Can Uber Make It to an IPO?

Uber has delayed an IPO, and investors aren't sure whether that has been good for them or not.
By Anders Keitz ,

Editor's Note: This article was originally published on Real Money at 10:15 a.m. on July 22.

You've got a billion-dollar idea. Then the world tells you it's more of a $100 billion idea. Do you cash in as soon as possible or ride it out as long as possible?

If you're Uber, you go for the ride.

But that may not be by choice.

Uber was hailed one of the top IPO prospects for 2016, but looking at the second half of the year, an IPO for the ride-sharing company looks to be a long way off.

CEO Travis Kalanick has continued to push back any notion of an IPO.

At the NOAH Berlin conference in the beginning of June, Kalanick said that the company would go public "as late as humanly possible," according to a Business Insider report (which technically would be until the end of civilization). When questioned if investors asked him about an IPO, the CEO replied, "We have an obligation to ultimately find liquidity for investors."

But investors could ultimately drive Uber to go public.

Kathleen Smith, manager of IPO-focused exchange-traded funds at Renaissance Capital, believes that Uber should have gone public "long ago."

So, what's holding it back?

The San Francisco-based company is in the midst of a legal battle with drivers who are seeking employee status -- a designation that could hurt Uber's profitability as the company would have to start paying employee-related taxes, such as payroll taxes.

But Baruch College Professor Steven Melnik, who specializes in tax law, said in a phone interview with Real Money Wednesday that the company's current tax situation is not the main reason for the company to stay private.

There is also not a lot of pressure on Uber to go public given that plenty of capital is available, Smith said in a recent phone interview with Real Money. That is especially true considering its current valuation of $62.5 billion.

Uber's ability to attract capital even makes the private company look more like a public company. In January of this year, CNBC's David Faber said, "By many standards and ways, [Uber] is resembling a public company given how broadly it raises money." That statement introduced news that Morgan Stanley (MS) - Get Report created a special fund, called New Riders LP, for wealthy clients to invest in the ride-sharing company.

But determining if Uber is actually worth $62.5 billion is difficult. A public company is required to disclose financial statements, meaning there is more transparency than with a private company. In the middle of January, Bloomberg reported that an offering document sent by Morgan Stanley included risk factors for clients, but it did not include basic financial information, such as net income and revenue figures.

"Without the information, the valuation is like augmented reality," Smith said.

Furthermore, the Jumpstart Our Business Startups Act, or JOBS Act, increased the number of shareholders a company can have before it must disclose financial statements. Under the new rule, the threshold number of shareholders that triggers registration and reporting requirements was increased to 2,000 persons from 500. A company also becomes subject to these requirements if it has 500 persons who are not accredited investors.

The 2012 law means that Uber can keep gathering investments as a private entity for the time being and continue to bolster its multi-billion-dollar valuation. But that eventually will have to change.

"There has to be a path to monetization for investors," Smith said.

According to global management consulting firm McKinsey, two factors often make an IPO inevitable.

First, the company needs to have exceeded the maximum number of shareholders allowed (i.e., JOBS Act); and second, shareholders who seek liquidity could force an IPO.

"Investors typically want to provide returns to their LPs on a seven- to 10-year time frame and, therefore, often push for IPOs," according to McKinsey.

Uber's investors have remained tight-lipped about whether they support the CEO's decision to hold off on an IPO for as long as possible. There are no other media reports that seem to show support for the company's quest to remain private. Various firms with investments in Uber would not directly comment on Kalanick's comments or did not return calls.

With Kalanick at the helm, an Uber IPO will likely be a long journey.

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