Why Uber Needs to Take the High Road en Route to IPO: QuickTake

(Bloomberg) -- Back in 2015, explaining why Uber Technologies Inc. was years away from a public offering, co-founder Travis Kalanick likened the company to an eighth grader too young to go to the high school prom. Since then, the ride-hailing giant has been besieged: allegations of sexual harassment, a lawsuit (now settled) alleging theft of trade secrets, a miscellaneous morass of malfeasance that spawned multiple criminal investigations, and the ouster of Kalanick as chief executive officer, followed by a lawsuit to keep him from taking control of the board. The newly appointed CEO 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 $69 billion valuation that made Uber the most valuable unicorn on the planet. Meanwhile, the firm that dominates ride hailing in China, Didi Chuxing, gained a valuation of $56 billion 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 Inc., its closest rival in the U.S. 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. The company hasn’t been charged, but it was said to be facing at least five separate investigations by the U.S. Justice Department as of October. All that’s known about these probes 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. Under a 1909 ruling, the U.S. Supreme Court allowed prosecutions of corporate entities when acts and intentions of the company’s employees can be attributed to the company itself. 

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 Uber investigations, and it remains to be seen whether the ultimate target is the company or individual executives. If the company were to be indicted for any crime, it would face immense pressure to try to work out a deal -- either by pleading guilty or persuading the government to defer prosecution as long as Uber stays out of trouble -- rather than take the risk of fighting the charges at trial.

4. What would a criminal conviction mean?

Corporations convicted of crimes don’t go to jail like people do. 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. Here are just two areas of vulnerability:

• The company faces investigations by multiple U.S. states and the European Union, 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 labor force to keep costs down. The company has the upper hand in its battles with U.S. drivers, because they are barred in their contracts from pursuing class-action suits. But in the U.K., Uber lost at two separate courts in a high-profile suit challenging the way it treats workers and is now appealing.

6. What does all this mean for an eventual IPO?

Introducing himself to Uber’s staff in August 2017, new CEO Dara Khosrowshahi 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 in recent years of fines, lawsuit settlements and writedowns 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 in June. Instead of rewarding “lawbreaking and its unsavory consequences,” Edelman concluded, regulators ought to shut down the company.

8. Can Uber steer clear of still more trouble?

It can, if there aren’t more skeletons in the closet -- like this one from January -- 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. In settling Waymo’s complaint that Uber stole its technology for driverless cars, Khosrowshahi expressed regret over the ordeal. 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 have taken effect.

The Reference Shelf

• A QuickTake explainer of the sharing economy.
• Airbnb, too, is being told to grow up, writes Bloomberg View’s Leonid Bershidsky.
• Cooley law firm’s 25 considerations for companies preparing for an IPO.
• Why a Harvard business professor says regulators should shut Uber down.

--With assistance from Eric Newcomer

To contact the reporter on this story: Peter Blumberg in San Francisco at pblumberg1@bloomberg.net.

To contact the editors responsible for this story: Elizabeth Wollman at ewollman@bloomberg.net, Laurence Arnold

©2018 Bloomberg L.P.