Tilman Fertitta has purchased the Houston Rockets from current owner Les Alexander for the stunning sum of $2.2 bn. The sales price breaks the National Basketball Association (NBA) record sale of $2 billion from when the Clippers were sold to Steve Ballmer a few years ago. Fertitta was the runner-up when the Rockets were last sold back in 1995, by Charlie Thomas. Alexander bid $85MM; Fertitta bid $81MM. One might say that was about the most expensive $4MM underbid in quite some time. Conversely you might say Alexander made quite the investment, locking in returns which come out to about 15% annualized.
Fertitta is from nearby Galveston and made his fortune in the restaurant business. Will he continue the current direction of the Rockets, led by analytics wiz General Manager (GM) Daryl Morey? At this point Fretitta has not made any public statements but in late July Alexander made sure to lock up his senior management team, including Chief Executive Officer (CEO) Tad Brown, Morey and coach Mike D’Antoni. Given the direction the Rockets have taken over the past couple of years, one can hope Fertitta will maintain stability.
The same should not be true for new Uber Technologies Inc. (Uber) CEO Dara Khosrowshahi, who had been the CEO of the online travel company Expedia. According the New York Times (NYT), “the company’s troubles run deeper than Mr. Kalanick’s flubs and scandals, and new leadership alone won’t be able to right this distressed ship.” It is well known that approximately 70% of Silicon Valley start-ups fail and the NYT notes that Uber may be a candidate for failure if Khosrowshahi cannot right the ship. On the financial side of things, “Uber has never figured out how to offer taxi service at a lower price and still earn a profit. It lost nearly $3 billion in 2016 (plus another billion or two in China), and it has already lost over $1.3 billion in the first half of 2017.” Indeed, there are troubling signs as “some investors are publicly saying Uber is worth far less than $70 billion, and the Uber board is offering shares to new investors at a discount.”
This does not even get to the toxic culture which existed with former CEO Travis Kalanick, as detailed in the Holder Report. Here Khosrowshahi must work to rid the company of the frat-house culture that existed under Kalanick. He should move swiftly to implement the recommendations in the Holder Report of both cultural, control and structural changes. Equally important is Uber’s relationship with its field based employees – its drivers. In most companies, the nefarious conduct happens in the field rather than the corporate headquarters. At Uber it was the opposite. However, Uber apparently has a poor relationship with many of its drivers. As the NYT noted, “Khosrowshahi should find a way to repair Uber’s poor relationship with its drivers, since the company will need them for a good while longer. One study found that only 4 percent of people who sign up to drive for Uber are still driving a year later. Uber burns through drivers as fast as it burns through its investors’ cash.”
Finally, and near and dear to the heart of most compliance practitioners, is the Uber Foreign Corrupt Practices Act (FCPA) investigation. It really should not be any surprise that Uber would be investigated for engaging in bribery and corruption. The Holder Report detailed a litany of unethical conduct. Their conduct in the Waymo litigation has been so unethical that the judge has approved a special instruction to the jury regarding Uber’s lack of document production. Further, there was the software program, Greyball, which was designed to evade law-enforcement officials.
Douglas MacMillan and Aruna Viswanatha, in a Wall Street Journal (WSJ) in a piece entitled “Uber Faces Investigation of Possible Foreign-Bribery-Law Violations”, wrote that the Department of Justice (DOJ) “has taken preliminary steps to investigate whether managers at Uber Technologies Inc. violated a U.S. law against foreign bribery, according to people familiar with the matter. The agency has begun to review allegations that Uber may have violated the Foreign Corrupt Practices Act, which bans the use of bribes to foreign officials to get or keep business, these people said. Based on what it finds, the Justice Department may or may not decide to open a full-fledged FCPA investigation into Uber.” At this point the scope of the investigation is not clear, including the countries which might be the site of the investigations.
They went on to note that Uber previously has gotten into hot water in countries outside the US, “In South Korea and France, for example, it was found to violate transportation laws. In Singapore, local managers bou ght more than 1,000 defective cars last year and rented them out to drivers, only fixing the safety defect after one of the cars caught on fire.” Lastly, there was a charge brought by the Federal Trade Commission (FTC) that Uber recently settled and which alleged the company did not provide sufficient privacy protections for users of its app, which is every Uber customer.
Khosrowshahi certainly has his work cut out for him. On both the financial and cultural sides of the company and with all the outstanding regulatory issues. One suggestion I have is that Uber immediately, as in yesterday, hire one of the country’s top compliance professionals to work to clean up the company from the compliance perspective. From culture to internal controls to compensation; the company needs a full house cleaning and Uber needs someone who has done exactly that, with the DOJ watching over their shoulder through a Deferred Prosecution Agreement (DPA). Only such a person who has helped a company completely overhaul its culture and compliance program from top to bottom can step into this mess and try to straighten it up. While he is at it, Khosrowshahi should insist that a Board seat be given to a true compliance professional.
As to Fertitta, keep the ship steady. Let D’Antoni see if his system really can take a team to the NBA finals. Go Rockets!
Jay Rosen and I are back with a one hour edition of This Week in FCPA-Episode 67, the Harvey Edition. Check it out by clicking here.
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© Thomas R. Fox, 2017