How ride will Grab-Gojek merger be?

Singapore

THE ride-hailing sector is abuzz with merger talks between Grab and Gojek. Will it be a merger or a takeover? Who's the acquirer and who's the target?

At first blush, Grab may seem to be the dominant force over its Indonesian rival Gojek, with the former reportedly valued at US$14 billion - about US$4 billion more than the latter - and having just raised another US$850 million in fresh firepower to expand into financial services.

But as an eight-year-old firm, Grab could be facing more pressure from its backers to turn profitable and make a splashy exit. And to succeed in South-east Asia, it must capture the region's crown jewel: Indonesia.

Enter Gojek, which has a stronghold in its home market of Indonesia, where it has been fighting Grab tooth-and-nail. Ten-year-old Gojek too likely faces an impetus to turn profitable. It has already spoken of plans for a dual listing.

Naturally, a marriage of Grab and Gojek in Indonesia would make sense on paper. And it is no wonder that the market was abuzz on Tuesday, on talk that the two are reportedly discussing a merger.

A union could be sweet, but the process may turn sour. Most notably, a deal of such significance is likely to face roadblocks in the form of pushback from regulators and both companies getting in the way of each other, as respective valuations and deal terms are hammered out.

And then, there will be the tough business of figuring out the appropriate valuations on which to structure the deal, and to what extent this could be a marriage of equals.

On Tuesday, US-based tech news outlet The Information reported that the two firms are holding talks on a potential merger, although hurdles remain to negotiating how control of the combined firm will be split.

According to The Information's report, which cited people familiar with the matter, both companies' management teams have had "serious" conversations about a potential merger in the past few months. In early February, Grab president Ming Maa and Gojek chief executive Andre Soelistyo were said to have attended the latest discussion.

But the market buzz simmered on Tuesday when Gojek publicly denied the report. Grab was silent.

So is a merger still a possibility? With Grab's acquisition of Uber's South-east Asian business still in recent memory, the prospect would not be entirely far-fetched.

Indeed, a Grab-Gojek deal could benefit both. For one thing, reduced competition means less cash burn and a more viable path to profitability for both, said Willson Cuaca, managing partner of East Ventures.

A potential merger may not necessarily need to happen at the group level, as it could even concern specific units or businesses.

A Grab-Gojek deal would make sense from a profitability viewpoint, Chua Joo Hock of Vertex Ventures, an early backer of Grab, noted. "This is particularly so for Indonesia, where both companies are competing head-on fiercely and also where most of resources, money and people, are being spent."

But of course, there are also clear difficulties, particularly from a regulatory perspective. Such a deal involving two tech titans will not be easy to pull off, given antitrust concerns, noted Joel Shen, a partner at law firm DWF.

"This presents a very interesting dilemma for antitrust and competition regulators across South-east Asia, especially in Indonesia... Uber's withdrawal from South-east Asia meant that Grab was left as the dominant ride-hailing operator in markets such as Singapore.

It then came as no surprise when Grab reduced discounts and rebates in these markets almost immediately post-merger," he noted.

Still, Indonesian regulators might end up deciding that consumers are better off if Grab and Gojek merge to build a sustainable business, given that ride-hailing and food delivery are "notoriously unprofitable", he said.

And as much as a merger might make sense for both sides, "tech mergers of this scale are very rare and very difficult to execute", said an investment banker, who is also of the view that the Indonesian market is large enough for two big players.

Valuing both entities will be a difficult process. One could individually value each business line of each company, then do a "sum of parts" analysis. But this is complex because of Grab and Gojek's super app strategy, he said.

A simpler way would be to use valuation metrics that were used in previous funding rounds, though each party might disagree on what is important.

And even past the technical hurdles, more human problems could come into play. Mr Chua cites "ego" and "culture" as two elements that could hinder a smooth merger.

Adding to those complications is the fact that Gojek's heart and soul is in Indonesia, making it likely that the selling price for any part of its Indonesian business will be steep. To convince Gojek to sell might require a price too good to turn down - unless the company itself is not in any position to bargain.

While it remains to be seen if any Grab-Gojek deal will materialise, one thing is for sure: it will be a ride of twists and turns.