The proposed merger between South-east Asia\u2019s two\nlargest ride-hailing companies is now off the table, reports The Business\nTimes. This marks an end to the year-long saga abuzz with talks of shareholder\npressure, final deal terms, anti-competitive concerns, and public backlash. <\/p>\n\n\n\n
This saga has\nreminded investors and consumers alike of antitrust concerns that come with the\nmerger of two unicorns. The pitfalls and dangers in the valuation process of a\nhigh technology company have also been highlighted.<\/p>\n\n\n\n
GAO tracks the\nconcerns brought up in this process and offers insights into these pertinent\npoints.<\/p>\n\n\n\n
Anti-competition debate in the post-Grab-Uber era<\/strong><\/p>\n\n\n\n Questions of market concentration and compliance\nwith competition regulations remained central in the bid. Across Southeast\nAsia, Grab, valued at more than US$14 billion, has a presence in eight\ncountries while Gojek, valued at approximately US$10 billion, has a presence in\nfive countries. <\/p>\n\n\n\n The sheer size and reach of the companies have made\ninvestors and consumers nervous about a proposed merger. <\/p>\n\n\n\n It is important to note that these companies are in\nthe digital market where network effects are accentuated as opposed to\nconventional markets. So, it would be nearly impossible to overthrow market\nleaders in the field due to high switching costs and informational asymmetries\nthat give the incumbent a competitive edge. Thus, a merger of this magnitude\nwould more likely than not shift the market into a monopolistic direction. <\/p>\n\n\n\n The Government, therefore, has been expected to step\nin with its anti-monopoly laws to ensure consumers are protected from any\nanti-competitive effects. <\/p>\n\n\n\n In Singapore, the Competition and Consumer\nCommission of Singapore (CCCS) has said that \u201cit is looking at the at the new\ndevelopment\u201d and \u201chas written to the parties for new information\u201d as despite\nhaving a voluntary merger notification regime, section 54 of the Competition\nAct (CA) prohibits a merger that results \u201cin a substantial lessening of\ncompetition\u201d. This proactive stance\nsurely comes from its dealings with the contentious Grab-Uber merger that\nhappened in 2018. <\/p>\n\n\n\n Grab announced in March 2018 that it had acquired\nUber\u2019s Southeast Asian business (with Uber acquiring a 27.5% stake in Grab). The\nCCCS responded by commencing an investigation under section 62(1)(d) of the CA\nas there were reasonable grounds for suspecting that the transaction has\nresulted in a significant lessening of competition in the ride-hailing market\nin Singapore. <\/p>\n\n\n\n Through a seven-month investigation, the CCCS found\nthat there was a substantial decrease in the degree of competition. <\/p>\n\n\n\n For the first time in history, the CCCS imposed a\nfinancial penalty of S$6,419,647 on Grab and S$6,582,055 on Uber. It argued\nthat both companies \u201chad given specific consideration to the likelihood that\nthe transaction would breach antitrust rules and lead to financial penalties\u201d.<\/p>\n\n\n\n Several companies like India\u2019s Jugnoo have expressed\ninterest in entering Singapore\u2019s ride-sharing space since the merger. However, reinforced\nnetwork effects cause such entrants to “likely have to incur significant\namount of upfront capital in order to attract drivers and riders”, CCCS\nfound.<\/p>\n\n\n\n The \u201cupfront capital\u201d includes providing driver\nincentive schemes and rider promotions, in addition to acquiring a sufficient\nfleet of vehicles and pool of drivers, as well as partnerships with taxi\noperators. <\/p>\n\n\n\n In the backdrop of decreased competition in the\nride-hailing industry, consumers too felt the pinch in terms of increased\nprices and lack of options. For instance, Grab prices had increased between 10%\nto 13% in the post-merger period.<\/p>\n\n\n\n These concerns reappeared in the Grab-Gojek saga,\npushing the Government and the CCCS to be more pro-active in their bid to\nensure citizen welfare.<\/p>\n\n\n\n Valuing tech companies<\/strong><\/p>\n\n\n\n Another question inside investor circles surrounding\nthe potential merger was the issue of inflated valuations of tech companies. <\/p>\n\n\n\n Tech start-ups, especially the ones that are already\nwell known before hitting the public market, are often valued more than what\nthey are worth. This is commonly the case as those who buy the company buy its\nbrand and name, rather than its growth or investment returns potential. <\/p>\n\n\n\n Valuations have to include not only its assets and\nliabilities but also its innovation, flexibility, cultural relevance, and\nsocial reach. The most prominent\nillustration of this happened in 2019 when the IPO of a company touted as the\nnext \u201cAlibaba\u201d imploded. <\/p>\n\n\n\n WeWork valued its worth at a whopping $47 billion\nand claimed to stand out from its real estate competitors due to its status as\na high technology company. This value stood in stark contrast to its actual\nvalue of around $8 billion, plummeting as low as $2 billion as in May 2019.<\/p>\n\n\n\n \u201cTechnology is at the foundation of our global\nplatform,\u201d WeWork\u2019s S-1 filing reads. \u201cOur purpose-built technology and operational\nexpertise has allowed us to scale our core WeWork space-as-a-service offering\nquickly, while improving the quality of our solutions and decreasing the cost\nto find, build, fill and run our spaces.\u201d<\/p>\n\n\n\n This and a myriad of other factors such as\ndifficulty in measuring how long a company\u2019s rapid growth rate will last and\ngauging how effective its barriers to entry will dampen the accuracy of their\nvaluation. <\/p>\n\n\n\n This could explain the tensions that arose during\nthe valuation proceedings between Gojek and Grab. Observers from the Business\nTimes noted that tensions between the two companies arose due to a disagreement\nbetween their perceived value. Neither wanted to concede to be the smaller\nparty in the merger. <\/p>\n","protected":false},"excerpt":{"rendered":" The proposed merger between South-east Asia\u2019s two largest ride-hailing companies is now off the table, reports The Business Times. This marks an end to the year-long saga abuzz with talks of shareholder pressure, final deal terms, anti-competitive concerns, and public backlash. This saga has reminded investors and consumers alike of antitrust concerns that come with … Continue reading Grab-Gojek union topples, concerns remain<\/span>