Grab-Uber deal: M&A 2018

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Ride-hailing or ride-sharing services have grown dramatically in many countries. Grab and Uber are the disruptive innovation firms. Their business strategy is to burn cash to get a more market share, by advertising and intensive capital investment. This strategy is similar to Amazon and other Silicon Valley’s modern enterprises.

Selling south-east Asia businesses

Recently, Uber has reached an agreement to sell its businesses in south-east Asia to Grab, including ride-hailing service and Uber Eats. In return, it will get 27.5% in Grab. Furthermore, Uber’s board of director will be a board of committee of the enlarged business.

Perhaps behind the deal is Softbank, which recently poured $9,300 billion into Uber. It is also the major stakeholder in Grab. It wants to stop the bleeding of Uber’s and Grab’s money and encourages ride-hailing startups in its portfolio to cut back on competing with each other.

Furthermore, it encourages them to focus on the main market where they have a chance to be a market leader. For example, the Japanese tech conglomerate SoftBank told Uber to focus on its “core markets” in the U.S., Europe, Latin America and Australia.

This deal is similar to previous deals, Uber-Didi Chuxing deal in 2016. Ubers sold its business to Didi Chuxing, after facing cut-throat competition in China market, in return for a 20% stake in market leader Didi Chuxing. Didi Chuxing, a 15 percent stake held by Softbank, is a result of the merger between two old-rivals, Didi Dache and Kuaidi Dache, for the purpose of fighting against Uber.

It also replicates previous deals in which Uber has withdrawn from Russia, in return for a 37 percent stake in an enlarged market leader, Yandex.

Grab, which has more than 81 million mobile app downloads, was valued at $6 billion when it raised money last year, compared with the $70 billion Uber was valued. Some scholar, Zafar Momin, said that we should give Grab a lot of credit for executing well because it understands the local context better. Uber has been more about duplicating whatever they do in other parts of the world, and it rarely adapts their model to be suited for local markets.

However, this deal is a win-win for everyone, In the first place, Grab will be a market leader in this region. Secondly, Uber raises a significant capital to focus on its core market, and it will be a stakeholder in Grab. That stake — approximately $1.65 billion — is a strong return, considering that Uber said it has invested $700 million in south-east Asia over the past five years.

If Grab archives a good financial result, Uber will receive a good return on this investment. Moreover, Uber will become a strategic partner to Grab in its next phase of growth. FT estimates that Uber-Grab deal will raise the value of Grab to $7,000 billion, increasing in value of the Uber’s stake to $2,000 billion.

Lastly, Uber’s new CEO, Dara Khosrowshahi, has been pushing to clean up the company’s financials in preparations for an initial public offering next year (2019). Pulling out of markets like south-east Asia would boost profits at a company. Also, Uber will aim to expand their business and investment opportunity in other key markets such as Japan or India which be likely to be a potential market in the future.

Visible effects of the Uber-Grab deal on Thailand

Uber-Grab deal is raising concern about antitrust issues in the Ride-Hailing market. The market will have only one player in this sector. According to the research of TDRI, its study on ride-hailing found that 15-20% of taxi passengers use mobile ride-hailing service applications on a regular basis.

In addition, TDRI estimated the taxi sector is worth 43 billion baht per year (taxis generate average daily revenue of 1,600 baht, with 60,000-70,000 of them in Bangkok), comparing with Ride-hailing services that generate 6-7 billion.

Apart from the ride-sharing service, Grab has made a push into financial services through its GrabPay service, which allows users to pay for goods and services offline, and a new venture that provides micro-loans and insurance products.

Not only Thai consumers have a question about this deal, but also Singaporean. Consumers and drivers are raising concerns that Grab’s acquisition of rival Uber’s South-east Asian business will reduce competition and lead to higher fares.

If prices increase or if they match regular taxi prices, some consumers will probably go back to public transport. Some drivers concern their incentives, commission rates. Also, Uber’s drivers want to see how well Grab takes care of them.

From the Competition law point of view, merger and acquisition have positive and negative effects. In theory, when some players disappear, they cause a cost of fewer choices, an oligopoly. However, with the potentially lower cost of operations via lower staff overheads and less spending on advertisement, Grab can focus on delivering better terms for drivers and consumers. Therefore, there must be an appropriate regulation to ensure that an enlarged company does not abuse its power to prevent other rivals.
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References

Uber exits south-east Asia with sale to rival Grab
Uber Is Giving Up on Southeast Asia
Grab-Uber deal sparks fears of price hike
Grab gets Uber onboard, eyeing Chinese competition
Southeast Asia exit deal is a win, not a defeat, for Uber
Merger of Grab and Uber drive monopoly, pricing concerns
Uber Pulls Out of Southeast Asia, Selling Operation to Rival Grab
Grab Close to Deal for Uber’s Southeast Asia Business
Uber said to reach agreement on South-east Asian sale to rival Grab

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