April 17, 2019

Breakingviews: Uber’s wordy risk factors mix tedium and terror

by Breakingviews.

The “risk factors” section of a prospectus is the first thing prospective investors in an initial public offering should read. Uber Technologies’ warnings to buyers of its shares are a wordy mix of tedium and terror.

Since Microsoft managed with just 1,100 words or so when it went public in 1986, U.S. technology firms seeking to go public have steadily ramped up the extent of the caveats for would-be investors (see chart). Ride-hailing app Uber’s draft risk factors run more than 35,000 words, topping smaller rival Lyft at just under 30,000. The extra wrinkles when foreign companies like Alibaba float in the United States add some verbiage, but even the massive Chinese e-commerce outfit required fewer words overall than Uber when it listed back in 2014.

American society’s litigiousness partly explains the sprawl. Disclosure doesn’t absolve companies of liability, but it does provide a bit of legal armor. There’s also a ratchet effect over time. If one company says something new, such as that earthquakes may harm it, other firms – or their lawyers – tend to play safe by adding the risk to their own list. Natural disasters, U.S. government regulation and class-action lawsuits are all listed as potential problems in Uber’s prospectus. None made an appearance in Microsoft’s.

The growing complexity of a maturing technology sector also plays a part. Sexual harassment, company culture, accounting compliance and social media all routinely make appearances today. Uber, for example, says its brand is vulnerable to campaigns such as the #deleteUber effort during the messy tail end of former boss Travis Kalanick’s tenure. Meanwhile, startups enjoy cheap web services from the likes of Amazon, but they must admit there’s a chance of being stuck with a single provider or getting hacked.

Yet part of the risk-factor spread is simply that dicier firms are floating. Only 16 percent of the tech firms that went public last year were profitable, according to Jay Ritter, a University of Florida professor. That’s the lowest percentage since the dot-com boom 20 years ago. Levi Strauss, the profitable jeans maker that just returned to public markets, was retro with its risk factors, too – its screed clocked in at less than half the length of money-losing Lyft’s or Uber’s. The quantity of tech disclosures is worrying in itself, but what they reveal about the underlying businesses is what investors should find alarming.


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