Bobby Liu

@bobbyliu

It’s Not Alliance, It’s Domination

The latest news that blew the internet was the ‘merger’ of Didi and Uber China. What is in store for the other players in the ride hailing sector?

So now the world knows about the explosive news of the merger that happened between Didi and Uber China. In this deal, Uber China gets absorbed into Didi, at 20% of Didi’s share by Uber, bringing the valuation of Didi to $35 Billion, and a $1 Billion investment into Uber Global at a valuation of $68 Billion.

This deal alone has thrown a few spanners into the wheel of the other ride hailing giants, Lyft, Grab, and Ola, pun intended. What can we expect from this alliance of all alliances?

1. Total Merger

It’s not too far-fetched to even think of a total merger. Between Didi’s current $35B and Uber’s $68B valuation, we’re practically looking at an at-least $100B total valuation conglomerate.

I’ll leave to the bean-counters to work out the actual valuation but it could possibly mean a whole lot more. When news first broke at Bloomberg, it mentioned a path for Uber to pursue its IPO ambition.

Hold that thought for a little longer. Why? I’m sure all the investors in Didi and Uber, across all continents, are probably on the phone to each other and see what the bigger picture can possibly be. Between these 2 giants, there’re at least half a dozen of investors that have invested in both companies. This is on top of the fact that Didi has also invested into all its rivals.

While you may say it’s a natural hedging tactic, I’d go a step further to hypothesize that this deal in fact make these investors somewhat nervous. Should Didi decide to expand out of China, we may yet again see another round of bloodbath. Why risk losing a couple of billions in order to make another couple more? Why not just be a win-win situation for the investors?

The simple solution, if at all possible, is a total merger, and both Didi and Uber can then sit down and carve out territories, at the expense of all other rivals, post-IPO. A real juicy thought, wouldn’t you say?

2. Ripe for the Pickings

Let’s say total merger doesn’t happen, but to have total dominance, there will be some conquering to do. While the Bloomberg report did state that the deal now allows Uber to expand elsewhere, it is no big surprise to guess what Uber is thinking, that Didi will also expand.

Let’s look at the supporting cast. Lyft is primarily in the US, Ola is in India, and Grab is now caught in the crossfire in the South East Asia region. What scenario can we paint with this?

a. Uber acquiring Grab

Nah, this probably won’t happen. But let’s imagine. Should a deal be brokered, Uber will likely do away with Grab’s taxi side of the business. Ok, you’re thinking I’m crazy. But think about it. It’s far easier to battle all the incumbent taxi companies due to their inferior service quality. Uber doesn’t need to ‘educate’ taxi companies. Uber just needs to convert taxi drivers to drive on Uber service.

This will also make Didi’s entry a lot harder, as the main bulk of its business is from taxi rides. Which means Didi will have to start all over. At the same time, given China’s reputation in this region, it will be hard-pressed for them to gain market share. Maybe in Cambodia, but let’s not politicize.

b. Didi acquiring Grab

Should Didi expand into the region without the pertained mega-merger, it will not play nice either. With Uber getting their IPO, we will witness another round of cash burn, this time round, it’s a 3-way fight.

Hence, the acquisition seems a more natural fit. Didi has already invested in Grab, so why not a complete buyout? Didi doesn’t have to change the name, at least not immediately (think Lenovo and IBM), and Drab really isn’t a word that can be suitably used.

One of the biggest investors in Grab is Temasek, so go figure. I’m quite sure Temasek doesn’t want to have Grab get caught in the crossfire. Moreover, the current valuation of Grab is relatively low enough for a complete acquisition, even at more than a few multiples. It is safe to say Grab must be thinking of this possibility too. A sweetheart deal, with investors and all the co-founders walking away richly rewarded.

One other possibility is for Lyft and Grab to merge but this isn’t going to create much of a threat, merely representing an irritant of a fly to be swatted away. There is very little, if at all, value to be had with this merger.

3. Anti-Uber Alliance

The anti-Uber alliance is all but dead. As covered by NYT, the alliance bears little significance in light of the Didi-Uber China merger.

What the merger effectively does, is strengthen Ola’s existence. I don’t see in a foreseeable future any of these ride hailing companies will want to enter India, and the merger will firmly keep Ola in India.

So the anti-Uber alliance will simply morph into a collaboration with Ola by everyone, Uber included.

Conclusion

It is in the DNA of Chinese businesses to dominate, not to play nice, not when billions of dollars are involved. To say nothing of the face-losing possibility of Didi losing the ride hailing war. The merger is only the first step, and a total merger seems to make the most sense on a few levels. For one, Didi doesn’t need to worry about other competitors anymore, with Uber taking the battle front. It also negates the necessity of Didi having to conquer the US.

To think that Didi will be cordial to Grab is delusional when it goes into South East Asia. This is a winner-takes-all game. Grab won’t be a Grabber at all costs, but it doesn’t have the luxury of choice. The soft landing will be to be acquired by Didi, and then a total merger of Didi and Uber, (spawning Duber perhaps?) and an eventual IPO of this extended company.

As outlined in the NYT’s article, Lyft will possibly also be spared due to the anti-monopoly law in the US, but forever be stuck in smallness.

Perhaps the biggest winner is Apple. With a chump-change of $2 Billion, it has a cheap entry into the ride hailing sector and a real opportunity to launch with aplomb its driverless car initiative.

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