Ranjan here, writing about why the Uber - Postmates deal is brilliant, but also why I think it won’t go through.
A number of people were asking me about the Uber - Postmates deal. I guess you write one piece on food delivery and people assume you know something. This transaction feels even more 2020 than an Uber-GrubHub tie-up would've been. The latter would've been a pretty simple antitrust-baiting, market-consolidation play.
This one is a bit more intriguing.
We have to start with Matt Levine's coverage, where he calls this type of deal a "perpetual-motion machine of implausible consequences” then outlining a hilarious imaginary food delivery pitch:
This would be a perfectly viable pitch to venture capitalists:
We’ll get into the crowded miserable burrito-delivery business.
We’ll grow our market share by charging customers less and paying drivers more, losing a ton of money ourselves but also causing our competitors to lose even more money than they already do.
They’ll hate that.
Eventually they’ll pay us a few billion dollars to stop. (Er, to acquire us.)
All we need is a few hundred million dollars to subsidize our losses until the competitors give in and buy us.
More importantly, it's a brilliant deal. Everyone from Uber and Postmates can celebrate on a job well done.
That price. Postmates was supposed to IPO in 2019 after a last fundraise at a $1.9bn valuation. They delayed that, but as this is the Softbank-ian era, delaying your IPO means you go raise $225mm in growth capital, pushing the valuation to $2.4 billion.
There's barely anything swimming around about Postmates financials, other than booking $400mm revenue and "not being profitable" in 2018 and booking $107mm in Q1 2020. One would assume, given the competitive bloodbath that is food delivery and the hundreds of millions in losses being stomached by their competitors, the unit economics haven’t pronouncedly improved since 2018.
One might also assume that Uber would hold all the cards and exert some leverage on their weaker counterpart, especially when it's bleeding cash.
But it's 2020 and implausible consequences are the order of the day. Postmates sold to Uber for $2.65 billion, more than their last aggressive valuation. It's a huge win.
What piqued my interest was that it was an all-stock transaction.
Disclaimer: This is where, armed with one semester of corporate finance during my MBA, I will try to think through the logic behind the deal-financing. Please reply with moderately kind words about how wrong I am and why.
A few points to start with:
Uber has $9 billion cash on hand, more than enough to cover at least some significant portion of the transaction.
Issuing debt is as cheap as its ever been, and is how Uber financed previous acquisitions like Careem.
From speaking with a few people, an all-stock transaction is quite rare here (usually there’s some cash component, and often a debt component).
At least as I remember being taught, issuing new equity to finance an acquisition is theoretically the most expensive approach.
Uber will be issuing another $2.65 billion in equity (currently with a market cap of ~$56 billion) so the dilution is not insignificant. Again, there should be some theoretical cost to the equity issuance. But, naturally, shareholders loved it and Uber stock popped on the news. There was no negative price reaction to the dilution.
That's what makes this a brilliant deal. It is unquestionably good for Uber and its Uber Eats division and effectively at no cost. You're one step closer to the monopolistic pricing power required for your survival. Happy days.
Then take Postmates. They have not grown their market share in any significant manner. In a market where Uber Eats has Uber, GrubHub has Just Eat, and DoorDash has 3x your capital and 5x your market penetration, I don't know if things were existential, but they couldn't have been great.
Yet you somehow convinced the great white shark swimming towards you to treat you really nicely.
An all-stock transaction is perfect. We’re in such a frothy market for anything pandemic-friendly it's a safe bet an army of traders and algorithms will trigger buys on the headlines, ignoring any cost to the dilution. You have investors like Tiger Global, with positions in both companies, now essentially converting their Postmates stock into Uber, at a surprising premium. Uber itself can argue that food delivery is actually good business because look at the Postmates exit (that sounds ridiculous, but I would not be surprised by anything).
The mechanics once again like it's just money being moved around, to the benefit of all the players involved and no one else.
Because, as we know, the quiet part is often said out loud. This deal proclaimed to the market - we’re one step closer to monopoly! The euphemisms are almost delightful to read:
Increased Prices on both consumers and restaurants (Morningstar): “We applaud this move as it will further consolidate the online food delivery market which could lead to pricing stabilization in the long-run”
Job Cuts (SeekingAlpha): "management hopes to create $200 million in run rate synergies as a result."
Lower fees for Drivers and Couriers (Uber Presentation): "Delivery People - More work opportunities and improved earnings."
I still am amazed at how open public figures are about the need to raise prices and concentrate power. Former Uber exec Emil Michael said about the Uber-Grubhub deal last month:
That's why this deal was a no-brainer. Thanks to market conditions and smart financial construction, every single player involved wins, while everyone else loses. You signal to the market you’re on the road to monopoly and structure a deal that more than compensates for all potential cost.
Everything I've read seems to indicate this will sail through, save for some Amy Klobuchar tweeting:
This where our current state of antitrust confounds me. This isn't some modern antitrust paradox like Facebook, where the service is "free" making pricing standards inapplicable. This is good old-fashioned, they're gonna raise prices market concentration. Yes, Uber+Postmates would now "only" be at 31% of the overall market, still well behind Doordash's 43% (and surpassing GrubHub's 23%). But maybe the problem is when a quadropoly purportedly needs to become a triopoly to even forecast a profit.
And then you have the "essential" nature of these businesses. As America once again becomes a very scary place, we are headed back towards lockdowns and dependence on these services. To push through potentially problematic M&A at a time like this feels a bit opportunistic.
Proposal: Any business that is allowed to operate as an essential service during a lockdown should not be able to engage in M&A.
I'm not sure if this is remotely possible or even sensible, and once again, please reply with angry words to explain why this is a nonsensical idea.
The Potential Explanation / Upside
One point I did want to address was the idea that the true value of the acquisition is around it pushing Uber into it's long-dreamed of status as a logistics or local delivery company:
it also opens the door for an even more important longer-term opportunity to compete with big retailers for all categories in local commerce, Uber CEO Dara Khosrowshahi told investors on a call Monday. He explicitly called out Amazon and Walmart. Uber Eats has experimented with non-food deliveries.
I saw a few tweets circulating about Postmates last-mile API that certainly felt promising:
But before we all jump on that bandwagon, I'd like us to take a quick walk down valuation-inflation memory lane:
July 13, 2012: Ice Cream Trucks
"The idea is that FedEx gets you packages in 24 hours, Uber picks you up in five minutes. As a logistics company there are other applications of our software and what you are seeing is us thinking about what else the Uber software can be applied to," Mohrer said.
Aug 23, 2013: An Instant Gratification service
In Kalanick's mind, Uber can offer much more than rides. The CEO hinted at the company's potential in an interview with Fortune's Jessi Hempel, where he called Uber the "cross between lifestyle and logistics." Kalanick wants Uber to be an "instant gratification" service that gives people what the need, when they need it, whether that's a ride or some other delivery.
Dec 5th, 2013: Christmas Trees
You could view it as just another Uber publicity stunt (the company calls them "surprise-and-delight campaigns"). Previous stunts include letting Uber users order up kittens on demand for cuddle time (a comparatively meager $20), or, instead of ordering a car, hailing an ice cream truck, stocked with cones to share with friends ($25 for six cones). But I think the tree delivery is better seen as a creative experiment into the broader realm of urban logistics.
Oct 29, 2015: KITTENS!!!!
(Okay, I admit, there was no publication that tried to extrapolate logistics dominance with the kittens marketing stunts).
Reading through those pieces was kind of fun in the whole "tech vs. journalist" context because it was a time capsule of just how fawning press coverage used to be. But it also reminded me that this "logistics" story has been there from the beginning to justify those lofty valuations. I'm certainly intrigued by the Postmates delivery API idea (their developer page is here) but it feels far more moonshot than value-generating. It also feels like whenever Uber is in a tough financial spot, they play the “logistics” card. From my co-host Can, who is a former Uber engineer:
“The idea was to become the TCP/IP layer of the physical world (google packet switching).”
I’m going to make an aggressive call to end this piece: I don’t think this deal will go through. Lockdowns mean food delivery will get very sensitive once again. The press has treated it like an absolute given, but the mechanics feel like they worked out too perfectly.
Could a dip in Uber’s share price even force everyone back to the negotiating table? Could regulators look at this as an easier first case, with clear consumer pricing implications, than breaking up one of the giants? The food delivery industry has certainly not gotten any less interesting since the heady days of pizza arbitrage.
In the meantime, at least everyone got to make the same joke:
Note 1: I became really curious about the all-stock nature and was trying to find some other big examples. Everything I read about (FB-Insta, FB-WhatsApp, GOOG-Nest, AMZN-Whole Foods) in tech was Cash+Equity or Cash+Debt. Are there any classic examples like this, where it feels more of a free option for both parties?
As for the all-stock deal, I think you hit the nail on the head with this:
"You have investors like Tiger Global, with positions in both companies, now essentially converting their Postmates stock into Uber, at a surprising premium. "
The question is how many more investors are like this? Since cash is king in startups if you want to merge two startups you own, why would you drain one of cash to do the merger? Just merge them and you still have stock in both. I imagine this was a deal born in the VC conference rooms.
On the broader topic, I think Uber is falling for the old "Railroads forgot they were in the transportation business" cliché. In this cliché you sagely demonstrate that you are not really selling the thing you sell, but instead a meta thing. But this is the wrong way to play that.
If Uber wants to say "we are a last mile-logistics company" then they should be OEMing their logistics services through GrubHub, DoorDash, Postmates. They could also find other companies that want to deliver things such as flowers, groceries, or booze. The smart play is to make someone else's back office their front office.
Uber's problem now is that you can't really name their customer or their market. Are they selling to people who want to go to the airport or people who want a tasty snack? How are these two markets synergistic? How do marketing costs associated with tasty snacks going to help rides to the airport?
The most limited assets in a company are Time, Talent, and Management Attention (Geoffrey Moore, I think) How is a "logistics" company going to apportion these resources to rides, tasty snacks, or anything else Uber suddenly thinks it should be "logisticsing"?
I don't know how classic of an example this is, but one all-stock deal that I remember recently was when Disney acquired the majority of 21st Century Fox in an all-stock deal, and it looks like they outbid some Cash+Equity offers in the process (source: https://en.wikipedia.org/wiki/Acquisition_of_21st_Century_Fox_by_Disney).