This article is written by Abhishek Dubey, a BBA.LLB student from Chanderprabhu Jain College of Higher Studies and School of Law. This article discusses the acquisition of Uber Eats by Zomato and also various concepts related to that acquisition such as the all-stock deal that has been practised by Zomato and how it is different from an all-cash deal. 

Brief History of Zomato and Uber Eats

UberEats parent company was founded in 2009 by Garret Camp and Travis Kalanick. The company started its food delivery in August 2014 with the launch of UberFRESH in California. The platform was renamed as UberEats which started its operation in London in the year 2016. In August 2018, UberEats started its delivery fees depending on the range or distance of the order placed. In the UK and Ireland, the delivery fees are based on the value of the order. In November 2019, UberEats announced that it will deliver the food through drones by summer of 2019. On January 21 Zomatoo acquired UberEats in the all-stock acquisition, with UberEats gaining 9.99 per cent stake in Zomato.

Zomato is an Indian restaurant and food delivery startup founded in the year 2008 by Deepinder Goyal. Zomato offers its services in 24 countries and in 10,000 cities. In 2011, Zomato expanded its delivery across India in Delhi NCR, Mumbai, Banglore, Chennai, Pune, Kolkata etc. 

Zomato has acquired 12 startups globally. In July 2014 Zomato acquired the startup Menu Menia. Zomato acquired Tongue stun in September 2018, a Bengaluru startup, for cash and stock deal of 18 million dollars. Zomato also acquired Tech Angle startup in Lucknow that worked on drones.

Zomato acquired stocks of UberEats for a deal value of 350 million dollars on 21st January 2020.

Zomato’s motive behind the acquisition of Uber Eats

• Large acquirers acquire a smaller company so as to provide speedy and efficient services at a lower cost. Zomato is a larger organisation than Uber Eats and both operated in the same line of business but Uber was not able to influence the market. 
• This will help Zomato gain competitive benefits from Swiggy as the combination of Zomato with Uber Eats will help increase its share to more than 50 per cent of the market, pulling it ahead of Swiggy.
• Zomato will also have greater negotiating power with restaurants which will reduce the losses. 
• The discussion was going with the soft bank to consider Swiggy as Food Tech or Food Hub but now, after the acquisition of Uber Eats by Zomato, Zomato will become the Food Tech or Food Hub in the food market.

Why Uber agreed to sell

Uber was running in loss for a few years and its CEO Dara Khosrawasahi said that the company will only operate in the market where it will be in the No. 1 position whereas, Zomato and Swiggy were ahead of UberEats in India, which is why we sold it to Zomato. It has pulled back its business from Vienna and South Korea because it was running in losses and it was not in number 1 position.

Uber was a competitor of Swiggy and Zomato which already have well-established market relations with local restaurants and they are able to respond quickly to changes in the market such as technological change, etc.

As per industry estimates, UberEats has 5 per cent of overall global booking in online bookings for food delivery. In December 2019 UberEats made a huge loss of 107 million dollars.

The deal also gives Uber 9.99 per cent of ownership in Zomato which will be valued at 3 billion dollars. This deal will give Uber a chance to recover at least the initial investment in India. Moreover, the purchase price that is given by Zomato in buying UberEats can be used by UberEats in growing other businesses. 

How the deal will affect the customers, employees and restaurants

Swiggy and Zomato will try to attract the customers after the acquisition of Uber Eat with discounts, offers and subsidies and this will be their ongoing strategy. Restaurants who are already with Zomato will give a gold offer to their customers such as dining out and delivery. But restaurants will lose their bargaining power. Also, 100 employees will be reallocated or laid off due to acquisition.

Why Zomato and Uber Eats agreed to go for stock acquisition

This type of acquisition involves the purchase of a business or acquiring a business by giving them shares. Zomato agreed to give 10 per cent of shares to Uber Eats and acquired 100 per cent of stocks. In this type of acquisition, the acquirer assumes all liabilities and assets of the business and the buyer can also contractually allocate the liabilities. The cost of acquisition in case of stock acquisition or stock deal is inexpensive and easy to execute. Also, no tax is deductible on goodwill.

Mistakes made by Uber Eats

1. Increasing the frequency of audience

UberEats recognises Alia Bhatt as its brand Ambassador. It is the only food delivery app which brings celebrities in its communication. In January 2019, it launched a campaign called Everyday Moments. This was the largest viewed video on Youtube; around 50.3 million Indians watched this on Youtube. 

2. Late mover disadvantage

One of the main reasons for the failure of UberEats was that it could not do proper research on the need for people. To create a distinct identity, UberEats should have followed the discounting strategy and other policies for its customers to acquire and retain them. In this way, UberEats could have gained more views from its customers.

3. Developing a distinct identity

Uber should have developed a distinct identity from others in its food delivery system and it should have introduced various discounts and allowances in its food. If this would have been done by UberEats then the situation of selling themselves to Zomato would not have occurred. 

The all-stock deal between Zomato and Uber Eats and how it is different from the all-cash deal

The terms ‘all-cash’ and ‘all-stock deal’ is used in the transaction of merger and acquisition. The difference between merger and acquisition is that in a merger, a merger company merge with each other and in the acquisition, one company acquires another company. In the merger, the companies merge with each other and a new company is formed and in the acquisition, the acquiring company starts working in the name of the acquired company. Such deals can occur in either all-cash basis or all stock basis.

All-cash basis basically involves the purchase of the company from cash. In an all-cash deal, the equity portion of the balance sheet of the parent company remains unchanged. But in an all-stock deal, the equity portion of the balance sheet gets affected. All-cash merger and acquisition deals are those which occur without any exchange of stock or equity and this is because trading happens when the trading company purchases shares of the other company in cash. This type of situation arises when the company acquires an even larger company that has a large amount of cash, so the financial situation of the companies does not get directly affected. However, the cash deal method has a lot of drawbacks as there are a lot of tax deductions. 

Factors affecting mergers and acquisitions are changes in technology and other internal and external environments. But there is a trend for cash deal in mergers and acquisitions and 60 per cent of mergers and acquisitions are on a cash basis and the deals in cash basis are of large value too. But this shift of trend has disadvantages for shareholders of both the companies; acquiring and acquired company. 

In cash deal, the duties, rights and obligations are clear cut such as transfer of ownership, but in an exchange of shares, it is difficult to determine the buyer and seller of both the parties. There is a large ambiguity as to which business is being acquired and by whom. Also, there is a possibility of fraud because in most of the cases, the acquired company ends up owning most of the shares when a share is acquired for the exchange of stocks. But the decision to pay in shares rather than cash also has an impact on the return of shareholders because the number of shares is reduced and share price is affected. In an all-stock deal, the shareholders of acquiring company receive shares rather than cash.

Illustration: An investor owns 10,000 shares in a beverages company. When the company is acquired by a larger company, the universal company shareholders will receive compensation for their share of ownership in the acquired company. The all-stock deal may be used when shareholders of the target company prefer to obtain ownership in the acquiring company rather than a cash settlement. This may also be initiated by acquiring a company which wants to buy out the investors of the target company but do not have sufficient cash assets. All-stock deals can be favourable when the merger is successful and result in acquiring companies. When there is a decrease in value of share then the all-cash deal is riskier than an all-stock deal.

Issue of shares for consideration other than cash

When an asset is acquired by the company, the payment to purchase those assets can be made by cash or by the issue of a share. When a share is issued against the purchase price, it is known as the issue of shares for consideration other than cash. 

Determination of purchase price

Sometimes one company purchases another company and takes over all cash, assets and bank balances, liabilities of third parties, etc of the other company. Seller is called the vender and purchase price payable to vender is called consideration. 

The purchase price is determined:

On the basis of the amount payable

For the determination of purchase price, the sum of the value of the shares to be issued and cash payable becomes the amount of consideration.

On the basis of the number of shares

For the determination of purchase price, the product and number of shares and the value of the shares is given. The shares may be issued at a discount, at par, at premium etc.

On the basis of assets and liabilities

For the determination of purchase price, the difference between assets and liabilities along with their resultant value is taken into consideration.

Issue of shares for purchase of assets

The company can issue shares in consideration for acquiring the assets of the business. If a company purchases assets and assumes liabilities then it is known as the purchaser of the business.

Promoters are the ones who do the research, technological changes and other work when the shares are issued to them. It is known as an issue of shares to promoters.

Issue of shares for consideration as per Companies Act

Securities can be allotted for consideration other than cash. There shall be a PAS 3 form attached for allotment of securities, along with a copy of the contract duly stamped. In its contract, it should contain the details of securities which have been allotted to the shareholders, along with the contract of sale relating to property or consideration other than cash to be submitted to the tribunal. If the contract has been reduced to writing, it shall be deemed to be an instrument within the meaning of the Indian Stamp Act 1889 Section 2(a).

Issue of shares for consideration under FDI consolidation

This topic is very important because the investors of Uber Eats are foreigners. The issue of shares to foreign investors is brought under FDI policy 2011. This regulation was brought to check the issue of money laundering in a number of cases, where shares are issued to foreign shareholders. Prior to 2011 FDI policies, Indian companies were allowed to issue equity convertible securities under automatic route only if there was cash consideration.

Steps required for government approval

In case of issue of shares for capital goods

• Any import of capital goods must be made in accordance with the export/ import policy issued by the Government of India, defined in Directorate General Of Foreign Trade and Foreign Exchange Management Act.
• Independent valuation has to be done by the third party entity excluding second-hand machinery.
• The application should indicate beneficial ownership clearly of both acquiring and the acquired company.
• The application must be completed within 180 days in all respects. 

Issue of share in pre corporation expenses

• Submission of foreign inward submission certificate for remittance of funds by the overseas promoters for expenses incurred.
• Verification and certification by the statutory auditor for the incorporation of expenses.
• Payment to be made to the foreign investor directly or through the bank account under FEMA regulation. 

Conclusion

Zomato acquired Uber Eats for an all-stock acquisition deal. This deal will provide great discounts to customers and it will be the most beneficial to them. The stock deal is done by the companies operating in the same line of business. Resulting in Zomato becoming number one in food marketing and food supply or in other words as the megastar of the food business. Moreover, Uber Eats can invest their money in other growing business.

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