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I can't tell if this is a good deal for Uber investors or not. As I understand it, Uber will own a 20% share in the combined company. The combined company is va

I can't tell if this is a good deal for Uber investors or not. As I understand it, Uber will own a 20% share in the combined company. The combined company is valued at $35 billion, so Uber's share of the value will be $7 billion (actually less, since they also need to share it with Baidu which invested directly into Uber China too). $7 billion doesn't sound too bad as an exit. However, if Uber's China business is worth only $7 billion, and their current valuation is $68 billion, does that mean the rest of the world is worth 9x China, even though China is one of their largest and highest potential market? Suddenly the valuation of Uber's business outside China looks very inflated (even more than before). Doesn't it?

fuzionmonkey 10y ago
It's not a $7 billion "exit". It's an investment for a 20% stake in Didi for $7 billion, which presumably will increase in value as Didi continues to expand in China, especially with less need for ridiculous spending on driver incentives since they will no longer be competing with Uber. Uber probably had something in the ballpark of 20% market share in China so it sounds like the two decided to simply make peace and become profitable together instead of duking it out for years on end and throwing away billions.
- sk5t 10y ago
  Suppose you spent $1B on a factory to make blenders + blender marketing + distribution channels, etc. Later, you invest $200MM in another blender concern for a 20% stake. How do you value / account for the first $1B in sunk costs?
  - argonaut 10y ago
    You answered your own question? You don't - it's sunk costs.
  - fgonzag 10y ago
    As a loss obviously, a sunk cost is exactly that: sunk
- 20andup 10y ago
  Its not a 20% stake. "Uber Technologies will receive 5.89 percent of the combined company with preferred equity interest equal to 17.7 percent of the economic benefits."
- deleted 10y ago
  [deleted]
johnloeber 10y ago
Uber's China business was losing money before (I believe to the tune of about $1bn/year), and it looked like they weren't going to get a permanent hold in that market. Local competition was very strong. Consequently, I would conjecture that China was never a large part of Uber's valuation. Leaving it at slightly more than 10% of their valuation seems reasonably realistic to me. Keep in mind: * The major Chinese cities generally have very developed and efficient systems of mass public transit, reducing demand for rideshares (and cars in general) * While China is a large country, not everyone can afford an automobile or a rideshare service. There are many reasons why scooters are so popular in SE Asia; this is one of them.
- seanmcdirmid 10y ago
  Ride sharing is a huge deal here. I use it daily, my wife more so, most of the people I know use it. Car ownership is low, but that created even more opportunity here. And it's not like there was a healthy volume of taxi/black car activity before, the apps have just made it way convenient and much nicer. This will be the biggest market for uber like services, if it isn't already. But it is also way cheaper here, so that changes the dynamics a bit.
  - shimon_e 10y ago
    Biggest volume and lowest prices.
- rahimnathwani 10y ago
  "The major Chinese cities generally have very developed and efficient systems of mass public transit, reducing demand for rideshares (and cars in general)" This depends on your frame of reference. If you're comparing with SF, sure. If you're comparing with London or New York, less so. In London, the underground is faster than private car for many (most?) daytime journeys. In Beijing and Shanghai, a private car is almost always faster. Subway stations are spaced too far apart, and the walking involved in changing lines is pretty long. Buses are slower than cars even at times when bus lanes are active. "While China is a large country, not everyone can afford an automobile or a rideshare service." The people who don't have cars are precisely the people who use rideshare services. Compared with the West, in China, ridesharing fares are lower, and the cost of owning+operating a car is higher. I ride Uber 10-15 times per week. The total cost of those rides is 20%-30% of what it would cost to lease and operate my own car, even if parking were free (which it's not).
azernik 10y ago
A general approximation in business is that the non-US market is 5-8x the US market. So if the world market is only 9x the China market, I'd consider that a very big deal.
- eru 10y ago
  Is that an approximation for US businesses?
  - azernik 10y ago
    Yeah - used to (once you've worked out the size of the US market) get a vague feel for the international possibilities. Very rough first-order approximation.
rahulgulati 10y ago
One of the factors for Rest of the world vs China gap could be the ticket size of a cab ride. A 5km Uber ride in India/China/SE-Asia costs $1.5 on an average, while in developed countries its $15 on an average (10X). So, I guess, it's value over volume for Uber and markets that are on fast-track to profitability. source - http://www.priceoftravel.com/6536/price-of-a-5-kilometer-uber-ride-around-the-world/ http://www.priceoftravel.com/6536/price-of-a-5-kilometer-ube...
- yomly 10y ago
  Spot on - ubers in China were easily 70% cheaper for me (coming from the UK). I don't think the volumes were appropriately bigger. Also seemed like Uber were going wild at the time - Easter weekend was totally free for all riders all weekend iirc.
robk 10y ago
I think this is exactly right. It's a decent face saving move for Uber to have some sort of outcome in an otherwise very very difficult market where they were losing. Seems like the investors in Uber China could have done better to just put the money directly into Didi though. I guess the upside was it got them into the parent company though, which otherwise they may not have had access to.
robk 10y ago
Didi was last valued at $28b according to press from June. http://www.forbes.com/sites/ywang/2016/06/17/didi-in-valuation-fantasy-land-with-new-7-bln-funding/#200b38b27e94 http://www.forbes.com/sites/ywang/2016/06/17/didi-in-valuati...
EGreg 10y ago
Apple win!
georgeecollins 10y ago
This is how you realize that the $68 billion value is suspect?
fullshark 10y ago
Looks like a good deal to me because continuing to fight Didi in China was a losing proposition. Also they now own 20% of the dominant chinese ride hailing company.
aetherson 10y ago
As always with Uber you have to understand the relative, not absolute, situation. Uber needs to not just be successful, it needs to be MASSIVELY successful. It's valued at north of $60B! If it makes a bunch of modest deals that are successful to the tune of making a 15% return on investment, and that investment is $2B, then it needs like 20 of those deals to justify its valuation, much less to grow. At risk of pointing out the obvious, there aren't 20 Chinas. And Uber doesn't have $40B to spend on a series of 20 $2B deals. Uber's entire existence for at least the last five years has been predicated on being a major global game-changer. Anything that is less than "major global game-changer" for them is a failure.

fuzionmonkey 10y ago

It's not a $7 billion "exit". It's an investment for a 20% stake in Didi for $7 billion, which presumably will increase in value as Didi continues to expand in China, especially with less need for ridiculous spending on driver incentives since they will no longer be competing with Uber. Uber probably had something in the ballpark of 20% market share in China so it sounds like the two decided to simply make peace and become profitable together instead of duking it out for years on end and throwing away billions.

sk5t 10y ago
Suppose you spent $1B on a factory to make blenders + blender marketing + distribution channels, etc. Later, you invest $200MM in another blender concern for a 20% stake. How do you value / account for the first $1B in sunk costs?
- argonaut 10y ago
  You answered your own question? You don't - it's sunk costs.
- fgonzag 10y ago
  As a loss obviously, a sunk cost is exactly that: sunk
20andup 10y ago
Its not a 20% stake. "Uber Technologies will receive 5.89 percent of the combined company with preferred equity interest equal to 17.7 percent of the economic benefits."
deleted 10y ago
[deleted]

johnloeber 10y ago

Uber's China business was losing money before (I believe to the tune of about $1bn/year), and it looked like they weren't going to get a permanent hold in that market. Local competition was very strong. Consequently, I would conjecture that China was never a large part of Uber's valuation. Leaving it at slightly more than 10% of their valuation seems reasonably realistic to me. Keep in mind: * The major Chinese cities generally have very developed and efficient systems of mass public transit, reducing demand for rideshares (and cars in general) * While China is a large country, not everyone can afford an automobile or a rideshare service. There are many reasons why scooters are so popular in SE Asia; this is one of them.

seanmcdirmid 10y ago
Ride sharing is a huge deal here. I use it daily, my wife more so, most of the people I know use it. Car ownership is low, but that created even more opportunity here. And it's not like there was a healthy volume of taxi/black car activity before, the apps have just made it way convenient and much nicer. This will be the biggest market for uber like services, if it isn't already. But it is also way cheaper here, so that changes the dynamics a bit.
- shimon_e 10y ago
  Biggest volume and lowest prices.
rahimnathwani 10y ago
"The major Chinese cities generally have very developed and efficient systems of mass public transit, reducing demand for rideshares (and cars in general)" This depends on your frame of reference. If you're comparing with SF, sure. If you're comparing with London or New York, less so. In London, the underground is faster than private car for many (most?) daytime journeys. In Beijing and Shanghai, a private car is almost always faster. Subway stations are spaced too far apart, and the walking involved in changing lines is pretty long. Buses are slower than cars even at times when bus lanes are active. "While China is a large country, not everyone can afford an automobile or a rideshare service." The people who don't have cars are precisely the people who use rideshare services. Compared with the West, in China, ridesharing fares are lower, and the cost of owning+operating a car is higher. I ride Uber 10-15 times per week. The total cost of those rides is 20%-30% of what it would cost to lease and operate my own car, even if parking were free (which it's not).

azernik 10y ago

A general approximation in business is that the non-US market is 5-8x the US market. So if the world market is only 9x the China market, I'd consider that a very big deal.

eru 10y ago
Is that an approximation for US businesses?
- azernik 10y ago
  Yeah - used to (once you've worked out the size of the US market) get a vague feel for the international possibilities. Very rough first-order approximation.

rahulgulati 10y ago

One of the factors for Rest of the world vs China gap could be the ticket size of a cab ride. A 5km Uber ride in India/China/SE-Asia costs $1.5 on an average, while in developed countries its $15 on an average (10X). So, I guess, it's value over volume for Uber and markets that are on fast-track to profitability. source - http://www.priceoftravel.com/6536/price-of-a-5-kilometer-uber-ride-around-the-world/ http://www.priceoftravel.com/6536/price-of-a-5-kilometer-ube...

yomly 10y ago
Spot on - ubers in China were easily 70% cheaper for me (coming from the UK). I don't think the volumes were appropriately bigger. Also seemed like Uber were going wild at the time - Easter weekend was totally free for all riders all weekend iirc.

robk 10y ago

I think this is exactly right. It's a decent face saving move for Uber to have some sort of outcome in an otherwise very very difficult market where they were losing. Seems like the investors in Uber China could have done better to just put the money directly into Didi though. I guess the upside was it got them into the parent company though, which otherwise they may not have had access to.

robk 10y ago

Didi was last valued at $28b according to press from June. http://www.forbes.com/sites/ywang/2016/06/17/didi-in-valuation-fantasy-land-with-new-7-bln-funding/#200b38b27e94 http://www.forbes.com/sites/ywang/2016/06/17/didi-in-valuati...

EGreg 10y ago

Apple win!

georgeecollins 10y ago

This is how you realize that the $68 billion value is suspect?

fullshark 10y ago

Looks like a good deal to me because continuing to fight Didi in China was a losing proposition. Also they now own 20% of the dominant chinese ride hailing company.

aetherson 10y ago

As always with Uber you have to understand the relative, not absolute, situation. Uber needs to not just be successful, it needs to be MASSIVELY successful. It's valued at north of $60B! If it makes a bunch of modest deals that are successful to the tune of making a 15% return on investment, and that investment is $2B, then it needs like 20 of those deals to justify its valuation, much less to grow. At risk of pointing out the obvious, there aren't 20 Chinas. And Uber doesn't have $40B to spend on a series of 20 $2B deals. Uber's entire existence for at least the last five years has been predicated on being a major global game-changer. Anything that is less than "major global game-changer" for them is a failure.