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How Uber became so intertwined with Saudi Government

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Monday 05, November 2018

Even as Uber’s lawyers finalised the details of the deal, they still couldn't quite believe it would really happen.

(Bloomberg)--The Saudi Arabian Government was set to give the San Francisco-based start-up $3.5 billion, an astronomical amount. The company’s legal team had to double-check that it was even possible to send that much money in a single wire transfer. But on 1 June 2016, the Saudi Public Investment Fund sent Uber Technologies Inc. the cash in one lump sum. It was the largest single investment from a foreign government to a venture-backed start-up ever—and still is.

The sprawling consequences of that mega-deal have yet to fully unfold. Two years ago, the money helped Uber settle its war with Didi Chuxing in China, fortified its position against rival Lyft Inc. and empowered then Chief Executive Officer Travis Kalanick ahead of a long, pitched battle with investors who ultimately pushed him out. Now, the deal is drawing Uber into a global reckoning over the business world's relationship with Saudi Arabia.

Bloomberg has learned that through direct and indirect holdings, the Saudi government owns more than 10 per cent of the ride-hailing company. Its board also includes Saudi official Yasir Othman Al-Rumayyan, the managing director of the Kingdom’s sovereign wealth fund, and an ally of Saudi Crown Prince Mohammed bin Salman, the fund’s chairman. As the fallout from the murder of Washington Post columnist Jamal Khashoggi at the hands of Saudi agents roils Silicon Valley, there is arguably no company more deeply intertwined with Saudi Arabia than Uber.

That’s complicating efforts by Uber’s current CEO, Dara Khosrowshahi, to put a new face on the company as it moves toward an initial public offering targeted for early next year. Khosrowshahi, an Iranian immigrant, was one of the first to pull out of a Saudi-led investing conference in October. But he'll have a harder time severing his company's broader relationship with a government that's now been implicated in the grisly murder of a journalist.

What follows is the strange story of the massive deal that has already shaped one of the world’s most valuable startups, and whose effects will ripple well into the future. It spans Uber’s operation to spy on a Chinese rival, an international bribery investigation, and the starkly different positions of Khosrowshahi and Kalanick in the face of a simmering geopolitical crisis. This account is based on more than half a dozen current or former employees and investors, all of whom spoke on condition of anonymity in order to protect their relationship with Uber.

The financial opportunity in Saudi Arabia first appeared on Kalanick’s radar in 2016. That spring, then Uber executive David Plouffe, Barack Obama’s former campaign manager, was making a three-city tour to Cairo, Dubai and Riyadh. Uber was already operating in Saudi Arabia, where it pitched its service as a safe way for women to get around in a country where they were not allowed to drive. In Riyadh, Plouffe met with top Saudi officials, including Public Investment Fund manager Al-Rumayyan.

In those talks, Plouffe learned more about the Saudi government’s plan to diversify its investments and reduce its dependence on its vast oil industry, said two people familiar with the discussions. The Public Investment Fund declined to comment for this story.

At the time, Uber was thirsty for more money. The company was deeply embroiled in a drag-out fight in China with local rival Didi Chuxing. The two companies were spending billions discounting rides and recruiting drivers in an attempt to crush one another. Gaining market share had turned into a question of who could light more money on fire. By 2016, Uber realised it would have to call a truce, and that cash on hand would be a key part of leverage in the ultimate deal. The company with more money, it was clear, could hold out longer and win better terms.

So, when Apple Inc. invested $1 billion in Didi in May 2016, Uber panicked. The company had raised plenty of money, but it was spending it on unprofitable businesses all over the world.

It was against this backdrop that Uber started to discuss a possible deal with the Saudi Arabian sovereign wealth fund. The terms were relatively straightforward. The Saudis would buy shares at the same price as a previous investment led by Tiger Global Management earlier that year, valuing the business at $62.5 billion. The Public Investment Fund had one primary request: It wanted a board seat. Uber agreed.

Kalanick was also able to use the investment to expand his own power within Uber. The CEO directed his staff to draft documents that would expand the board, not just including a new seat for the Public Investment Fund, but also three other board seats he would be able to fill.  His demands came at a time when Uber was flying high, and its board largely served as a rubber stamp, according to people familiar with the company. No one really considered blocking Kalanick’s power grab, especially since it was tied to a $3.5 billion investment. The board unanimously approved the changes.

When it came time to announce the deal, there was some trepidation inside Uber's policy and communications team about taking Saudi money. The primary objection cantered around gender discrimination in the country, and in particular, the ban on women driving. In an effort to build goodwill that May, Uber’s policy team added Princess Reema bint Bandar Al Saud, a member of the royal family and a vocal women’s rights advocate in the region, to its global policy advisory board.

On 1 June, the company announced the investment and waited for the reaction. A call to boycott Uber bubbled up on social networks. The feminist activist group Code Pink rallied against the company. “We protested at Uber’s offices. We did these petitions. We were bugging them on social media,” Code Pink co-founder Medea Benjamin recalls. But the criticism didn’t stick. Said Benjamin: “We couldn’t get any traction.”

Uber wasn’t just monitoring the media that day. It was also very literally watching the competition. In a bizarre twist, when the company announced the deal, it sent a surveillance team to covertly watch Didi’s president, Jean Liu, who was in the US for the Code Conference at the Terranea Resort in Rancho Palos Verdes, California. The team recorded her reaction to learning about the Saudi investment while in a public space at the resort. Whatever her reaction was—no one who spoke to Bloomberg was willing to elaborate—the news seemed to have an impact.

Two months later, Uber reached a deal with Didi. Though it was largely a tactical retreat, Uber could still make billions in China, and Kalanick declared victory.

But the triumph was fleeting. While the deal forced Didi to the negotiating table and furthered Uber’s global expansion plans, within a few months cracks in the new alliance were starting to show, and Kalanick’s problems were growing. By 2017, Uber was roiled by a series of scandals over its workplace culture. It was also increasingly at odds with the US Government. The Justice Department had started looking into allegations that Uber violated bribery law in its business dealings around the world. The result of that investigation is still unclear. As part of the company’s response to the probe, Uber’s outside legal team also explored the company’s relationship with Princess Reema. The lawyers found no evidence of any improper conduct. A representative for Princess Reema wrote in an emailed statement: “Since no payments were made, then obviously there could be no violation of American laws.” A spokesman for Kalanick didn’t respond to emailed questions.

As Uber’s crises mounted, a group of investors turned on Kalanick that summer, kicking off another power struggle. Facing an intervention (that notably did not include Al-Rumayyan), Kalanick announced a sabbatical and then resigned a week later. In the fallout, early Uber investor Benchmark filed a lawsuit claiming that it had been misled about the state of the business when it agreed to give Kalanick control over three board seats. Benchmark ultimately dropped the suit as part of a truce with Kalanick. By then, he had already filled the seats.

When he took over, Khosrowshahi set to work trying to salve Uber’s many scandals, and there was little indication that its ties to Saudi Arabia would ever become one of them. By 2018, things were going so well that Uber effectively re-upped its relationship with the country by raising $9.3 billion in funding in a deal led by SoftBank Group Corp. The enormous check was a coup for Khosrowshahi as Uber’s new CEO. And behind the scenes were the Saudis, who provided $45 billion in funding for the $93 billion SoftBank Vision Fund. While the investment is currently on SoftBank’s corporate books, like many of its investments not made directly through the Vision Fund, this one is also expected to transfer over to the fund after government approvals.

As recently as this summer, when Saudi Arabia lifted its prohibition on female drivers, Uber’s relationship with the kingdom appeared trouble-free. American conventional wisdom saw Prince Mohammed as a liberalizing force, despite the anti-corruption purge in 2017 that was viewed as a bid to concentrate power. The relationship had been so productive that Uber was considering doubling-down in the region with an acquisition of Dubai-based ride-hailing company Careem. (Today, Uber is still considering making the acquisition, one person said.)

Then, in October, journalist Jamal Khashoggi was killed in a Saudi consulate in Istanbul, trying to pick up his marriage papers. Allegations started piling up that Prince Mohammed was involved in orchestrating the killing. Within days, the event became a full-blown public relations disaster for Saudi Arabia and its US business partners, after nothing else seemed to stick. “This is a real turning point,” said Code Pink’s Medea. “So much has changed in one month.”

Plunged into crisis mode, Uber board member Arianna Huffington was one of the first to pull out of the Saudi’s October conference. Uber privately wrestled with what it should do. Executives implored Khosrowshahi to move swiftly, predicting accurately that there would soon be a mass exodus of executives from the event. Khosrowshahi called Al-Rumayyan to tell him that he would not attend. 

One man, however, did not publicly distance himself from the Saudis. Kalanick was spotted in Riyadh the week of the conference. And unlike other leaders including Y Combinator’s Sam Altman and former US energy secretary Ernest Moniz, he has not announced that he’s withdrawing as an adviser to Neom, the Saudi mega-city project. Kalanick’s links to the country stretch back before Al-Rumayyan proved a faithful ally during his fight with the board, to 2016, when he met with Prince Mohammed at San Francisco’s Fairmont Hotel.

Kalanick’s association with the Saudi Government, however unpopular, is not exactly surprising. The Uber co-founder has long had a reputation for a win-at-all-costs mentality. “There was a general perception that they would take money from anyone,” said Arun Sundararajan, a professor at New York University’s business school who wrote a book called The Sharing Economy. But Khosrowshahi has tried to build a more principled reputation. He has enshrined, “We do the right thing. Period,” as one of the company’s cultural values. Much of Khosrowshahi’s first year at Uber was spent apologising for Uber’s past transgressions. It now appears he’ll have another one to add to the list.

It will be a delicate task. Khosrowshahi’s position is particularly interesting because of his Iranian heritage, which he has talked about frequently in past public appearances. Iran has long been a foe of Saudi Arabia, and the tension between the two countries is thought to be shaping the ongoing fallout around Khashoggi.

Executives involved in cutting the deal with Saudi Arabia said there isn’t much that Khosrowshahi can do to extricate Uber from its deep ties to the kingdom. The best hope for resolving Uber’s Saudi stigma, insiders said, is for the company to go public, giving it more latitude to reshape its board. Public companies have little control over their investors, potentially absolving Uber of some of the blame for an autocratic bedfellow.

So far, Uber’s strategy appears to be waiting out the public backlash. The company’s board met Tuesday in a marathon meeting attended by the entire board, including Kalanick and Al-Rumayyan. Khosrowshahi was scheduled to present his plan for 2019 as Uber prepares for a public offering. And Al-Rumayyan’s status as a director, the company said, is unchanged. At least for now, Khosrowshahi seems willing to ignore the Saudi in the room.

TAGS : Uber, Saudi Public Investment Fund, Uber Technologies Inc., Yasir Othman Al-Rumayyan, Mohammed bin Salman, Jamal Khashoggi

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