If there's one corporate merger in the world that would not surprise anyone if announced, it would probably be the combination of Ola and Uber’s Indian business.
The integration of these two ride-hailing services has been anticipated by public investors and analysts for some time – ever since Uber sold its Southeast Asian operations to Singapore-based Grab in March 2018.
Uber’s withdrawal from Southeast Asia came two years after it sold its China business to homegrown ride-hailing app Didi Chuxing.
Those disposals have been widely taken as a sign that the American firm wants to eventually exit Asia altogether to focus on the rest of the world.
Uber also still has operations in Hong Kong, Taiwan, Japan, Korea and Australia, but the reason why India is its next likely disembarkation point is crystal clear – India is currently the only market where there is a strong homegrown rival capable of buying Uber's local business.
A merger between Ola and Uber India is also seen as highly likely because the two share a common major investor in SoftBank. The Japanese conglomerate is also a backer of Grab and therefore facilitated the merger with Uber’s Southeast Asian operations last year.
Softbank owns 16.3% of Uber and about 26% of Ola through its Vision Fund.
WHAT'S THE HOLD-UP?
So what is holding back this highly-anticipated merger?
One major barrier is India’s under-penetrated ride-hailing market, which leaves a lot of room for growth even without consolidation.
That is evidenced by both companies’ strong revenue growth last year. Uber India's revenue soared more than 20 times to Rp215 million ($3.1 million) in the 2018 fiscal year, while Ola reported a 61% increase in revenue to $319 million, according to data from the Ministry of Corporate Affairs.
And unlike their peers in China and Southeast Asia, Ola and Uber India were able to maintain growth without the need to spend heavily on discounts and promotions to lure customers and drivers from each other.
Data from market research firm Statista shows that the penetration rate in India’s ride-hailing market stands at about 2%. This is significantly lower than in China at 20.5% and the 9% to 33% range recorded across different Southeast Asian markets.
Uber was forced to sell its Chinese and Southeast Asian businesses to end the fierce and costly battles against its local rivals. At this point, it does not make any economic sense to do the same in India.
There are also regulatory hurdles to overcome. India’s Competition Commission has hinted it would not approve a merger between Ola and Uber India in order to avoid the creation of a monopolistic player in the ride-hailing market.
It is also highly doubtful whether Ola founder Bhavish Aggarwal wants to push forward the merger, which will likely come in the form of a share swap similar to Uber’s sale to Didi Chuxing and Grab.
Should the merger come in the form of a share swap, it would further dilute the interest of Aggarwal, who owns only 12% of the $6.2 billion business after multiple rounds of equity financing.
According to local media reports, Aggarwal turned down a $1.1 billion investment from Softbank late last year in order to keep management control and avoid a further stake dilution.
At the same time, Uber, which completed a highly scaled back $8.1 billion initial public offering in New York earlier this month, may well want to avoid further losing investor confidence by selling one of its fastest-growing units. Uber's share price has recovered somewhat after a near-18% loss but remains comfortably below its IPO issue price.
Ola, which claims it has over 70% share of India’s ride-hailing market and operates with a workforce five times larger than Uber India, will have to consider merging with its smaller rival sometime in the future when growth slows.
But for the time being, it is better for Ola to spend time expanding its business rather than taking on its rival.