This article is written by Srishti Kaushal, a first-year student of Rajiv Gandhi National University of Law, Patiala, Punjab. In this article, she discusses Uber’s acquisition of its Middle East competitor Careem and its impact upon various stakeholders.
For any business to be successful, it is essential to manage the competition. In fact, If the competition cannot be managed, it is better to just leave the market. But, there is one other thing you can do- acquire your competitor. Sudhanu Barik once said either buy or bury your competition. In 2019, Uber decided to do just that by acquiring its biggest competitor in the Middle East, Careem.
In a letter addressed to its employees, Uber’s CEO Dara Khosrowshahi said that Uber has acquired Careem for $3.1 billion, thereby aligning the common vision of the companies. He also said that Careem would work as an independent brand which has, time and time again, proven its ability to develop innovative local solutions. It has also played a key role in shaping the future of urban mobility across the Middle East, becoming one of the most successful startups.
In this article, we will understand what the deal was all about, the reasons behind Uber’s decision, how it affected Careem and what was the impact of the acquisition on the various stakeholders of the companies.
Uber Technologies Inc. or Uber is a San Francisco based American ride-hailing company offering many services like peer to peer ridesharing, ride service hailing, food delivery etc. As of 2019, it is estimated that Uber has more than 100 million users worldwide and is operating in approximately 63 countries and 785 cities worldwide.
Since its inception in 2009, Uber has come a long way and won over the public’s heart throughout the world. It has a market valuation of $49 billion. It’s innovative ways and techniques have bought remarkable changes in the industry, so much that it has been referred to as Uberisation, and many companies have gone on to call their products as “uber for” their products.
In 2019, Uber finally went public with an initial public offering of $45.
Careem is one of the few ride-hailing and vehicle for hire companies which has managed to make a name for themselves and win over a market with its unique propositions. Based in Dubai, It is operating in over 120 cities in 14 countries in the Middle East, Africa and South Asia. It was started in 2012 by Mudassir Sheikha and Magnus Olsson. It has created employment for more than 1 million people in the regions of its operation and has 30 million registered users. In 2018, the company got valued at $2 billion. Presently, Careem works as a subsidiary under Uber but has separate operations.
Details about the acquisition
In March of 2019, Uber-Careem Deal was finalized. Let’s look into the details of the deal to understand the acquisition better.
After 9 months of continuous negotiations, Uber and Careem finalized their deal on March 2019. On 23rd March 2019, Uber announced that it will be acquiring Careem for $3.1 billion, paying $1.4 billion in cash and 1.7 billion in convertible notes. These notes were convertible into Uber’s share at the price of $55 per piece. This horizontal acquisition (acquisition by which 2 companies providing similar services come together) created a record for the highest price paid for acquiring a middle east tech startup.
Through this deal, Uber acquired Careem’s mobility, delivery (Careem NOW) and payment (Careem PAY) business across the greater middle eastern region, including Egypt, Jordan, Pakistan, Saudi Arabia and the United Arab Emirates. The acquisition made Careem a wholly-owned subsidiary of Uber. But Careem’s app, brand and operations were left intact, and it was decided that both the apps would work separately.
Through this deal, Uber also bought all of Careem’s external investors. It also acquired Careem’s equity.
As far as the board of directors is concerned, Careem’s co-founder Mudassir Sheikha, Magnus Olsson and Abdula Elyas stayed on Careem’s board after the acquisition. However, Careem’s board was overhauled to some extent. While two seats were retained by Careem, three went to Uber. These 2 seats were taken by Mudassir Sheikha, Magnus Olsson, and it was decided that Mudassir Sheikha would continue as Careem’s CEO.
Finally, in December 2019, Egypt’s government gave consent to the acquisition. However, the Egyptian Competition Authority (ECA) placed some restrictions upon the deal and laid down some provisions for the combined business to follow. These are:
- The merged firm would have to share its mapping and trip data with any emergent rivals.
- Companies shall share consenting riders details with any competing companies.
These controls would be applicable for:
- Five years, or
- Till at least one alternative ride-hailing provider achieve a weekly market share of 20%, or
- Alternative ride-hailing providers achieve a 30% market share collectively across various cities.
How does the acquisition affect the companies?
Now that we know what the deal exactly was, let’s understand the reasons why the companies agreed to the deal. Why did Uber pay the whopping amount of $3.1 billion? What benefits did Careem get through this deal?
There are many reasons why Uber decided to go with this deal. Let’s discuss them in detail.
- Uber decided to become a public company in 2019. However, the deal with an initial public offering (IPOs) is that the company is required to show continuous growth. Uber had faced legal bans in various countries, which affected its growth. Careem, on the other hand, had shown tremendous growth of nearly 30% on a monthly basis and thus acquiring Careem helped Uber to increase its consistency and growth.
- Uber has been involved in many controversies. It has been alleged for many heinous crimes like rape and murders. As a result, Uber faced full and partial bans in many countries. Uber understood that laws in the Middle East region are very strict and Uber realized that these controversies might become a hindrance in maintaining a license in the Middle East. Careem, however, is known for its fair working and women empowerment. Thus, through acquisition, Uber avoided a ban in the area.
- Middle East region is very traditionally routed. People have a great affinity towards the homegrown brands. Because of this, international players like Uber can face a lot of difficulty in establishing itself. Uber, through this acquisition, carved out an easy way of expanding its geographic footprint and winning over the Middle East market.
- Previously, Uber has faced many defeats in markets away from home. For instance, in 2016, Uber sold its services to Didi Chuxing, the local taxi-hailing business in China, because of which it lost around $1 billion every year. Similarly, it also withdrew its services from Singapore because of the local taxi-hailing company, GRAB. Uber clearly learned a lesson and avoided the same from happening in the Middle East by acquiring Careem.
- Compared to Uber, Careem had a larger presence in the Middle East, North Africa, Pakistan and Turkey, with operations in 98 cities (Compared to Uber’s 23). With this acquisition, Uber capitalized on the popularity and brand value which Careem had created over the past nine years. The merger helped Uber to get better revenues and greater market share.
For Careem as well, this deal was quite beneficial. To understand this let’s look at what the CEO of Careem has said.
Muddassir Sheikha said that “by joining forces with Uber, Careem would be able to achieve its ambitions of improving and simplifying people’s lives and building an organization which inspires all. The advanced Western technology would not only help Careem in gaining a greater market share, but it would also go a long way in helping Careem in becoming a super-app (a do-everything mobile app), which it has always wanted to be.”
Moreover, this deal brought a lot of benefits for Careem’s employees and investors. To understand these benefits, let’s look at the impact of the deal in detail.
Impact of the acquisition
Both Uber and Careem have multiple stakeholders. Of course, a deal of this magnitude affects them. Let’s see how different stakeholders would be impacted by this acquisition in detail.
Uber and Careem, individually were two of the biggest taxi-hailing companies. Their combined operation created a void in the industry. This happened because as a result of the deal Uber has achieved more than 60% of the market share in the Middle East and North African region, where Careem had dominated.
This has essentially created a monopoly for Uber. For customers, this might be a problem as consumers would face a lack of options. This would also give power to Uber to raise the fares as they would have no real competition. In fact, this is what happened in China after Didi (Chinese local taxi-hailing services provider) won the battle with Uber and bought it out.
However, there is an upside as well, Uber and Careem have both proved to have impeccable service and features. Thus, it cannot be denied that customers may gain the advantage of more advanced service as a result of this deal.
Before we discuss the deal’s effect on Careem’s employes, it needs to be clarified that the drivers or “captains” do not qualify as Careem’s employees, and are actually independent contractors.
Now, when two companies merge together, the effect on employees is usually negative. This is because as two companies streamline their workforce and expenses, continuing with all employees becomes quite uneconomical. Moreover, when two companies from different areas merge, new cultures are introduced and a change is observed.
Since Careem is a local company from the Middle East and North African region, where culture and traditional practices are given high importance, the introduction of western culture by Uber could cause a plethora of options and make it difficult for the workforce to adapt to the new practices.
But there is also a positive side to the acquisition for the employees which can not be overlooked. All 4000 employees of Careem had stock options and as part of the deal, their shares have been bought by Uber. As a result, all these employees have made a good sum of money. In fact, at least two hundred employees have become dirham millionaires and at least 75 employees have become dollar millionaires.
The Uber-Careem deal was a huge bargain for Careem’s investors. This can be clarified by going back to the term of the deal. As per the terms agreed upon, on listing in the New York Stock Exchange, if the share price of Uber is $55 or lower, the investors would get the minimum guaranteed price of $3.1 billion. And, if Uber got a higher valuation than $55 per share, they, of course, stand chances of even higher profits.
The advantage of this deal was clearly visible to the investors who welcomed it open-heartedly. Let’s look at the testimonials of some investors.
- Al Taylor said it would receive $1.34 billion riyals profit as a result of this deal.
- Saudi Telecom, which had invested in Careem indirectly through its venture funds, said that it will receive $275 million as a result of this deal.
Now, Uber’s share prices opened at $42 because of which though the investors did not make over and above profits, it can’t be denied that it was a good deal for them. Moreover, with the shares of Uber that they continue to hold, these investors can still look for profits in the future.
Uber-Careem deal is actually a golden opportunity for new taxi-hailing players in the Middle East to enter the arena and monetize their startups. As discussed before, because of the lack of competition, the acquisition has led to a huge void in the industry. New, lesser-known players have an advantage of entering into this industry by offering cost-efficient, reliable and local alternatives, making localities favour them. Moreover, the high local sentiments in the people in the Middle East and North America region further strengthen their position in this regard.
Also, this deal has brought in a lot of attention to this area, which has the potential to encourage more investments in the area, as more international players will want to merge with or acquire the local startups.
Concerns like the development of a monopoly leading to increased prices for the customers, loss of a homegrown business and loss of profit money for the regional markets because of Uber-Careem merger cannot be overlooked. But, there is a massive upside to this deal as well.
Not only does this deal bring in handsome rewards for the founders, investors and employees of Careem, but it also has an amazing effect on the Middle East startup ecosystem. As a result of this deal, it is the region which wins through the vast sum of money which gets reinvested locally. This deal has successfully sent out a message to the international investors that entrepreneurs in Dubai can successfully nurture innovative projects and has also created hope for further acquisitions which can bring in more money.
Moreover, as far as Uber is concerned, this acquisition would enable it to take advantage of Careem’s local knowledge and brand value and thus, will definitely help it in strengthening its global transportation network and becoming a global leader.
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