco-based VC firm with astrong ESG component, is raising upwards of $300 million for its third fund, according to a regulatory filing. It also appears that Ira Ehrenpreis has joined the firm. Ehrenpreis remains listed as a general partner and head of the cleantech practice at Technology Partners. www.dblinvestors.com
• TPG Capital is seeking to raise upwards of $3 billion for its next growth equity fund, compared to the $2 billion it raised in 2012, according to Bloomberg. TPG Growth portfolio companies include Airbnb and Uber. Read more.
MOVING IN, UP, ON & OUT
• Paul Camp, former managing director and global head of transaction services for JP Morgan Chase & Co., has joined Boston-based crypto-currency startup Circle as chief financial officer, corporate treasurer and EVP of financial operations. www.circle.com
• Jeffrey Chang has joined Guardian Life Insurance Company of America as a senior director of private equity, as first reported by peHUB. He previously was a principal with Performance Equity Management. www.guardianlife.com
Vector Capital has promoted Alex Beregovsky and Andy Fishman to managing directors. Beregovskyhas been with the firm since 2010, and serves on the boards of WatchGuard Technologies and Tidel Engineering. Fishman joined in 2008 to lead the private equity firm’s application software team, and serves on the board of Allegro Development. www.vectorcapital.com
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