Opinion: Only two stars for the Uber-Careem deal

Elie Khouri, CEO of Omnicom Media Group MENA, takes a longer-term view of the record-breaking transaction
Opinion: Only two stars for the Uber-Careem deal
Elie Khouri, CEO of Omnicom Media Group MENA.
By Elie Khouri
Thu 04 Apr 2019 04:04 PM

The reaction to Uber’s decision to acquire Careem has been so overwhelmingly positive that we could do with a more balanced view of the region’s biggest technology transaction to date.

After Amazon’s acquisition of Souq.com in 2017 for $580 million, the $3.1 billion price-tag for Careem, in cash and shares, intimates the appetite for the Middle East’s Internet start-ups is growing. Most observers celebrate it as proof that tech investments in the region are judicious and can lead to a profitable exit.

But are we being blinded by the short-term impact? Is the deal as good as it seems for our ecosystem and region?

Like Souq.com, Careem is one of the most salient stars in our tech universe. Its success over the years literally gave Uber a run for its money. No wonder the Silicon Valley giant saw in Careem both a threat and an opportunity.

Uber’s track record in emerging markets is patchy so the acquisition route was an obvious way to assert dominance in a region from which its CEO, Dara Khosrowshahi, promised the company would not pull back.

World dominance is no easy task and while the technology can be the same everywhere, market nuances can make or break you. Careem has learned this very quickly, as it now operates in over 120 cities across 15 countries. If nothing else, its local touch could well be what Uber is buying.

When Careem’s two founders ventured out of McKinsey, it was not transportation they were thinking of to build a billion-dollar business. What they did want is to grow the region’s economy, stimulate entrepreneurship and improve people’s lives. It’s fair to say that with their, and their team’s, hard work, they’ve achieved this. Mudassir Sheikha and Magnus Olsson, along with Abdulla Elyas, are rightfully held as a model for other entrepreneurs to follow.

Careem’s success has turned it into a unicorn and made it a beacon for the Middle East tech sector. This was enabled by the vision of Dubai’s rulers to transform the emirate into a tech hub as part of its drive to diversify its economy from its historic oil dominance. This strategy has paid off and today, Dubai is one the 50 most innovative cities in the world, according to a ranking by data firm 2ThinkNow.

The upside

Dubai wins: The headline-grabbing value of Uber’s acquisition will go a long way in drawing attention to Dubai and bringing it closer to Silicon Valley for its incubation credentials. After Amazon’s Souq deal, this is another top-level endorsement of the emirate’s and the region’s IT sector and ecosystem.

Handsome rewards for the founders: The $3.1 billion price tag is not only significantly higher than Careem’s valuation at the last investor round, it could potentially go higher still once Uber IPOs. If its shares go above $55, the founders, staff and investors could be looking at an even greater windfall. This transaction certainly validates Sheikha’s and Olsson’s idea, approach and work with all their stakeholders.

Investors are cashing in: Many of Careem’s investors, including Al Tayyar Travel Group, Beco Capital and Wamda, have been in it for the long run and are being substantially rewarded for their support. There was a lot of Saudi money in Careem, as well as in Uber, so investors there, and beyond, will happily cash in the high multiples of their capital.

Good for the VC ecosystem: Venture capitalists wanted nothing more than this to confirm juicy exits are possible in the Middle East. The transaction proves that the region can successfully nurture innovative projects from conception to exit, generating vast sums that can be reinvested locally. It will only build appetite for further acquisitions, creating new hope for entrepreneurs and investors. Kingdom Holdings has already announced plans to invest the proceeds into Saudi Arabia, as well as Europe.

The downside

Is there such a thing as the perfect deal? Can there be winners without losers? The downsides of the Uber-Careem deal may not be immediately obvious or concrete yet but they’re looming. While there is much to celebrate, we must also be pragmatic and consider the potential shortcomings.

Consumers lose out: The acquisition of a major competitor, particularly in a duopoly situation, usually spells bad news for consumers who may face price increases. Margins are notoriously thin in the ride-hailing business so the temptation to hike fares will be strong. Let’s not forget competition regulators will still have a say and the Egyptian Competitive Authority is already surveying both drivers and consumers about the impact of the transaction on them.

Just witness what happened in China. Uber and Didi Chuxing battled it out. This led to lower fares for consumers and higher incomes for drivers. Didi ended the fight by acquiring Uber’s operation in China but keeping it as an independent brand and business. With this monopoly, things have worsened for both consumers and drivers.

Money out of the region: As it is the case with most foreign acquisitions, profits will most likely be channeled back to the home country rather than being reinvested locally. This could take the air out of the room if we’re not careful. Maybe regulators could seek to limit the risk.

Missed opportunity for the regional capital markets: Given more time, Careem’s lead could have grown further and warranted an even higher valuation, maybe $10, $20 or even $50 billion. A regional IPO would have generated more wealth and jobs. It would have proved local tech start-ups can make it to the stock market and benefit employees and consumers in different ways. Instead of short-term gains, we ought to be aiming for long-term value.

So long for home-grown brands: While Uber has stated the Careem brand will continue across its different businesses, including delivery and payments as well as mobility, one can only ponder how long for. Once the transaction closes in 2020, Careem will become a subsidiary of Uber. The two will most certainly seek synergies and combine resources, potentially ending up with a single brand. The pressure to do so will be heightened when Uber needs to deliver greater results post-IPO.

If Uber’s strategy to offload costly overseas units in exchange for a stake in its competitors still applied, Careem could have acquired Uber’s Middle East operations. This would have been an even greater validation of the success of a local start-up. Careem would have remained in Middle Eastern hands and stayed true to its original purpose of developing the regional economy, inspiring entrepreneurship and improving people’s lives.

A dent to our collective national and regional pride: Instead of letting our regional champion fall into foreign hands, we should have worked towards Careem acquiring Uber’s regional business, like Didi in China. Surely, we have wealthy entities and ambitious individuals ready to make such a move. This would have proven that not only the Middle East can create and build strong local tech brands, but it can also own them for the long term and take them into the future. Who knows, maybe Careem could have become a global giant grown from Middle Eastern roots.

Careem is barely seven years old. Whether this acquisition is driven by Uber’s need to either capitalize on or stifle its competitor, investors’ desire to cash in or both, it feels like we’ve let go of our child prodigy. Our national and regional tech champions are few and far between. They’re worth more to us than their balance sheets.

Elie Khouri is CEO of Omnicom Media Group MENA, a serial tech investor and an entrepreneur

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