If Bloomberg can be believed, a Grab-gojek merger is in the final stages.
As per its recent report, the two Southeast Asian tech giants, more popular for their ride-hailing services, have narrowed their differences of opinion and made substantial progress in working out a deal to combine their businesses.
Is the marriage inevitable?
Most industry experts are of a view that the marriage between Grab and gojek is necessary for many reasons.
Both these have been around for almost a decade and are still competing with each other, bleeding millions of dollars — even as some of their global peers, who started the ride-sharing revolution, have already graduated to the public market and moved on to the next stage.
“There are certainly benefits in potentially coming together,” said Dave Ng, General Partner of Altara Ventures. “For starters, it takes out the day-to-day distraction of competition on several fronts and allows them to focus on improving products and services.
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It will also enable the reallocation of more capital to real innovation. After all, a dollar spent less in marketing means a dollar more for R&D or new offerings launch.
Both companies are fiercely competing with each other in Indonesia. And neither is profitable. Aside from this, both have already dipped into the fintech space to diversify their revenue streams and enter new markets.
“The merger is necessary from investors’ point of view,” opined Sergei Filippov, Managing Partner of Morphosis Capital Partners.
Just in 2020, he shared, Grab raised over US$1 billion to grow its payments and financial services arms to diversify the business and raise both profitability and valuation. Grab, considered to be well past-Series H with an outstanding US$10.1 billion raised already, has a valuation of around US$15 billion, and there’s no room for a new round of investment.
“IPO is probably the only option left, which was considered a possibility by its CEO Anthony Tan in November 2019 (if and when entire Grab will become profitable),” Filippov added.
“gojek is in a similar position though it is enjoying a better valuation multiplier— US$6.2 billion invested so far with a US$12 billion valuation. But to make a potential IPO a success, the market proposition claims should be well-supported and the profitability margin increased. That’s why such a merger is a real way to get the IPO valuation even beyond the US$20 billion,” Filippov explained.
Additionally, Grab’s major shareholder SoftBank is keen for a merger. In March 2020, the Japanese investor said in an announcement that it intended to sell off US$41 billion worth of its assets to buy back and retire its shares, thus executing the strategy of reducing the debt and strengthening its balance sheet.
“Such a strategy seems well-thought after the WeWork scandal last year and the shaky future of the co-working behemoth. No wonder it is SoftBank that is pushing hard for a potential merger,” shared Filippov.
Clearly, a merger is a win-win for all the stakeholders.
But the key question is:
Will the merger lead to a monopoly?
“I don’t think it will result in a monopoly,” argued Ng. “Grab and gojek have both evolved to platforms that provide multi-offerings, beyond just ride-sharing.”
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But of course, they are still most well-known for rides. Within this vertical, there are many other options for customers. Before they came into existence, consumers had multiple choices to get from point A to B and this remains the same today.
“There have always been and will always be alternative options for customers to get around, beyond just relying on Grab and gojek,” Ng said.
In the ride-sharing vertical, in recent times, most of the rides were priced closely to other alternate options such as the traditional taxi service.
And for the other verticals, they are even more diverse in terms of available market options, as both players are relatively early in such newer verticals.
“So in my view, a merger won’t have a significant impact on customers,” Ng reasoned.
He further shared that the days of both firms giving out substantial discounts are a thing of the past because it is now about convenience and availability at similar prices. “It is not about branding and marketing anymore as both companies are now household names. Both firms have consciously focused on pegging the pricing close to market rather than subsidising,” Ng elaborated.
Agreed Fong Jek Gan, Founding Managing Partner at early-stage VC firm Jubilee Capital Management. Gan believes that creating a monopoly is unlikely as these two companies are headquartered in different countries and are regulated by multiple governments. Having said that, this coming together may pose a huge challenge for traditional companies.
But Morphosis Capital’s Filippov begs to differ. In his view, the merger is going to be a dampener from a consumer point of view.
“Consumers, most probably, will be disappointed as the merger of the two main competitors means there will be no significant competition left. The prices will eventually go up, not to mention the service troubles,” he asserted.
“We have precedent in the past to relate. In 2018, the same thing happened in Singapore during the infamous Uber exodus from Southeast Asia. If such a merger was to be discussed in the US, the deal would most probably be blocked by the antitrust law,” Filippov pointed out.
Concurring with Filippov, 1982 Ventures’s Managing Partner Herston Powers said that consumers were not too happy after the last ride-hailing merger in Southeast Asia (Grab and Uber) and should probably get used to higher prices.
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Echoing a similar sentiment, Access Ventures General and Founding Partner Charles Rim, said the merger is going to be negative from a customers standpoint as Grab will not have as much pressure to compete as it has today.
“Additionally, it is also a negative for the driver workforce fewer less options,” Rim added.
Who will have the last laugh?
“Broadly speaking, the tech ecosystem,” replied Ng when asked who is going to be the ultimate winner of this deal if realised — differing with Filippov, who believes that investors (who are hungry for consolidation of assets, reduction of costs, valuation growth and potential exit through an IPO) are going to be the real winners.
According to Ng, we have seen companies such as Razer and Sea Group being the beacons of Southeast Asian tech in this current wave of innovation. They both traced their roots to gaming before branching out to several other businesses.
“People will often ask what is next for Southeast Asia as a tech ecosystem. I think the ability to show ecosystem strength in terms of having more long-lasting tech platforms being built out of this region is a great sign. And going forward, over the next decade, we will see more category leaders emerging across other sectors such as fintech, education, healthcare, enterprise software, as tech founders go beyond consumer, gaming and e-commerce,” Ng maintained.
But for Elton Powers, it is Grab and gojek, who are gonna be the real winners. The merger is also a sign of a maturing tech ecosystem in Southeast Asia.
“The merger is obvious and you can see how existing shareholders will be pleased that the ‘war’ is over. However, the hard part is to put together two cultures and taking care of employees,” Elton Powers commented.
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Image Credit: Grab
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