It was recently reported that Warren Buffett considered investing $3 billion of Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) capital in ridesharing giant Uber. While this may seem like an out-of-character investment for the Oracle of Omaha, a closer look shows that Uber does indeed have some of the qualities that Buffett loves to see.
It's tough to overstate the value Buffett places on good managers. He believes the right management team can add billions of dollars to a company's intrinsic value, while the wrong management team can have the opposite effect.
Buffett's emphasis on good management can be seen in any of his widely read letters to Berkshire Hathaway shareholders. He spends a substantial amount of time each year writing about the leaders of Berkshire's various businesses and why they are the right people to be in charge.
Because of this, it shouldn't be too much of a surprise that one of the primary reasons Buffett was interested in Uber is because of his high opinion of CEO Dara Khosrowshahi. In a recent CNBC interview, Buffett said that he's "a great admirer" of Khosrowshahi, and it seems like the feeling is mutual.
"One of my business goals in life has been to get Warren Buffett to invest in something that I'm involved in and, so far, I failed," Khosrowshahi said.
If you're not familiar with his resume, Khosrowshahi was CEO of Expedia (NASDAQ:EXPE) from 2005 through 2017, when he was offered the top job at Uber, where he succeeded founder Travis Kalanick.
In addition, Uber has some clear competitive advantages and other characteristics that may appeal to Buffett. Just to name a few:
- Uber has a dominant 77% of the ridesharing market.
- Uber has an extremely valuable brand name. The latest estimates by Brand Finance put the value of the its brand name at $14.6 billion.
- Uber has advantages over traditional alternatives (taxis) in terms of technology. It is simply easier and more convenient to call, track, and pay for an Uber rise than it is to hail a cab.
- Uber also has an advantage when it comes to quality assurance. Drivers are rated by riders, which ensures that the overall experience is preferable to taxis.
Buffett also likes businesses that have lots of cash compared to their debt, and Uber definitely qualifies. At the end of the first quarter, Uber had $6.3 billion in cash on its balance sheet and a relatively small amount of debt.
Why did the deal fall apart?
The specific details of the talks between Uber and Berkshire aren't public information, but we do know that the two companies disagreed on terms and the size of the deal.
As far as the size of the deal is concerned, Berkshire generally needs large investments to really move the needle. Buffett initially proposed investing well over $3 billion in Uber, and Khosrowshahi proposed a deal size of just $2 billion. Reports indicate that the final amount that was being considered was $3 billion, so it's possible that Buffett wanted to own more of the company than Uber's management was willing to let go.
It's also possible that Buffett wanted more favorable terms than Uber was willing to offer. Buffett is notorious for getting excellent terms when injecting Berkshire's cash into businesses with reputational issues, which Uber certainly has. Berkshire's post-financial crisis deal in Bank of America (NYSE:BAC), where Buffett essentially got free warrants to buy 700 million shares of common stock in exchange for buying preferred stock in the bank was one of Buffett's biggest investment wins in recent years.
In a nutshell, in exchange for his vote of confidence in the company, Buffett may have wanted better terms than other investors could get. This was likely the biggest reason a deal didn't happen.
Could a Berkshire-Uber deal still happen?
It's entirely possible that a deal between Berkshire and Uber could eventually happen. Uber anticipates going public in 2019 and a Buffett investment could go a long way toward boosting investors' confidence. For the time being, however, it looks like the deal is dead.