Professor Meziane Lasfer comments on Uber's plan to acquire Dubai-based rival Careem

The deal

It is unusual for private companies to engage in a takeover, particularly just before their initial public offerings (IPOs). Generally, they wait until they have their IPOs before acquiring other firms. The reason for this is that many studies show that the very basis for an IPO is to create paper money to finance acquisition. Therefore, one would think that Uber could wait until it enters the stock market before acquiring Careem and then paying with cash, if it is available, and/or shares. These shares would be quoted in the stock market, so the public would know exactly what the valuation is.

Given that Uber hasn’t gone public yet, we don’t know for sure how much it would pay to acquire Careem. The San-Francisco-based ride-hailing giant is said to be offering $1.4 billion in cash and $1.7 billion in convertible notes, which are going to be converted if the price is above $55 per share. In layman’s terms, the value that Uber is putting on Careem is so uncertain. The minimum is 3.1 billion, however, this valuation depends critically on the price of Uber shares after the IPO. For example, if the price of Uber goes up to $110 per share, it means the actual value of Careem is 4.8 billion dollars.

What does this mean for investors?

For investors of Careem, this acquisition is a good deal as they have the minimum guaranteed price of $3.1 billion, if the share price of Uber is $55 or lower - but they can get a higher value if the share price is higher than $55, meaning they have a large potential upside value.

However, for shareholders of Uber, it is the other way around. Overall, if the price of the company is trading at higher than $55 per share, Uber’s shareholders will lose and those of Careem will gain.

The question that begs to be asked is why isn’t Uber waiting until they have the IPO? It could be that it wants to signal to the market that it is a strong company and diversifying internationally. It might also be doing this to deviate the public’s attention from its American rival Lyft, a company that will soon be going public on Nasdaq.

What does it mean for customers?

This isn’t good news for consumers. By acquiring Careem, Uber will have a monopoly in the MENA region, which means that customers will be left with no choice on which ride-sharing app to use. When there is monopolistic power, it is likely that fares will increase.

Quotes can be attributed to Professor Meziane Lasfer, Professor of Finance, Cass Business School.