M&A

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Uber China bows out to Didi Chuxing in M&A deal

Uber CEO Travis Kalanick addresses a gathering during a conference of start-up businesses in New Delhi

Seeking a truce: Kalanick

Barbara Tuchman’s The Guns of August is one of the more famous histories of how the First World War started. But this month its title might also be aptly applied to describe not the start but the cessation of a war – in this case between two of China’s powerful ride-hailing apps.

On the first day of August Uber’s China unit and its bigger local rival Didi Chuxing announced they were ending two years of a costly price war – with the former agreeing to sell itself to the latter. The sudden end to their high-profile feud is not, mind you, without uncertainties. Whether the proposed deal will get regulatory approval is unclear.

Under the deal, which values Uber China at around $7 billion, Didi Chuxing will acquire Uber China’s data, brand and company (an outcome we hinted might happen in WiC330). In return Uber Global will receive a 17.7% equity stake in the newly bolstered Didi Chuxing and an investment from its former competitor of $1 billion. Uber Global’s board will welcome Cheng Wei, the CEO and founder of Didi’s parent company Xiaoju Kuaizhi – while Didi’s will be joined by Travis Kalanick, Uber’s founder.

It is estimated this new partnership will command some 90% of the Chinese market for internet-based car-hailing services, a stranglehold that might prompt China’s antitrust regulators to veto it.

But in a message sent to Reuters from Didi Chuxing, the firm claimed that it had no need to file a request to the Ministry of Commerce (Mofcom) or the National Reform and Development Commission (NRDC), both of which handle antitrust issues, because neither it nor Uber China had yet turned a profit.

This may be technically correct – the highly subsidised fares offered by both companies have prevented either from enjoying financial success – but a day after the merger’s announcement, Mofcom still demanded Didi Chuxing submit an application before the deal can be allowed to progress.

There is reason to believe the deal will be approved however. A few days before the proposal was announced the Chinese government officially legalised internet-based taxi services: before then firms like Uber China were operating in what many considered a legal grey area. For Uber the new law was a double-edged sword. The Economist points out the legislation effectively bans all subsidies and would have made it harder for Uber to compete with Didi, which has a far bigger market share. “The new law is a factor in why Uber China sold out,” the magazine reckons. Uber’s investors were also worried that those same subsidies had cost it $2 billion in China over the past two years and $250 million in just the last month.

Profitability certainly seems to be part of Kalanick’s reasoning: speaking of his decision to cede to Didi he stated, “Getting to profitability is the only way to build a sustainable business that can best serve Chinese riders, drivers and cities over the long term.”

Technicalities may still see the deal stall. In the wake of the M&A announcement, a lot of media attention has turned to Didi Chuxing’s business structure. 21CN Business Herald reports that Didi has been built as a Variable Interest Entity (VIE): whereby a chain of offshore shell companies create a foreign-owned enterprise in China. According to China Business News, it is a well-known secret that the Mofcom does not approve M&A requests from VIEs.

Of course, there is also the possibility that the merger will be considered a monopoly. Caixin Weekly suggests that if the authorities determine that this merger constitutes the formation of a monopoly then it implies it views “internet-booked taxis” (as per the wording of the new regulations) as an industry separate from traditional taxis. However if internet-booked taxis are considered as merely a subsection of the broader taxi market then the combine cannot be a monopoly.

Huang Yong, an antitrust expert advising the State Council, says that drawing this boundary would require “loads of sophisticated research”.

Meanwhile, if the deal goes through Didi will become the first company to be backed by all three of China’s internet giants: Alibaba and Tencent (which own Didi) plus Baidu (which had a stake in Uber). That suggests the newly merged entity will be hard to beat.


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