Uber's Acquisition of Postmates: Financial Impact Analysis

MOS 4465 Acquisition Assignment December 14, 2023

Uber Technologies Incorporated’s Acquisition of Postmates Incorporated Details of Company Acquired Postmates Incorporated hereinafter referred to as “Postmates” was founded in 2011 by Sean Plaice, Bastian Lehmann, and Sam Street before becoming a prominent and well-respected player in the on-demand delivery service industry. Postmates gained popularity for its convenient and flexible approach to delivering a wide range of goods including food, groceries, alcohol and even non-food items. Postmates positioned itself on a few key features and aspects that aided in their increasing market share. These key features and aspects included a user-friendly application, promotions and discounts, expansions, and partnerships as well as its effective utilization of couriers and a gig economy model (functioned to allow flexibility in scheduling and provided opportunities for individuals seeking part-time or temporary work). Uber Technologies, hereinafter referred to as “UBER” acquired Postmates on December 1 st , 2020. The acquisition process, however, began on July 4th, 2020, when UBER announced the acquisition's commencement. UBER acquired 100% of Postmates for $3.494 billion in UBER stock, a $100 million dollar note, and a $308 million dollar stock-based compensation award based on pre- combination services. The share price of UBER stock is approximately $31.45 per share. A break-down of the total consideration given to acquire Postmates is shown in Figure 1 in the appendix. Based on the news articles published, the acquisition deal took over 5 months to finalize but the acquisition itself was completed all at once.

Allocation of Acquisition Differential There was no acquisition differential in UBER’s investment in Postmates. The figures used to compute the acquisition differential were collected from UBER’s financial statements as prior to the acquisition. UBER’s policy stipulates that in the event of an acquisition differential, the excess would be allocated to goodwill and intangible assets. The intangible assets acquired by UBER however, included Merchant Relationship, Fleet Relationship, Consumer Relationship, Developed Technology, IPR&D as well as Trade Names. Impairment of goodwill is to be tested annually and written down whenever necessary. Since the acquisition date there have been no goodwill impairment losses or other intangible asset impairment losses. Accounting Policies Both UBER and Postmates are American companies and follow the US Generally Accepted Accounting Principles which requires the cost method to be used when accounting for investments where the acquirer has control. UBER therefore consolidated their financial statements and, in the process, eliminated all intercompany balances. The purchase price is allocated to tangible assets and intangible assets acquired and liabilities assumed. The excess is then allocated to goodwill. UBER’s financial statements made no disclosures about the timing and expected impact of conversion to International Financial Reporting Standards.

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Impact of Acquiring Postmates on UBER’s Financial Statements The balance sheet in the year of acquisition in Figure 8 shows that between 2020 and 2021:  Cash and cash equivalents decreased by 24%,  Accounts Receivable increased by 127%.  Investments increased by 30%.  Intangible assets increased by 54%.  Goodwill increased by 38%. This was traced to the recent Postmates acquisition.  The other assets figure increased by 220%.  Accounts Payable increased by 265%.  Long term debt increased by 22%. Figure 8 shows the financial ratios before and after the acquisition of Postmates. Based on the changes to financial ratios such as the Current ratio, Debt – to – Equity ratio and Return on Assets ratio. The current ratio decreased from 1.44 to 0.98 post-acquisition which could wither have been a result of a decrease in the amount of current assets or an increase in current liabilities. This reduction in the current ratio suggests that in 2020, UBER Technologies was better able to service their current liabilities with their liquid assets whereas in 2021 they do not have enough liquid assets to service their short-term debts. A current ratio of 1 is deemed good therefore 2021’s current ratio of 0.98 is no real cause for concern. The Debt–to–Equity ratio decreased from 2020 to 2021, which signaled an increase in borrowing levels for working capital needs or for further business development. The Return on Assets ratio’s improvement from –0.2 to –0.01 post-acquisition suggests that assets are being used more effectively. However, the ratio is still exceptionally low, and it can be assumed that there is much room for improving this ratio.

Regarding the income statement in Figure 6, revenue increased by 56.7% in the year following the acquisition. Cost of revenue increased by 81% between 2020 and 2021 which was not related to the percentage amount increase in revenue over the same period. During the financial year 2021, Sales and Marketing expenses increased by 33% whereas General and Administrative expenses decreased by 13%. Depreciation, a non-cash expense, increased by 56% but we must consider the addition of the depreciable assets to UBER’s balance sheet because of the acquisition that would have contributed to this increase. The loss on operations decreased by 21% whereas Net Other Income increased by 300%. Based on the notes to the financial statements, the Net Other Income line item includes Interest Income, Foreign Exchange Gains, Gains on Business Divestiture amongst many other items. Net loss attributable to UBER decreased by 92% during this period ending 2021. Based on insights from the Statement of Cash Flows, Net Cash used in Operating Activities decreased by $230 million between 2020 and 2021, a decrease of 84%. Net Cash used in Investing Activities decreased by 58% and Net Cash provided from Financing Activities increased by 23% over the same period, ending 2021. The amount of cash recorded as being paid for common stock issued with relation to acquisitions was $3,898 (in millions) in 2020 and $1,868 (in millions) in 2021. The acquisition had no impact on the company’s exposure to foreign currencies because both companies are headquartered in the United States of America. Monetary assets in other currencies are measured in the functional currency at the spot exchange rate in the market. Foreign currency policies at UBER have remained unchanged.

Note Disclosures on Acquisition US Generally Accepted Accounting Principles stipulates that a company must provide extensive disclosures regarding all business combinations. This includes the name and description of the acquiree, the date of acquisition, percentage ownership acquired, description of how control was obtained and the strategic rationale and purpose of the acquisition. The note disclosures to UBER’s financial statements included these items and so conform to the stipulations of the principles. UBER provided information including all acquisitions made in 2020, therefore, the pro forma financial statement information is not representative of the Postmates combination specifically. Strategic Rationale for the Acquisition The delivery space had been a bright light for UBER throughout the Covid-19 pandemic as more people turned to ordering food online through food delivery applications. UBER’s Eats business however was still making a loss. The online food delivery industry is an industry where growth seems exponential thus, the initial thought, was that by acquiring Postmates, Uber could cut its losses and gain pricing power because of an increase in market share. At the time Postmates was the smallest company among the major U.S food delivery applications and boasted a market share of about 8% in 2020 whereas UBER Eats controlled about 23% of the market share at that point, combining the business would help to cut administrative and technology related costs significantly. Additionally, removing a competitor from the market would improve pricing power, which could help lead to higher discounts and incentives for users, resulting in higher user retention rates. The combination therefore maximizes shareholder value as consumers get more options and restaurants get more exposure resulting in improved bottom lines. UBER and Postmates have

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shared a common belief that their platforms can contribute hugely to local commerce and communities which was deemed as important during Covid-19. Despite the business combination, Postmates continues to operate under its own name but now both companies have a combined 37% share of the food delivery industry in the United States of America. Moreover, now that the companies’ assets are pooled together, they are deemed as interrelated which strengthen both UBER’s and Postmates’ existing assets because both delivery platforms have their own merchant relationships, customer relationships and fleet relationships, brand loyalty and technology. By acquiring Postmates, UBER has everything Postmates has had access to which improves UBER’s operational efficiency by providing an opportunity for UBER to strengthen their delivery of food, groceries, essentials, and other items. The combination should enhance global scale and local category strengths to drive operating efficiency and accelerate path to profitability, improved high-quality restaurant selection, including SMB restaurants and local favorites. UBER’s acquisition of Postmates will expand and strengthen the existing customer base and the addition of strong, trusted consumer and restaurant facing brand. This newly integrated platform, because of an improved batching and chaining capability, technology, and operations to facilitate delivery for non- partnered merchants will accelerate UBER’s delivery-as-a-service efforts. Disney’s Acquisition of 21st Century Fox

The Walt Disney Company The Walt Disney Company is a California mass media and entertainment conglomerate. The company which began as a small animation studio created by 2 brothers has since become a household international mega-corporation in all aspects of media and entertainment. The company is split up into 3 main business units. Disney Entertainment produces media content through its many studios like Marvel Studios, Pixar, and Lucasfilm. In addition to news and content from ABC and ABC News. This division also holds streaming services Disney+, a majority stake in Hulu and Star internationally. Its next division is Disney Entertainment, which includes its world-famous parks, Disneyland and Walt Disney World, many hotels, and cruise lines worldwide. Lastly, its sports division has become one of the largest and most known brands in sports media. ESPN broadcasts a variety of sports through its many channels. 21st Century Fox 21st Century Fox was formed after the Rupert Murdoch-run News Corporation split in 2013. The original News Corporation company was one of the largest media conglomerates in the world with iconic holdings such as 20th Century Fox Films and Television, Fox News, National Geographic, HarperCollins, and the New York Post. In 2012, due to many scandals, the company’s media and publishing divisions were split into 21st Century Fox and News Corp respectively. Allocation of Acquisition Differential

In 2017, it was reported that Disney was in talks to acquire the 4-year-old 21st Century Fox. Their plan was to acquire the company’s media divisions and divest the sports, entertainment, and news channels as those would be redundant with ABC and ESPN. According to Bob Iger, Disney CEO, the company was mostly interested in Fox’s large content library due to the impending release of Disney+ in 2019. (Franck 2019). Other companies such as Comcast became interested in bidding for Fox especially as a similar deal between AT&T and Time Warner passed through Congress. Following a bidding war, Fox accepted Disney’s offer of $73.1 billion. Following approval from Congress, the FCC, the European Commission, and Fox’s major shareholders, the deal was made official on March 19th, 2019. Due to anti-trust laws and the Federal Communications Commission, Disney divested several former Fox assets which formed a new company called Fox Corporation. The deal was completed using a combination of cash and stock, with each share of 21 st Century Fox to be exchanged for $51.57. According to Disney in their 2019 Annual Report, Figure 11, the total fair value of 21CF after allocation came to be 74.244 billion dollars USD. Less its 30% holding in Hulu, the total purchase price for Disney came to 69.507 billion dollars USD. There was no acquisition differential. Accounting Policies

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Both companies are based in the United States and are publicly listed on the New York Stock Exchange therefore adhere to US Generally Accepted Accounting Principles and International Financial Reporting Standards. Impact of Acquisition on Financial Statements: In Fiscal 2019, Figure 12 shows revenues for the Walt Disney Company grew 17% while expenses grew by 29%. This and a greater than 100% increase in restructuring and impairment charges caused the company’s net income to fall by 12%. The company also recorded an almost $4 billion increase in other income due to its now controlling interest in Hulu acquired in the transaction shown in Figure 13. As for the cash flow statement, as shown by figures 14 and 15, there was a large change in cash flow from 2018 to 2019. Cash provided by operations – continuing operations decreased 58%, Cash used by investing activities– continuing operations increased 183% and Cash used by financing activities– continuing operations decreased 95%. New to 2019 cash was provided and used from discontinued activities. This is due to the sale of Regional Sports Networks which Disney agreed to sell when acquiring 21 st Century Fox. The comprehensive balance sheet (Figure 16) of Disney shows almost a 100% increase in total assets, largely due to a 66% increase in receivables, an 189% increase in television costs and advances. Intangible assets increased 241% with goodwill also increasing 157%. Current liabilities from 2018 to 2019 increased 75% with a similar increase in borrowings. Total equity almost doubled (78%) due to a 47% increase in common stock. Ratio Analysis

Based on data from the company’s financial data, ratio analysis was completed from 2018, the last full year before the Fox acquisition and 2020, the full first year after the acquisition. The data in Figure 17 showed that Debt to Equity decreased by 68%, Return on Assets decreased by 109% and Operating margin decreased by approximately 112%. The Debt-to-Equity change is possibly due to Disney incurring Fox’s debt increasing their liabilities. Due to the increase in costs, the operating margin has decreased. Lastly, the Fox acquisition is a part of a long-term plan for the company to compete with other entertainment corporations, this will cause ROA to lag in the short term. Note Disclosures on Acquisition: The note disclosures starting on page 82 provided by Disney in their 2019 annual report provide all additional information regarding the acquisition. Pro Forma statements (Figure 18) showing if Disney acquired Fox 2 years earlier in 2017. Strategic Rationale of Acquiring 21st Century Fox With Netflix being the largest streaming service and Disney wanting to enter the market, the company needed content to be able to compete. The company formerly had a deal in which every Disney theatrically released movie was released on Netflix a few months after its theatrical run. The company was reported to lose approximately 150 million dollars a year in income due to cutting its licensing deals. (Whitten 2019) Therefore, Disney needed new content to supplement its current offerings and compete with Netflix and other streaming services. The acquisition of 21 st Century Fox allowed Disney to expand its catalogue. After decades of the company being known for their ‘kids’ movies, the company now has more adult geared intellectual property. Namely, The Simpsons, Family Guy, Titanic, Star Wars and more. This move propelled their

streaming service which has now become the 3 rd largest streaming service by number of subscribers. (Flixpatrol) With these IPs, Disney can now expand their content not only on their streaming service but in their parks, hotels, cruises and more. Long term this will probably prove to be profitable for Disney as they will not only take Fox’s existing customer base but retain and attract new ones as well. Conclusion In conclusion, both Disney and Uber charged their respective industries with their acquisitions, these proved fruitful due to the pandemic which happened in 2020. With the whole world at a standstill and people forced to stay home, home entertainment and home delivery saw a large surge in activity and users. With Disney+ becoming an alternative to movie theaters and UBER and Postmates allowing people to enjoy their favourite restaurant foods from the comfort of their own homes. There are a couple differences between the two acquisitions. Firstly, Disney and 21 st Century Fox are both legacy public companies who have existed in some capacity for decades and have years of financial data. On the other hand, Uber and Postmates were founded in 2009 and 2011 respectively making hem relatively new companies. Postmates being a private and younger company means they had less information for Uber at acquisition. With only an 8% market share in their industry compared to Fox’s 11.56% market share, the Disney/Fox acquisition is more likely more valuable to Disney shareholders compared to the Uber investors. Lastly the difference in the 2 acquisitions can be seen in branding and operations. Uber and Postmates continue to operate as separate entities and brands while Fox was engulfed into the Disney Entertainment umbrella. The iconic 20 th Century Fox movie production company and logo was renamed 20 th Century Studios.

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Appendix UBER Technologies Ltd.’s Acquisition of Postmates Figure 1 Figure 2 Figure 3 Figure 4

Figure 5 Figure 6

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Figure 7

Figure 8 Figure 9

Figure 10 Disney’s Acquisition of 21 st Century Fox Figure 11 Fair Value Allocation of 21 st Century Fox from 2019 Annual Report

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Figure 12 Consolidated Income Statement from 10-K

Figure 13 Other Income Breakdown from 2019 Annual Report Figure 14 Simplified Cash Flow Statement in 2019 Annual Report Figure 15

Detailed Consolidated Cash Flow Statement in 2019 Annual Report Figure 16

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Consolidated Balance Sheets as per 2019 10-K

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Figure 17 Disney Ratio Analysis Figure 18 Pro Forma Statements provided in 2019 Annual Report

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References UBER’s acquisition of Postmates 2021 Annual Report - s23.q4cdn.com . Available at: https://s23.q4cdn.com/407969754/files/doc_financials/2022/ar/2021-Annual-Report.pdf (Accessed: 10 December 2023). Littman, J., and Beckett, E.L. (2020) Uber completes $2.65B Postmates acquisition , Restaurant Dive . Available at: https://www.restaurantdive.com/news/uber-buys-postmates-in-265b- deal/580816/ (Accessed: 10 December 2023). Team, T. (2021) Why does uber want to buy Postmates? Forbes . Available at: https://www.forbes.com/sites/greatspeculations/2020/07/02/why-does-uber-want-to-buy- postmates/?sh=1b7975062195 (Accessed: 10 December 2023). The Walt Disney Company (20 Nov. 2010). Form 10-K 2019 . Retrieved from SEC EDGAR website http://www.sec.gov/edgar.shtml The Walt Disney Company. (2019). Annual report 2019 . https://thewaltdisneycompany.com/app/uploads/2020/01/2019-Annual-Report.pdf Top streaming services by subscribers • FlixPatrol . FlixPatrol. (n.d.). https://flixpatrol.com/streaming-services/subscribers/ Uber announces results for fourth quarter and full year 2020 (no date) Uber Technologies, Inc. - Uber Announces Results for Fourth Quarter and Full Year 2020 . Available at: https://investor.uber.com/news-events/news/press-release-details/2021/Uber-Announces- Results-for-Fourth-Quarter-and-Full-Year-2020/default.aspx#:~:text=Net%20loss

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%20attributable%20to%20Uber,as%20a%20percentage%20of%20revenue . (Accessed: 10 December 2023). Uber completes acquisition of Postmates (no date a) Uber Technologies, Inc. - Uber Completes Acquisition of Postmates . Available at: https://investor.uber.com/news-events/news/press- release-details/2020/Uber-Completes-Acquisition-of-Postmates/default.aspx#:~:text=As %20previously%20announced%2C%20the%20transaction,%2C%20essentials%2C %20and%20other%20goods . (Accessed: 10 December 2023). Uber completes acquisition of Postmates (no date b) Uber Technologies, Inc. - Uber Completes Acquisition of Postmates . Available at: https://investor.uber.com/news-events/news/press- release-details/2020/Uber-Completes-Acquisition-of-Postmates/default.aspx (Accessed: 10 December 2023). Whitten, S. (2019, February 8). Disney expects to take a $150 million hit as it cuts ties with netflix - and that’s OK . CNBC. https://www.cnbc.com/2019/02/05/disney-expects-to-take- a-150-million-hit-as-it-cuts-ties-with netflix.html#:~:text=Disney%20licenses%20its %20films%20and,after%20its%20Fox%20deal%20closes .

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MOS 4465 Acquisition Assignment Final

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