Thursday 22 March 2018

Another Angle: Scandal-hit Uber needs to take the high road to an IPO

Photo: PA
Photo: PA

Peter Blumberg

Back in 2015, explaining why Uber Technologies was years away from a public offering, co-founder Travis Kalanick likened the company to a secondary school kid too young to go to the school debs. Since then, the ride-hailing giant has been besieged: allegations of sexual harassment, a lawsuit alleging theft of trade secrets, a miscellaneous morass of malfeasance that spawned multiple criminal investigations, and the ouster of Kalanick as CEO, followed by a lawsuit to keep him from taking control of the board. Amid all this, the newly appointed CEO promptly announced he's aiming for an initial public offering by 2019. Will Uber be cleaned up by then?

1 What impact have Uber's scandals had on the company?

By one measure, they've collectively knocked off almost a third of the $69bn valuation that made Uber the most valuable unicorn on the planet. Meanwhile, the firm that dominates taxi hailing in China, Didi Chuxing, gained a valuation of $56bn in December and positioned itself to better compete with Uber in other parts of the world. Uber's tattered reputation has also been a boon to Lyft, its closest rival in the US. Lyft gained significant market share in 2017 as Uber suffered from executive turnover and self-inflicted wounds, including a protest over the company's ties to the Trump administration.

2 Could Uber be convicted of a crime?

Yes. It hasn't been charged, but was said to be facing at least five separate investigations by the US Justice Department as of October. All that's known is their subject matter: misappropriation of intellectual property, violations of price-transparency and overseas bribery laws and the use of software programs for spying on rival companies and deceiving regulators. .

3 Is the company likely to be indicted?

Large companies are rarely targeted with criminal charges. Federal authorities haven't disclosed how far along they are in the investigations, and it remains to be seen whether the ultimate target is the company or individual executives. If it was indicted for any crime, it would face pressure to work out a deal - either by pleading guilty or persuading the government to defer prosecution as long as it stays out of trouble - rather than take the risk of going to trial.

4 What would a criminal conviction mean?

Corporations convicted of crimes don't go to jail. Instead, they are typically fined and sometimes put on probation for several years. For Uber, that would mean court-ordered oversight of its operations - not an uplifting prospect for investors.

5 What other legal exposure does Uber face?

Plenty. It faces investigations by multiple US states and the EU, as well as class-action lawsuits, over its handling of a 2016 data breach that exposed personal information of 57 million customers and drivers around the world. Regulators might treat that breach as especially egregious because of actions taken by Uber employees: they paid hackers to delete the data and keep the breach quiet. Findings of wrongdoing may trigger multimillion-dollar fines. Uber is also locked in long-running litigation with drivers who want better pay and benefits. Whether Uber drivers remain independent contractors or must be treated like employees goes to the heart of the on-demand economy's reliance on a casual labour force to keep costs down. The company has the upper hand in its battles with US drivers, because they are barred in their contracts from pursuing class-action suits. But in the UK, Uber lost two separate court battles over how it treats workers and is now appealing.

6 What does all this mean for an eventual IPO?

When the new CEO, Dara Khosrowshahi, introduced himself to Uber's staff in late August, he said an IPO would probably happen within 18 to 36 months. It's hard to prepare for an IPO without a chief financial officer - and Khosrowshahi hasn't hired one yet. The big challenge facing Uber is to stop losing so much money; its losses have continued to widen even as its revenue and bookings have grown. Resolving outstanding legal disputes should also be on the to-do list. It's reasonable for investors to wonder whether the high frequency of fines, lawsuit settlements and write-downs is an unusual or a perpetual feature of Uber's business model.

7 What explains Uber's troubles?

Fairly or not, much of the blame is directed at Kalanick, whose view of the law as something to be tested is well-chronicled. He defined Uber's culture by hiring deputies who were, in many instances, either willing to push legal boundaries or look the other way. A broader view is that, for all its celebrated disruptive technology, Uber operates based on a fundamental illegality: it built a worldwide transport business using unlicensed vehicles. This approach allowed Uber and its drivers to avoid a litany of requirements such as insurance, registration, inspections "and countless other expenses," Benjamin Edelman wrote in the Harvard Business Review. Instead of rewarding "lawbreaking and its unsavoury consequences", Edelman concluded, regulators ought to shut Uber down.

8 Can Uber steer clear of still more trouble?

It can, if there aren't more skeletons in the closet - the latest emerged just last week - and if Khosrowshahi makes good on his promise to be the opposite of Kalanick on compliance issues. Several executives linked to shenanigans left while Kalanick was still in charge; more have departed since Khosrowshahi took over. The new boss has spearheaded an apology campaign to quell regulatory disputes in Norway, Britain and Brazil, hired a former high-ranking Justice Department official as his chief legal officer and tweeted about directing his staff to stop using encrypted and ephemeral communication methods.

Finally, it doesn't hurt that as part of the Softbank stock buyback, a number of governance reforms that effectively reduce Kalanick's influence at Uber will go into effect.(Bloomberg)

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