Uber and Public Capital Markets: Shareholder Rights, Uninformative Prospectus, Weak Post-IPO Performance
The recent IPO of Uber has been fascinating in terms of its relevance to many of the issues currently concerning participants in the public capital markets space. First, there is the issue of shareholder rights. Second, an excessively-long and simultaneously uninformative boilerplate prospectus. Finally, the weak post-IPO performance of the stock has been cited as evidence of public markets becoming dumping grounds for mature companies rather than the engine of economic growth as in the past. This blog will take a closer look at each of these issues and provide the CFA Institute perspective.
The return of one share one vote
It has become a trend for start-up IPOs to have a dual-class share (DCS) structure. This is designed to allow the firm to raise significant financing while simultaneously allowing the founders to retain majority control over the firm. It has been enabled by the relative market power advantage of entrepreneurs over investors desperate to not miss out on the ‘next big thing’. CFA Institute unequivocally advocates against DCS as we feel these are not compatible with market fairness, market integrity, or investor protections.
What is interesting about the Uber IPO is that the company seems to agree with the CFA Institute position and has chosen a single-class share structure. In fact, not only did Uber not avail itself of the latest corporate governance trend – dual class shares – but it has previously actively unwound super-voting rights of founders during an earlier, private-market investment round by Softbank.
Whether this renewed faith in single-class share issuances is due to a commitment to best-practice corporate governance, or a more cynical attempt to score a PR win over its DCS competitor Lyft, CFA Institute is happy to see this evidence of the tide turning back towards an equal playing field for investors.
The Uber IPO also featured a lengthy prospectus – over 400 pages – that attracted the usual criticism from commentators about boilerplate disclosure hiding any material discussion relevant to investors. In particular, omission of details about how many drivers have used the app over time, details on future growth businesses such as driverless cars (see this earlier blog for why I think this is vapourware) or freight shipment, have disappointed investors. Considering Uber does not make currently make profits, it is especially critical to understand what the company sees in its future that will lead to profitability.
In our latest report – Capital Formation: The Evolving Role of Public and Private Markets – we noted that some participants in our fact-finding workshops told us that disclosure in private markets was superior to disclosure in public markets because large institutions could use their size and influence to demand whichever information they felt was relevant to their valuation. In public markets, regulated disclosures sometimes provide companies an excuse not to disclose key information. As the linked article details, Uber is listed as a Pre-packaged Software company (like Microsoft or Oracle) while the equivalent rival service Lyft is listed as Business Services.
Efforts at making public disclosures more relevant to investors have been of interest to CFA Institute for a long time. Previously we engaged and supported the efforts of ESMA as part of the Prospectus Regulation to develop a summary for the prospectus that is concise, readable, and relevant. More information can be found in our report on this issue: Designing a European Summary Prospectus using Behavioural Insights.
Public vs. private markets
The Uber IPO also raises other issues that CFA Institute has covered, particularly regarding the topic of public and private markets and their evolution, detailed in our Capital Formation report. The particular concern is the impact of private market growth in contributing to income and asset inequality. In this narrative, new companies are financed by the already wealthy (e.g. SWFs, private equity, family offices) while retail investors can only invest in mature businesses with fewer growth opportunities, including for their retirement savings due to the global shift from defined benefit to defined contribution retirement plans.
The latest rush of big tech companies to IPOs is seen as some as a continuation of this problem because it is being driven not by a need to finance expansion but rather by the relative market power dynamics at play. Private equity investors increasingly are concerned that transaction multiples are too high, and so tech companies may feel they could extract more value from the public market that is desperate for anything labelled “growth”.
In summary, it seems that the capital raising ecosystem is still somehow out of kilter. Private markets are preferred by new companies trying to establish themselves, partly because the private arena allows new companies to be more comfortable disclosing valuable information to relatively few investors, resulting in more accurate (i.e. higher) valuations when compared to the relatively more rigid public disclosure arena. Critics argue that when these growth companies, having failed to achieve profitability, feel they can no longer raise attractive finance privately they resort to the public markets who are more desperate to invest in growth companies.
Is there a future for public markets beyond being a dumping ground for mature start-ups looking for their final ‘cash out’?
Image Credit: © Caiaimage/Paul Bradbury