October 15, 2018•1158 words
Uber and Careem are in the headlines for the rumored talks between the two regarding a merger, or an acquisition of Careem’s assets by Uber.
That’s quite an interesting piece of news in of itself, and has the potential to change the ride hailing, entrepreneurial and technology ecosystems in the Middle East. I am not as interested in the rumor itself, but I am genuinely curious as to why these two companies would consider a merger or an acquisition, and the implications of said deal, were it to happen.
First, let’s spell out what the rumor is. Uber is reportedly in talks to buy Careem’s entire business, but the numbers are ranging from $1 billion to nearly $2.5 billion. Talks, reportedly, have been ongoing for over a year, and we are just hearing these news now.
An outright acquisition begs the question: Would Uber absorb Careem’s operations into its own?
Or will Uber let the Careem brand run?
Were Uber to absorb Careem under its wing, what would Uber gain in return?
The case for Uber seems to revolve around the Uber’s CEO, Dara Khosrowshahi, and his promise to turn profits for the company in 2018, before a stated initial public offering (IPO), sometime in 2019. Khosrowshahi made turning a profit one of his key priorities, as Uber has not turned a profit in its nine-year existence. Ever. Uber’s strategy has alway been to aggressively go into a market, undercut the competition from regular cabs with incredibly low prices, and once the ecosystem has become favorable to Uber, control the prices from there. But that hasn’t actually panned out in most markets. In the Middle East, Uber faced tough competition from a nimble and innovative rival named Careem, that rode the technology wave and grew to 14 countries in 6 years. By buying Careem and eliminating Uber’s key Competitor in a massively growing market, Uber stands to earn a much bigger piece of the pie in the Middle East.
Acquiring Careem removes one variable in Uber’s pricing algorithm: competitor pricing. It allows Uber to control the rates from the consumer end, and gives it control over the driver (or “partner”) network as well, where a large sum of money still goes. Uber needs to do all it can to shore up its income statement, and to look for profitability wherever it might find it to bolster its finances before the 2019 IPO. Being in control of its pricing is one way to achieve said goal. Uber could use the larger footprint that comes its way as a result of the Careem acquisition to take advantage of the economies of scale, and work better to build a more profitable (or less loss making) business in the Middle East.
However, the stated goals and recent actions point to different set of priorities unfolding. It would seem contradictory for Uber to acquire Careem while it had only a few months ago sold its own businesses in China and Russia to cut its losses. Uber has, also, exited the self-driving truck business, to focus on more revenue-generating lines of business. The question, then, is, how to align these actions with the acquisition rumor.
The answer to me is in an alternative scenario where Uber is planning an exit, or a winding down of operations in the Middle East to, once again, focus on more revenue generating initiatives. In this scenario, Uber acquires Careem, and let’s Careem handle all of Uber’s business, and Uber pulls its own brand and personnel out of the region.
Uber could be pulling off a double play of acquiring a well-oiled machine that has been scandal-free throughout its entire existence, and using the goodwill Careem has built to expand in the region. Careem has built up a friendlier brand overall, using “Captain” as opposed to Uber’s “Driver”, for instance. Even the name Careem implies generosity in Arabic, a virtue priced very highly in the Middle East.
This scenario begs a different question, how much does it cost Uber to do business in the Middle East, for a $1-$2.5 billion acquisition to make sense?
It’s hard to tell. Careem, at its last funding round, was valued at $1.2 billion, nearly half the top end of the rumored range. Why would Uber consider a 100% premium over the price that investors valued the Careem at? In business terms, usually a premium has to do with either “synergies” or growth. In growth terms, the acquisition would make some sense. Careem does control a sizable chunk of the market, but Careem has never turned a profit either, paying a 100% premium simply doesn’t sound like a particularly savvy business move. Uber would grow by acquiring Careem’s share of the market, but it will still cost it a lot of money to operate that share. The other answer, “synergies,” makes more sense. Uber could be acquiring access to Careem’s network, support, and hoard of cash, and offloading its own operations onto that infrastructure. Thus, allowing Uber to pull its own operations from the market, and save cash before the all important 2019 IPO.
The parallel to this rumored acquisition is Amazon’s acquisition of Souq in 2017 for $580. Amazon spent over half a billion dollars to buy its way into a market that it didn’t previously operate in, and provided Souq with the support and infrastructure of one of the world’s most successful companies. While the differences end at the fact that Uber already operates in most of the markets where Careem operates, from a strategic goals point of view, Uber might be on the precipice of pulling the brand out of the MENA region, but retaining the operations under the Careem brand.
Once again, Uber could be taking advantage of economies of scale to service its customers and Careem’s, and pulling its own brand out of the market. Reducing staff, consolidating data centers and so on, could save some serious cash, but the question remains: do the savings make up for the $2.5 billion price tag? That’s hard to tell, and only those with access to the right financial data can make a more informed assessment.
I am ultimately skeptical on this acquisition. It remains to be seen how this rumor develops. However, this acquisition seems to be facing some headwinds already. The authorities in Egypt are considering whether such an acquisition would be an anti-competitive move. We have to wait and see how the Dubai authorities react to the news, if it happens. Uber and Careem must know, as the only two players in the market, government officials trying to impress their superiors and make some headlines are bound to throw words at the ride hailing companies, call the acquisition anti-competitive and attempt to stop it. That’s a headache no one really needs to deal with, but if the price tag is $2.5 billion, maybe Mudassir Sheikha is willing to deal with the headache to turn himself into a billionaire. How much do a few Ibuprofens cost anyway?