When Warren Buffett attempted to make a $ 3 billion investment in Uber Technologies, the ride-sharing company said no thanks. Bloomberg reported that Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) proposed making a convertible loan to Uber totaling well over $ 3 billion. "
Buffett likes these kinds of deals." If the borrower (Uber) succeeds and his stock gains in value, the lender (Berkshire) can participate in the appreciation by turning the debt into equity. that it is a loan that has the potential to generate a stock-like return, while providing many protections that are more creditors than owners.
Berkshire Hathaway made Finally, billions of dollars for shareholders by doing similar business with Goldman Sachs and Bank of America during the 2008 financial crisis and the European debt crisis of 201
Omaha Meets Silicon Valley
I've written a lot about the Buffett Award, or the billionaire's ability to make a particularly good deal based on his reputation. Business with Bank of America and Goldman Sachs are prime examples. Buffett injected capital and credibility into the banks when they needed it most, and garnered a huge return on the service.
But Silicon Valley unicorns are a different animal than banks on the sidelines. Private tech companies promote their valuations almost as much as their products, so investing Buffett, a man known for doing a tough business, does not have the glamor he has elsewhere.
Fast growing tech companies love to use tricks to disguise and even inflate their reported value. Last year, Uber agreed to a gimmick deal with SoftBank, which allowed existing owners to pay off at a discounted rate, while the ride company claimed that their value had not moved at all.
SoftBank and its affiliates divested approximately $ 8 billion of Uber stock buy-outs from existing owners at a lower discount to the most recent valuation. Investors bought a smaller stake directly from Uber for a valuation of about $ 70 billion, in line with the valuation of their most recent fundraising round.
The two investments total Uber at about $ 54 billion, according to Bloomberg. But the structure of the deal allowed Uber to declare its final round in line with previous fundraising as SoftBank bought a small stock of stocks at a $ 70 billion valuation. If you buy a lot of stocks at a low price and a few stocks at a high price, the actual valuation is probably closer to the lowest price – except in Silicon Valley.
Special Situations in Silicon Valley
Berkshire Hathaway has recently become more comfortable with companies in the tech industry, as evidenced by its $ 43 billion stake in Apple . But to my knowledge, it was not particularly active in sourcing or negotiating deals to invest in private companies with a short operating history.
There are a few things I notice when Buffett comes into contact with Uber:  Buffett is not the bullish on the carpool service: Admittedly, convertible securities are more common among private tech companies, but I suspect Buffett liked the added disadvantage of being a lender rather than a pure stock investor. We do not have all the details, but since Uber has finally entered into a stock agreement with SoftBank, Uber seems to have preferred to sell stock in debt. Buffett wanted to become a lender.
Whatever it takes, a $ 3 billion investment would not be a bottleneck for a company with more than $ 300 billion in stocks, bonds and cash. But for an 87-year-old man who still uses a flip phone bets over $ 3 billion in a company for a smartphone app, for me is one of the interesting financial stories lately.
Jordan Wathen has no position in any of these stocks. The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B-shares). The Motley Fool has the following options: long January 2020 calls Apple 150 and shortly January 2020 155 calls to Apple. The Motley Fool has a disclosure policy.