Back from a week in Silicon Valley, I have a hunch that the next headline-grabbing deal might just be Google acquiring Uber for upwards of $30 billion.
Companies have been waiting longer and longer to go public, raising vast sums of money from institutional investors at ever-higher valuations. These late-stage rounds have included not only the largest names in venture capital, but also large institutional investors — firms like Fidelity Investments, Wellington Management and Blackrock, which have historically waited until the IPO to invest.
The participation of these firms in pre-IPO late-stage investment rounds at seemingly lofty valuations may be a warning sign, but it also forestalls the need for companies to go public, permitting them to continue to grow without the costs of complying with Sarbanes-Oxley or the distractions of being a public company. This is a positive development for early investors, as it permits them to keep more of the growth and preserves optionality for their portfolio companies.
As a guest at the Bank of America Merrill Lynch Technology Innovation Summit last week in Menlo Park, I had the benefit of hearing an update on the technology financing market by BAML’s head of equity capital markets, JD Moriarty. He highlighted several companies that have raised private capital at $1 billion+ valuations recently, most notably Uber, the popular transportation logistics company known for its smartphone-based car dispatch service. We’ve written about Uber in the past, as one example of new technology that helps us optimize everything we do.
The IPO market has been particularly strong of late, with approximately 220 IPOs so far this year, the most in recent history. But the odds that companies will be able to launch successful IPOs will likely fall as the cycle continues. An Uber IPO would likely still do well, in part because of its size. One strategy that companies have been employing recently to increase the odds of a successful IPO is to reach for as high a valuation as possible, often by bulking up via acquisitions just prior to IPO.
A company going public with a $500 million valuation may struggle to find enough buyers, but one with a multi-billion valuation will surely be included in the large equity indices, meaning that many institutions will have to buy into the IPO. The success of these IPOs is self-fulfilling. Much like Alibaba’s recent debut with an IPO that was dramatically oversubscribed, an Uber IPO at a valuation of north of $20 billion would — by design — find ample demand.
The question is, can such a valuation be sustained long enough post-IPO for early investors to find liquidity, particularly under the scrutiny of the public markets? The answer may be yes, but it’s impossible to predict how long the equity markets will remain focused on growth and not value.
For many companies, an M&A exit is more attractive than an IPO. A sale of the company allows all investors to take their money (and risk) off the table at once, rather than dribble out shares in the public markets following the typical 180 day lockup period. An IPO can still be advantageous if a company expects continued growth, and wants a currency they can use to fund future acquisitions, but with a $18.2 billion valuation, it’s unclear how much higher the public markets might value the stock. Since Uber already has ample access to capital (having recently raised $1.2 billion) and seemingly few compelling acquisition candidates, short of buying their competitors, there may be less of a rationale for pursuing an IPO if a buyer for the company can be found instead.
But who would want to buy Uber – and could afford to pay?
The Mountain View behemoth has spent the past several years acquiring technologies that support its mission of cataloging and organizing the world’s information. Through its existing search business, Google knows what’s on your mind. Through its acquisition of Nest, Google can know what’s going on in your home. And through its acquisition of Waze, the popular crowd-sourced traffic app, Google knows where you’re traveling in your own car. But what’s missing is where you’re traveling when you’re not in your own car, or when you’re in a different city. This is where owning Uber could come in quite handy. Google Ventures already invested $258 million in Uber back when it was worth a mere $3.75 billion and put in additional capital in Uber’s latest $1.2 billion capital raise at a $17 billion pre-money valuation — but 100% ownership could be a game changer.
With Uber, Google would gain your credit card number, your most frequented locations, knowledge of not only where you are but where you’re going, and would be able to serve you highly targeted ads along the way. And the synergies work both ways. On a recent trip to JFK, an Uber driver (who shared my enthusiasm for Uber in nearly every way) had just one gripe: their app doesn’t accurately forecast arrival times, since it doesn’t take into account traffic patterns. This leads to some degree of customer frustration.
Enter Waze. In the ultra-competitive market for mobile phone car-for-hire dispatch, Uber has several competitors: Lyft, Gett, HailO. But if Uber could benefit from Waze data — to the exclusion of its competitors — Uber would be able to more accurately forecast arrival times. This could create a permanent advantage for Uber. Google could also serve location sensitive-ads, possibly in return for discounted car fares, cementing a pricing advantage. And, longer term, what better application for Google’s self-driving car technology than Uber? Remove from the equation the 80% of the fare that Uber currently shares with its drivers and Google might very well be able to justify a $30 billion valuation for Uber, enough to return a healthy premium to investors in the latest investment round while making a sale a viable risk-adjusted alternative to an IPO.
Through its recent acquisitions, Google has been smartly capitalizing on an important and powerful trend: the application of technology, on top of existing infrastructure, to glean better information and foster greater efficiencies. Uber fits squarely within this thesis, and could make for a compelling acquisition that would drive substantial revenue synergies for years to come.
How would you feel about a Google/Uber combination? Do you think it makes economic and strategic sense? Tweet at us @maxmyinterest to share your thoughts.