What to make of 2017? Politically, it was the year of Brexit, and the year of Trump Unleashed. But from a business point of view, it was undoubtedly - and yet again - the year of technology.
The NASDAQ index of US technology companies led global markets, appreciating almost 30% over the year. The technology-heavy S&P 500 wasn’t far behind, rising almost 20% in 2017. The reasons for the recent strength in the sector have been well documented; much has been written on the so-called “FANGS” (Facebook, Amazon, Netflix and Google). The four technology behemoths have US indices higher as investors continued to place a high value on strong leadership, strong market positions and increasing evidence of (or potential for) profits and cashflows.
Private markets, too, delivered strong returns. Again, they were boosted by technology stocks, with discussion focussing on the rapid proliferation of “unicorns” - private companies valued at more than $1 billion. Here, each new round of financing seemed to confirm further value creation by these (predominantly) technology companies.
However, between Christmas and New Year, we were reminded that valuations don’t always go up. Instead, we were provided with a stark reminder of what happens when these companies get it wrong. Uber cheerfully announced that a Softbank-led consortium would acquire a 17% stake in the company for $9 billion, buying a mixture of new and existing shares. The transaction injected about $1.25 billion of new equity into the business.
Drilling further into the detail, though, it became apparent that that the existing shares tendered to Softbank consortium were valued at a 30% discount to the previous fundraising – in a tender offer that was oversubscribed even at this price.
Now it should go without saying that 2017 was an “annus horribilis” for Uber, with the company wracked by mounting concerns over its structure, its culture and its business model. However, given that Uber is a private company, this is the first time that we have been able to see under the bonnet, and ascertain what damage the year has wrought on the company’s value.
Under its new chief executive, Dara Khosrowshahi, Uber now has a chance to get back on a more sensible trajectory. Governance already looks to have improved, and the new team appears to have digested the messages of past mistakes.
However, the mood music around many of these technology giants also feels like it is changing. There is much more public scrutiny of what these companies are, and what they are about. The Financial Times, in its New Year leading article, noted: “Gig economy titans such as Uber must start rethinking models that were built around willingness to arbitrage regulations and tax law”.
When Uber - and other technology unicorns - defined their businesses, they tended to make great play of “disruption”.
When Uber - and other technology unicorns - defined their businesses, they tended to make great play of “disruption”. It’s a safe bet that gaming the taxation and regulatory system was not what they meant to highlight. And “rethinking”, if the unicorns are steered down this path, is unlikely to result in additional profit.
One of last year’s more popular business books was Move Fast and Break Things by Jonathan Taplin. The title was taken from one of Facebook founder Mark Zuckerberg’s quotes regarding disruption. Taplin rages against “Fake News. Digital monopolies. Stealth marketing”. He asserts that the internet, which began as a dream, has become a nightmare. He recounts how organisations have profited from it, through massive reallocation of revenues from the creators and owners of content to vast digital monopolies. While many of Taplin’s views will not be shared by all, his nervousness over the power of the technological sector is becoming more common currency.
And finally, there is not a day that goes by without a politician opining on the power and potential misuse of the new-found power of the technology elites. It does feel that globally, politicians’ tanks are now firmly parked on the technology companies’ lawns. In itself, this may change behaviour and perhaps profitability. We will see.
The technology sector globally contains some of the finest companies in the world and some of the best leadership in the world and hires some of the best minds in the world. There remains considerable opportunity. But the winds feel like they are changing – just be careful.