How did the Government Shutdown Affect the Lyft and Uber IPOs? What are the Future Implications?
The recent government shutdown prevented privately held companies from submitting their requests to the Securities and Exchange Commission (“SEC”) to offer their shares to the public. The SEC is responsible for reviewing a company’s registration documents and financial data necessary for initial public offerings (“IPOs”). Prior to the shutdown, the SEC urged companies to file accelerated registration statements so that they could be approved. (Era Anagnosti et al., White & Case). Although companies may go public without SEC approved registration statements, the company would certainly be subject to SEC scrutiny upon the government’s reopening. (Rob Crilly, The National). Consequently, most companies decided to wait for approval from the SEC prior to their IPOs being made available.
Due to the partial government shutdown, the SEC was not able to review corporate registration statements until it reopened at the end of January. As a result, Lyft and Uber recently received feedback from the SEC regarding their IPO registration documents that were filed in December 2018. (Eric Newcomer and Olivia Zaleski, Bloomberg Law). The delay caused by the shutdown may have burdened companies that hope to IPO by causing administrative delays. In contrast, companies with a “strong balance sheet” are not relying on the additional funding from IPOs as heavily, and consequently will fare the shutdown easier. (Rob Crilly, The National).
Deciding whether to go public is an important decision, and business analysts emphasize that it is not for all companies. The average cost for a company to IPO is $13 million, and the expenses continue as a companies comply with reporting requirements once public. (Candace Elliot, Listen Money Matters). Additionally, public companies face greater scrutiny than private companies, and public companies are audited on an annual basis. (Id.). Still, there are financial advantages for a company that goes public by way of an IPO. A typical IPO, which is a sale of a company’s stock, raises between $100-$150 million. The company then has better financing options after it has raised money through the sale. (Id.). An investor who is looking to invest in IPOs should objectively research the company’s health, read the prospectus, and choose a company with a strong underwriter in order to lessen the risk of investing in shares that fall in price shortly after the company’s IPO. (Id.). Companies that have been profitable while privately owned and have a strong balance sheet are less likely to fail after IPOs.
Uber and Lyft have demonstrated significant profit as private companies and are in strong financial positions to engage in IPOs. Uber, for example, was valued at $40 billion in 2018 (Id.) and Lyft was valued at $15 billion (Trefis Team and Great Speculations, Forbes). Moreover, the companies have remained private for six years since their inception, which is significant because of their size and value as privately-held companies. (Rob Crilly, The National). A person familiar with the matter said Lyft is planning for a March or April listing, however representatives for Uber, Lyft, and the SEC declined to comment. Market analysts have predicted Uber’s valuation after its IPO to be $120 billion (Kate Clark, Tech Crunch) and Lyft’s valuation to be between $18-$30 billion. (Biz Carson, Forbes), which is a significant valuation increase for both companies.
Ironically, despite the shutdown’s impact on IPOs, the Trump Administration strongly supports companies going public. Specifically, the Trump Administration chose SEC chairman Jay Clayton because of his focus on making it easier for small companies to go public. (Ben Bain and Robert Schmidt, Bloomberg Law). Moreover, the Trump Administration defends the record-long shutdown despite voters blaming President Trump for the impasse. (Erica Werner, Damian Paletta, and Sean Sullivan, Washington Post). Despite the Administration’s defense of the first shutdown, lawmakers from both sides of the aisle were eager to reach an agreement in order to avoid another government shutdown, which was accomplished on Friday, February 15, 2019. (Id.). The SEC can continue clearing out its backlog of IPO filings if the government remains open for the rest of the fiscal year, which would be advantageous for companies aiming to IPO in 2019.
Dara Khosrowshahi, Uber’s CEO, is confident that the company will not be negatively affected by the government shutdown. However, the same may not be true for smaller companies intending to undergo IPOs in 2019. Khosrowshahi reiterated that “the plan was on track [and] a strong balance sheet meant a delay would not be a problem.”(Rob Crilly, The National). When asked what would happen if the company stayed private, he stated that he would “be disappointed . . . [and] the shareholders would be disappointed but the company would be just fine.” (Id.).
Specifically, Khosrowshahi is alluding to the fact that companies with large balance sheets will be better positioned to ride out delays in accessing investors' cash, whereas smaller companies that are looking to undertake IPOs as “the next round of funding may have to trim operations instead.” (Id.). Consequently, the government shutdown will have a stronger effect on smaller companies who are relying on the increased funding obtained as a result of an IPO. As Khosrowshahi stated, the majority of large companies will fall into the former situation while small companies may unfortunately find themselves in the latter situation. Only time will tell how significantly the shutdown impacted IPO registrations, however it is evident that the future is uncertain for companies that were relying on IPO for funding in the first half of 2019.