Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
In five years, Uber has gone from a train-wreck initial public offering to a record-high share price. Reaching long-awaited profitability has almost doubled the market value of the San Francisco company to $161bn. It plans to share its good fortune with investors by launching a $7bn share buyback programme. But there is another reason why Uber might want to repurchase its own shares.
Over the years, the ride-hailing and food delivery company has handed out generous equity awards to employees, inflating the total share count. A recent performance-related bonus paid to chief executive Dara Khosrowshahi highlights the difference between the number of shares traded on markets and the fully-diluted total. The payout required Uber’s capitalisation to top $120bn for three months.
Wind back three months from the date it was granted and Uber’s market cap was hovering around $97bn. But the company used a higher share count to calculate its boss’s payout, which included options held by employees. This, plus the use of an average share price over the period, explains why Khosrowshahi’s options were granted almost a month before Uber’s market cap exceeded $120bn for the period in question.
A substantial amount of Uber’s fully diluted share count comes from stock awards handed to employees. Increasing the pool of stock dilutes the stake of existing investors. Buybacks can neutralise this. Research by Bruce Dravis, former chair of the American Bar Association’s corporate governance committee, found that between 2009 and 2019 over one-third of repurchased shares had the effect of simply reversing dilution caused by equity compensation schemes.
Of course, not all equity awards will be cashed in. Nor will they arrive on markets in one go. But Uber shareholders should be aware of their scale. If Uber intends to implement a consistent reduction in share count, as it claims, large buybacks will have to be the norm, regardless of the price at which shares trade or other opportunities to invest in the growth of the company.
Khosrowshahi has defended Uber’s buyback plans in a letter to FT. It is not alone in handing out big stock awards. These can be useful. When free cash flow is limited, they give employees a reason to stick around while also keeping companies’ cash expenses down. Khosrowshahi’s options were agreed in 2017, when he took over running Uber from founder Travis Kalanick.
Uber calls its $7bn buyback programme a vote of confidence in the company’s financial momentum. Perhaps. But it is also a way to manage the hit from an ever-growing share count.
Read the full article here
