Sometimes you IPO. Sometimes you sell up. If you’re Uber, you might just get a chance at returning value to shareholders by doing both.
So, how do you take the most highly valued private company in the world public? Take a seat. We're watching that very process unfold right now, and thus far we’ve learned that you could find worse places to start than by selling stuff that costs too much money to maintain, namely, a business with $1 billion a year in operating costs that doesn’t even turn a profit. That’s not the most flattering way to think about Uber China. But that’s also a lot of cash to burn, especially against a less capably capitalized rival. To be sure, the global ridesharing behemoth looks less intimidating in its guise as just the $8-billion-dollar Uber China when standing next to the $28 billion Didi Chuxing. All the same, the Chinese arm of Uber Technologies has been sold to its rival in exchange for Uber taking a reported 20% stake in Didi—now the last ridesharing service with any clout left in the country—which will be valued at a reported $35 billion. It's also reported that Didi will invest $1 billion in Uber at a $68 billion valuation as part of the deal.
Both companies fought to a financial stalemate by competing with each other for two years through a costly marketing and subsidies campaign that fueled the basic transaction behind the ridesharing business model: someone paying someone else for a ride somewhere. Last week, that all changed when the Chinese government decided to issue nationwide regulations making these business practices effectively illegal. It’s likely that Uber didn’t see a path to victory with one arm tied behind its back in a battle on foreign soil. But its departure from the field seems like a familiar story for American tech companies. China—well, its growing middleclass, at least—continues to hold out the promise of the largest single market in the world for what many American companies sell only to crush those dreams of greater marketshare.
With the odds stacked against you, the best bet could well be the one Uber's played: “if you can’t beat ‘em, join ‘em.” It’s hardly a move without precedent.
“We were a young American business entering a country where most U.S. internet companies had failed to crack the code and with the product that needed rebuilding,” Uber’s CEO Travis Kalanick said in a prepared statement.
Indeed, China became the first country to offer comprehensive, nationwide regulations for the ridesharing sector. Although the new rules don’t go into effect until November, the country plans to prohibit ridesharing companies from operating below cost. This restriction in particular seems tailor-made to stop the subsidy battles fought between Uber and Didi over the past two years.
“We all knew the subsidies were clearly unsustainable,” Duncan Clark, a consultant who runs the Beijing-based investment-advising firm BDA, is reported as saying by the WSJ. “The subsidies cost Uber and they couldn’t have gone public with that black hole.”
Uber China will reportedly remain a separate brand with its own operations but—and this could be the real coup—all the data generated will be owned by Didi. But what else did Didi get? All three of China’s biggest tech companies are now among its shareholders: Alibaba, Baidu and Tencent.
Bloomberg reported late last month that PE shareholders may have been pushing for this deal all along. Jean Liu, Didi’s CEO, has also issued a statement that makes the deal sound like a forgone, if cosmically scripted, conclusion: “Uber has been a grand rival and we have had an epic battle […] We raged an earth-shaking war, and when we join hands, our love will last till the end of time.”
But that love may all amount to love lost if Didi ally Lyft gets too big for its britches on this side of the Pacific. As a result, Lyft is reportedly rethinking its potential conflicts of interest now that it and its biggest rival in the U.S. are backing the same horse in China.