Shareholder activism

Why a merger between Grab and Gojek is unlikely (for now)

A Grab-Gojek consolidation has always been the talk of the town, given overlapping business similarities, but never taken seriously – until now. There are two outcomes that seem the most likely, but an M&A is not one of them.

Speculation is building over a potential merger between Softbank backed Grab and its regional rival Gojek, following a February 25 article in The Information, citing that investors from both companies were looking to mitigate futures losses or exit their positions.

Following the story, Gojek immediately released a press statement saying, “there are no plans for any sort of merger and recent media reports regarding discussion of this nature, are not accurate.” The same comments were later affirmed to FinanceAsia on February 26. Grab did not respond to any requests for comment.

Of course, public statements are temporary and not always to be trusted. However, a merger between Grab and Gojek is not the most likely outcome at this stage. Here’s why:

Remove Subsidies, Build Profits

A Softbank pushed alliance between the two ride sharing companies aims to end subsidies used to accumulate market share. But this alone will unlikely materially impact a decision.

A potential reason is because Softbank and Grab, where Softbank has invested $2 billion, are currently facing different priorities. Softbank is hoping its investments become profitable to raise its overall market value, while Grab (and Gojek) want cash to operate their business. The latter two appear to be winning at the moment.

After raising $30 billion over nine rounds of fundraising, Grab announced a $700 million investment from MUFG Bank and $150 million from TIS Inc, a Japanese IT Service company, the same day The Information article was published. Grab’s rival Gojek has successfully raised $12 billion across three rounds.

For shareholders, removing subsidies would alleviate operational costs but not necessarily bring profits forward, since many of the costs do not directly overlap. This is particularly challenging since Grab and Gojek are also expanding their businesses outside ridesharing and into payment services.

Grab is working with Singtel to expand digital banking service while Gojek just reached an agreement with Blue Bird Taxi Indonesia to cross sell services. Both are acquiring different sets of consumer data.

The evidence that consolidation do not produce immediate profits is seen in other ride sharing platforms. Consider the merger between Grab’s consolidation of Uber in Southeast Asia or Didi’s consolidation of Uber in China. All three businesses remain unprofitable, and all share Softbank as a strategic investor.

Softbank’s Shareholder Activism

Softbank’s focus on profitability is well placed, but difficult to achieve in this environment. The Japanese conglomerate is building on some good news momentum. The deal to merge Softbank’s Sprint and T-Mobile appears pending, removes about $40 billion of debt.

Elliott Management’s (EM) decision to buy a 3% position in Softbank in early February also bodes well for shareholder confidence, as the hedge funds cites undervalued assets worth about $10 billion on the balance sheet.

The timing of EM’s investment into Softbank is particularly interesting given the Japanese regulator’s own efforts to stem foreign interference into domestic companies. This acts as a test for shareholder activism when the Foreign Exchange and Foreign Trade Act (FEFTA), which shields Japanese companies from outside criticism, goes into law in mid-May.

Softbank’s outside conduct to convince Grab and Gojek to reach an amicable truce feeds a sense of irony, since FEFTA may well protect Softbank from outside influences like EM. 

Possible Outcomes

Two outcomes appear more likely than an M&A. One, the conversation surrounding a Grab-Gojek merge fades as the calendar approaches May, around the same time FEFTA is implemented. Two, the Grab-Gojek meetings produce an outcome similar to when food delivery Door Dash and Uber Eats, both Softbank investments, met in 2019.

Like the Grab and Gojek competition, Door Dash and Uber Eats were both unprofitable and burning cash to acquire customers. While the meeting did not produce a merger, an agreement was reached to not rule out future negotiations. Door Dash is filing for an IPO for this year.

A price truce is possible, consider the 2017 agreement between Uber and Ola, which was also Softbank backed. However, if any arrangement produces higher prices for passengers, this will lead to tighter oversight from the regulator.

 “The regulator is the last person you want [looking in],” said Eric Ritter, adjunct professor of economics for Lakeland University in Tokyo. “Because that’s when your rapid growth story ends.”

Soft Bank’s Face-Saving Option

In order to appease its own shareholders, Softbank may ultimately compromise on a face-saving exercise such like a share buyback programme. On its website, Softbank values its shares at ¥11,000, suggesting that at ¥4,000, the market is pricing the company at more than a 60% discount to its value.

Suggesting that even if Grab acquired Gojek for nothing, since both are unprofitable, a share buyback programme would be a better investment for Softbank, but also suggests less capital for other investments later.        

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