Why Amazon Should Buy Uber
Uber is the hottest startup in the world, boasting a valuation of $40B and collecting $2.4B in venture funding in 2014 alone. The “Uber Model” is the gold standard for making quick startup comparisons, everyone is the “Uber” for X. So what’s next for Uber? Expansion into new markets (Southeast Asia) is obvious and handling same-day shipping logistics a natural fit, but there’s certainly more on the horizon.
The common assumption is that Uber will become a standalone business with an inevitable IPO. However, what would an acquisition prior to then look like? There’s only a couple of tech companies in the world with the capacity to make such a bold move. The one that seems like a natural fit is Amazon.
Amazon’s strategy is compelling — a tech conglomerate of separate business units with independent P&Ls. Some divisions are stable and profitable (Amazon Web Services, a nearly 100% gross margin business). Other divisions are startups in themselves and operate at a loss (think drones, on-demand delivery). Profits from division X are distributed to support the lucrative future of division Y, leading to zero cash flows, with all operating cash flows being reinvested into the business. Eventually, Amazon will turn the “profit screws”, given their commanding market position.
the numbers
Let’s start with the easy one: publicly-traded Amazon. AMZN’s market cap is $146B on $74B of annual revenue. They hold $6.8B in cash and short-term investments on hand, so an Uber acquisition would have to include significant stock and and likely a draw down on the $2B line of credit Amazon has available. Amazon has already taken on additional debt in the last several years, with $9B in liabilities on their books and $49M in interest paid in Q3, and it’s unlikely they would be able to fund the majority of a cash-bleeding (for now) Uber acquisition with debt.
Any Uber acquisition would happen at a premium to their fundraising valuation. Uber has had no trouble raising cash, with $2.4B closed in the last 6 months and a valuation going from $3.7B in August of 2013 to $17B in June of this year to $40B today. If Uber plans to IPO by Q1 of 2016 — with many in the industry expecting a 2015 IPO — they could burn $160M a month getting there. That buys quite a few free rides in new markets.
Since a $60,000,000 valuation on Jan 1, 2011, Uber has created $28.6 million dollars of value every single day. By comparison, it took Amazon over 16 years to reach a market cap of $40,000,000.
If we assume a 50% premium for a strategic buyer (AMZN) over a financial buyer (the latest investors — ignoring the strategic interests held by many) and an incredibly high-growth market leader, an acquisition may be feasible today in the $60B range. To make it work, AMZN would probably have to unload most of their cash holdings to pay off the $2.7B in previous investment, and fund the remainder with debt and stock to get to $60B. Assuming at least 2/3 of the deal is made in stock, AMZN would have to issue over 125 million shares to cover the $40B — representing 1/5 the company.
Not really buying low.. But then again, many thought Facebook was overpaying for Instagram at $1B, now estimated at approximately $20B. Not bad. Uber, at that multiple, would be worth $800B down the road as a standalone business — the most valuable company in the world.
aligning strategies
How would Uber and Amazon become more valuable together than they are separate (nearly $200B)? Let’s look at what each does well.
Uber: A network of tens of thousands of drivers. Travel logistics. Supply-and-demand equilibrium pricing algorithms. Travis Kalanick.
Amazon: Widest product offering on earth. Ability to be low cost leader. Huge market share. Economies of Scale. Distribution logistics. Jeff Bezos.
We see three advantages in combining respective strengths:
On demand delivery: It’s no mystery that Amazon is experimenting with on-demand/same day delivery. Products like Amazon Fresh and the use of drones to deliver products within 30 minutes of a customer’s order are already being tested. Since drones are 10–15 years away from being adopted by regulatory bodies, Uber’s network of drivers (and, eventually, driverless cars) could fill that void. Glass ball: Amazon increases investment in smaller distribution centers located within metropolitan areas. Utilizes Uber drivers as delivery drivers in between rides, giving Uber drivers less down time, increasing wages and the supply of Uber drivers. The highest demand for Uber drivers is from 10 pm to 2 am, leaving a lack of demand between 4am and 4pm. Drivers would be able to commit to being a full time Uber driver, creating more full time Uberteneurs (Trademark, babay). That influx of drivers would in turn make the customer experience even better (read: instant gratification) for both Uber and Amazon.
The Amazon Storefront: Through Uber, Amazon transitions from an e-commerce company to a company ingrained in the daily lives of millions of people. Coupled with on-demand delivery, Amaze-uber will own hyper-local marketing, knowing you’re in the car at a given time with certain events going on around you. Your entire travel history. Purchase history. What time you get an Uber to go to football practice. Taking Uber to work, and have a meeting scheduled on your calendar over lunch? Amazon Fresh will bring you lunch before. The distribution logistics efficiencies of combining Amazon with a fleet of hundreds of thousands of mobile storefronts would be invaluable.
Data: Oh, the data. Nate Silver wouldn’t even know what to do with all the data.
Over a billion rides given yearly (A mark Uber should easily hit in the coming years) bringing distribution efficiencies to Amazon delivery, with the ability to push Amazon’s storefront to all of those riders, AND a treasure trove of data for the combined Amazeuber. Uber can increase top-line revenue for Amazon substantially through Uber’s existing business (1 billion rides x $15 average ride = $15B gross revenue), Amazon’s mobile storefronts, and increasing demand for same-day delivery of Amazon products. And, Amazon would likely be able to reduce shipping costs long-term (9% of sales in 2013 — $6.5B) with an in-house solution for pricier on-demand delivery and decreasing reliance on external couriers. It’s not hard to imagine a return of much more than $60B long-term with the synergies (okay, we had to use that word once) of an Amazon-Uber corporation.
leadership
Uber was founded by the toe stepping, boundary widening, Travis Kalanick. Jeff Bezos of Amazon is similar to Travis with his bold bets, competitive nature, and willingness to forego short-term earnings for long-term returns. Riches are irrelevant to these two founders as their egos drive them to become the last one standing.
So?
Yeah, this would never happen. Bezos and Kalanick are too egotistical to combine efforts, even though Bezos is an investor in Uber. Their competitive nature and desire to be the top dog is why they’ve been so successful to date, and that won’t change anytime soon. Even if the founders meshed, an Uber acquisition would be a tough sell to Amazon investors, who would be agreeing to give up 20% of the company.
But, those profit screws Amazon is destined to turn some day would get a hell of a lot bigger with Uber under their wings, making an acquisition fun to dream about.
Hmm… Lyft?
