Why Uber Paid $3.1 Billion to Acquire Its Middle Eastern Rival Careem!
By acquiring Careem, Uber can claim a significant region outside of North America.
2019 was a rough year for Uber. After the ridesharing giant’s disastrous IPO, big losses, leadership shakeups and major layoffs kept the company in the headlines and rattled investor confidence.
But a mere month and a half before the negative news started rolling in, Uber announced a big acquisition, paying $3.1 billion for a Dubai-based ridesharing service called Careem, giving investors hope that the MENA region could represent a great growth opportunity for the company.
By acquiring Careem, Uber can claim a significant region outside of North America, where they are the dominant player.
Even though Uber’s had really a train wreck situation since the IPO, Careem has been one of the bright spots over the past year. It was not only Uber’s largest acquisition to date but the biggest tech acquisition that the region had ever seen, by more than a factor of five. It’s prompted hope that other homegrown companies will follow suit.
While this deal marked the first time that many in the U.S. had even heard of Careem, in the Middle East, it’s a household name.
Actually Careem started in a number of countries ahead of Uber. Understanding the local culture helped Careem built a very strong brand, something that was becoming more and more difficult for Uber to compete with.
So what exactly is Careem’s brand, and how did it help them to become so valuable?
Careem was founded in 2012 by Mudassir Sheikha, who grew up in Pakistan, and Magnus Olsson from Sweden. Both are ex-consultants at McKinsey and Co. And they’ve managed to get some major backers onboard, like Saudi Arabia’s richest man, Prince Al-Waleed bin Talal.
Overall, the company stands out in a region where entrepreneurialism generally lags behind the rest of the world. It operates in 87 cities in 14 countries, including some politically unstable areas like Iraq and Palestine, where Uber previously had no presence at all.
Careem also had an advantage over Uber when it came to customizing its offerings on the local level. The local teams that Careem had in the various markets had a more entrepreneurial approach and they were able to negotiate and talk with the regulators and work out deals on their own, something that is fairly difficult to do in a company like Uber, who’s trying to standardize everything that they do worldwide.
Along with local knowledge, Careem brought the tech know-how to build out much of the basic infrastructure that ridesharing companies in the U.S. or Europe may take for granted.
In Many of the cities and countries that Careem operates in, and these include places like Pakistan, Iraq, Palestine, Sudan, the company had to build its own locations database, maps, payment systems, messaging systems, call centers. In these places, businesses and homes lack formal addresses, the economies are largely cash-based, internet access can be slow and intermittent, and the older generation isn’t as comfortable with smartphones.
Additional regional touches include allowing users in low bandwidth countries like Iraq, to order a car via the international messaging service WhatsApp, and calling drivers “Captains” to counter the regional stigma that driving is a low-skilled profession. Careem has also made a point of recruiting female “Captainahs” in places like Pakistan and even Saudi Arabia, where women were banned from driving until mid-2018.
The company wanted to create a platform that was Middle East-centric, not viewed as something that was coming from, whether it’s Europe or the U.S into the Middle East.
As a part of the acquisition deal, Careem will maintain its independent brand. The two companies will continue to operate separately in the region, allowing Uber to leverage its name recognition with ex-pats and tourists and allowing Careem to build on its local appeal.
Basically, it’s a way of dominating the market but making consumers think that they have a choice.
The deal isn’t the end of Careem, it’s just the start of chapter two. That was a big part of the negotiations, that they could carry on their journey and keep the essence of Careem going.
Careem has a user base of over 30 million in a region with lots of untapped potential for digital services.
The Middle East is probably one of the fastest-growing internet markets around the world. Approximately 400 million people with very high smartphone penetration that reaches 97, 98% in countries like Saudi Arabia and the UAE. And hence, the growth rate and need for services like Careem and Uber are high indeed.
This could explain why Uber paid $3.1 billion for Careem, even though the company’s most recent valuation came in at only $2 billion.
Acquiring a local competitor is a change of pace for Uber, which has backed out of a number of markets over the last few years. Uber had to show investors that it wasn’t just retreating, but it was also making big bets to be dominant in certain markets around the world. They chose the Middle East to do that.
Like Uber, Careem is also expanding beyond ridesharing. Now that it’s built out the necessary digital infrastructure, the company aims to become the region’s “super app”, a one-stop-shop for a variety of online services.
Careem already offers delivery for small packages and food items, as well as digital payment services and bike-sharing.
In the future, analysts say we can expect Careem to expand its delivery business to more cities and build out its payment platform, potentially one-day allowing unbanked users to send and store money on their phones and digitally purchase a wide variety of goods.
Careem aims to become the app for people in the region to run their daily lives in a simpler and productive way.
Many also hope the deal will spur more regional entrepreneurship and inspire investors to take a chance on domestic startups. Aside from Careem, the region’s other major tech deal came in 2017, when Amazon acquired local e-commerce company Souq.com for $580 million.
Now that it has a strong foothold in the Middle East and North Africa, analysts say Uber would do well to follow Careem’s example as it expands further, leveraging local expertise in every new market it enters.
In the meantime though, Uber’s been hemorrhaging cash. It reported over $1 billion in net losses in the third quarter of 2019. In spite of this, CEO Dara Khosrowshahi projects the company will turn a profit starting in 2021, adjusted for interest, taxes, depreciation, and amortization.
Whether or not that timeline is realistic remains to be seen. But if Uber is ever going to reach profitability, Careem and the Middle East at large could be an important arrow in the company’s quiver.
Uber has to find new streams of revenue and it has to justify itself as a global platform for not just transportation, but as the operating system for our everyday lives.