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Within five years, Uber went from a failed IPO to a record high stock price. Reaching long-awaited profitability led to the San Francisco company's market capitalization doubling to $161 billion. It plans to share its good fortune with investors by launching a $7 billion stock buyback program. But there's another reason why Uber might want to buy back its own shares.
Over the years, the ride-hailing and food delivery company has distributed generous stock awards to employees, inflating the total number of shares. The performance-related bonus recently paid to CEO Dara Khosrowshahi highlights the difference between the number of shares outstanding in the markets and the fully diluted total. The payment requires Uber's capitalization to exceed $120 billion for three months.
Three months after its grant date, Uber's market cap was hovering around $97 billion. But the company used a higher number of shares to calculate its boss's bonuses, which included options held by employees. This, combined with the use of the average stock price over this period, explains why Khosrowshahi's options were granted roughly a month before Uber's market capitalization exceeded $120 billion for the period in question.
A significant amount of Uber's fully diluted share count comes from stock awards made to employees. Increasing the pool of shares dilutes the stake of existing investors. Buybacks can neutralize this. Research by Bruce Dravis, former chairman of the American Bar Association's Corporate Governance Committee, found that between 2009 and 2019, more than a third of repurchased shares had the effect of simply reversing the dilution caused by stock compensation plans.
Of course, not all stock awards will be cashed out. It will not reach the market all at once. But Uber shareholders should be aware of its size. If Uber intends to implement a consistent dilution of shares, as it claims, large buybacks should be the norm, regardless of the price at which the shares trade or other opportunities to invest in the company's growth.
Khosrowshahi defended Uber's buyback plans in a letter to the Financial Times. And it's not alone in handing out big stock awards. These can be useful. When free cash flow is limited, it gives employees a reason to stick around while reducing the company's cash expenses. Khosrowshahi's options were finalized in 2017, when he took over Uber from founder Travis Kalanick.
Uber describes the $7 billion buyback program as a vote of confidence in the company's financial momentum. maybe. But it's also a way to manage the hit from an ever-increasing number of shares.
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