Consolidation: Can SoftBank bring Uber and Ola together?

By Ayushi Gupta

SoftBank Group Corp., the Japanese telecommunications and Internet conglomerate, is one of the largest stakeholders in the cab hailing service providers Didi Chuxing (China), Grab (Southeast Asia), Ola (India) and 99 (Latin America). Even so, it lacks representation in North America. Understanding the critical place of the US on the globe, and future of ride-sharing as a key global industry, SoftBank Vision Fund has shown interest in buying a stake in the San Francisco based giant, Uber Technologies. Apart from being the largest stake owner in Ola (40% stake in the last financing round), the group has entered into an exclusivity agreement with Uber to buy secondary shares. The potential deal indicates the Japanese conglomerate’s intentions to make peace between rivals Ola and Uber.

Perverse investor relationships

Uber and Ola share a unique relationship dynamic. Apart from sharing big investors like Tiger Global Management and DST Global, Uber is also an investor in one of Ola’s investors, Didi Chuxing. In China, the race with Chuxing reportedly costs Uber $1 billion a year. Strong competition from domestic players impelled Uber to sell its China business to the local rival, and in return, it became the largest shareholder with about one-fifth stake in the company. This makes Uber and Ola allies of sorts.

There is a catch though: Didi Chuxing is a small but strategic investor for Ola. In December 2015, four of Uber’s prominent rivals in the US and Asia—Lyft, Ola, Didi, and Grab—entered into a partnership. This alliance allowed users to book cabs from each other’s apps in all the regions they operate in. Such an arrangement was expected to help Ola offer a multi-country experience to its users, without really investing in new markets. However, the changed Uber-Didi dynamics defeat the very purpose of this alliance. These relationships can create difficulty with respect to sharing confidential information, controlling rights and company’s future vision. In this complex scenario, consolidation, in the long run, seems to be an inevitable option.

Time to face the music?

SoftBank’s $100 billion Vision Fund CEO, Rajeev Misra said, “We saw in China between Uber and Didi… at some point, it made economic sense. Instead of both losing a billion-dollars fighting, Uber did end up exiting and taking a stake in Didi”. If we look at it from the Indian context, both Ola and Uber India run neck and neck with each other and invest in driver incentives and discounts, making profitability a tough goal. Both have burned huge amounts of cash trying to best each other out, however, neither of the two companies seems to have figured out an organic strategy to win market share.

Ola had incurred a consolidated loss before tax of $360 Mn (INR 2,313.66 Cr) in FY16, as compared to $123.9 Mn (INR 796 Cr) in FY15, while Uber has been bleeding with an exit from two big markets and internal troubles. However, with the sale of its China business, Uber is flushed with fresh capital. According to industry sources, Ola has a larger market share than Uber, but Uber has access to more funds. Hence, forging tactical partnerships instead of chasing market superiority might benefit both the companies, as they stand a chance to have a monopoly in this oligopolistic market.

Decoding SoftBank’s moves

What are the odds that a fat cat investor will nurture two competitors in the same geography? If the odds are low, it may not be counter-intuitive to assume that SoftBank is laying the grounds for some eye-popping consolidation in India’s fledgeling consumer Internet segment. SoftBank suffered a major hit when the Snapdeal-Flipkart merger collapsed after months of discussions. Now, its inclination towards getting Uber to its portfolio may be a hint towards a consolidation.

“The consumer Internet industry will always have scope for consolidation. You have to emerge as the winner or merge with the winner.” This observation by Rajeev Misra may well shape the group’s India strategy. Ola is one of the SoftBank India portfolios that has delivered on its promise. However, with only one big market to focus on, Uber is closing in. In addition, the internet corporation is already eyeing the Tiger Global Management stocks to increase its shareholding in Ola. Under such circumstances, it is not out of context to wonder that if the investment in Uber goes through, will the two unicorns eventually shake hands and call for a truce?

What does the future hold?

SoftBank is clear about how to tackle conflicting interests of these two competing companies. “There will be short-term conflict, but long-term benefits.” Rajeev Misra went on to elaborate that the present strategy is to connect the investee companies with the global ecosystem, by taking regional firms to international markets and bringing its global portfolio companies to India, which in turn, would help all to benefit from new technology adoptions. Once that’s done, the venture capital fund could explore consolidation opportunities. Whether SoftBank is able to convince Ola and Uber to bury the hatchet will surely be unveiled in the coming few months, with Uber’s new CEO Dara Khosrowshahi planning to take the company public in the next 18 months. Certainly, the present scenario has brought many new dimensions to the internet industry.

Featured Image Source: Flickr