Here’s how a tender offer like Uber’s would unfold
There’s no guarantee that the transaction with Japan’s SoftBank will get done, given how complex and massive this deal is.
by Theodore Schleifer @teddyschleifer
Oct 5, 2017, 7:21pm EDT
SoftBank plans to invest up to $10 billion in Uber. It would be the largest-ever purchase of existing stock in a Silicon Valley startup.
But there’s no guarantee that it’ll get done, given how complex and massive this transaction is proving to be. If successful, the deal will both reshape how Uber is structured and be the biggest sign yet that the Japanese conglomerate has reshaped Silicon Valley finance in 2017.
Here's how these deals typically unfold, and how the whole shebang could still fail.
Broadcasting the deal
SoftBank agreed this week to buy shares of Uber, most of them from current investors, and a smaller amount of new shares the company plans to issue.
Since SoftBank is buying shares from existing investors, it needs to broadcast that it is on the market through newspaper ads — and will soon do so, as Recode first reported. It’s perhaps an anachronistic formality, but one that is meant to make sure all existing shareholders are given equal information about the sale process.
The share price will value initially Uber at around $50 billion, we've reported. That may sound like a large haircut for a company that was last valued by private investors at $68 billion, but the 26 percent savings is a within-the-ballpark discount for a deal of this type.
To be clear, despite Uber being private, the process here is still regulated by the Securities and Exchange Commission, and in this case, the deal would fall under what might be called an “SEC-lite” offering — subject to some, but not all, SEC regulations explained attorney Jeffrey Selman, who has extensive experience in preparing these offerings. Selman said he typically recommends that private companies prepare documents similar to those that a public company would.
Once the tender is launched, shareholders would have somewhere around 20 to 30 business days to mull over whether they want to sell their positions. Remember that while Uber has big venture capital investors, it also doled out options to employees, and for some individuals, this is a chance to realize and cash in on an historic investment that could turn them into millionaires (or, for some institutional investors, billionaires!).
Selling the shares
Here's where things get tricky. SoftBank is eyeing a minimum of a 14 percent ownership stake. If SoftBank’s offer doesn’t elicit enough sellers to amass that stake, then the tender offer fails and there's no transaction. By the way, that means that the proposed governance changes, which reduces voting rights of early investors and founders — including and especially former CEO Travis Kalanick — falls through, too, and we're back to square one.
In recent months, several investors have balked at offers lower than the $50 billion valuation SoftBank is offering — some buyers are still holding out hope that it will drop. But the valuation at sale could be considered a clear uptick from the $40 billion to $45 billion initially proffered.
A lot of the attention will now focus on some of the biggest shareholders of Uber, such as Menlo Ventures, Lowercase Capital and Google Ventures. And, of course, on Benchmark Capital, the venture firm that seems placated by the governance changes that restrict Kalanick, and could now be comfortable with selling some of its holdings. Benchmark wanted to limit Kalanick’s power, and was therefore reluctant to sell any of its position, but now the aggressive CEO may now be constrained by the reforms to Uber’s board.
Another group of potential sellers: Early employees, who are fully vested at Uber but have options that can be costly to exercise. Employees typically have to front cash in order to make use of their options, and then might have to pay hefty taxes on it — which could lead to a wash, at least on their initial stock sales, explained Larry Albukerk, who runs a secondary market liquidity provider called EB Exchange. ( Here’s more on that from The Information.)
Not every employee will be able to participate in the tender offer. Employees who arrived after around November 2014 instead received restricted stock units, or RSUs — common stock that eventually vests, but that the company can buy back. Uber employees that hold RSU are free from the fees that hit their colleagues when they exercise their options — but RSU-holders are not eligible to sell their positions in this SoftBank deal.
What if SoftBank doesn’t find enough sellers?
Presumably SoftBank would be prepared to raise the price and try the process again, gradually increasing its purchase price until dollar signs flash in the eyes of an eager venture capitalist. But that means preparing new tender documents.
A company could also extend the life of the tender process beyond 30 days to negotiate and find more sellers, said Selman. At the same time, SoftBank could lower its threshold and agree to take a lower stake in the company, meaning not as many sellers are needed.
But Uber could also find more sellers than it needs. In an oversubscribed tender, Selman said, there could be an across-the-board cut in the amount that each shareholder is allowed to sell.
Johana Bhuiyan contributed reporting.