Six Things You Need To Know About UberChina and DiDi's Merger
摘要： All details about the deal between Didi and UberChina: Will it be subject to anti-monopoly review? Who benefits most from the merger? What's the impact on the market?
What a story! On July, 21st, a piece of news spread widely on the Chinese internet and among Chinese media, saying that Didi would acquire UberChina due to investors’ pressure.
However, Didi and UberChina later denied respectively. Yet, when the rumor finally died down, a screenshot of Travis Kalanick’s blog article about UberChina and Didi Chuxing’s merger was widely circulated again on the Chinese internet in the morning of August, 1st, and Bloomberg also issued a report about the possible merger, UberChina and Didi again denied it as rumor.
In the afternoon, however, Didi officially announced that it was taking over UberChina in a deal that could value the combined company in China at $35 billion. Uber Global will take a 5.9 percent stake in Didi, and Uber China's service will continue to operate independently. Uber’s founder and CEO Travis Kalanick also shared his internal letter on his Facebook and revealed more information about the merger.
The piece of news, with so many twists and turns, aroused heated discussion in the Chinese internet world. Some worried if the merger might put an end to the subsidy war, others were concerned if the merger might lead to monopoly and hurt the market, still others mourned for the “failure” of another foreign internet company in China or were thrilled at the success of Chinese internet company over a foreign one, while the rest made fun of the merger, came up with all kinds of jokes and thought so hard on the new name for the combined company（for example, Dudu, Diudiu, etc）.
Behind all these discussions and jokes, some important facts are ignored or forgotten. The following are six most important things you need to know about the merger:
1. Seriously，5.89% or 17.7%?
According to Didi’s release, “Didi Chuxing and Uber Global will hold each other's equity and become a minority shareholder of each other. Uber Global will receive 5.89% of the combined company with preferred equity interest which is equal to a 17.7% economic interest. At the same time, UberChina’s other investors, including search giant Baiu, will receive 2.3% economic interest in Didi.”
Many people might wonder what does Didi mean specifically by “economic interests”? Soon after Didi’s announcement, Travis Kalanick shared an internal letter to UberChina’s team on Facebook account, and stated that “UberChina's value will represent a 20% stake in the combined entity with Uber being Didi's largest shareholder.” (Read the full text of the internal letter at the end of this article)
Who’s telling the truth? Whether it’s 5.89% or 20% stake? What’s going on here?
“Uber will hold 5.89% equity in Didi Chuxing, but will be subject to higher share of economic interests,” Tao Ran, vice president of Didi Chuxing, later explained.
So it occurred to me that Didi might be playing on words in its official announcement and telling a fib by the blurred concept “economic interest”.
By comparing the statements from both sides, my guess about what really happened is that: UberChina and Didi Chuxing merged by splitting the share of the combined company by a ratio of one to four. Thus, UberChina’s shareholders will hold 20% of the new company, among which Uber Global takes up 17.7%, while other investors such as Baidu take up the rest 2.3%. However, similar to Alibaba and Facebook, Uber and Didi Chuxing chose to adopt the dual share class. That’s why Uber Global holds 5.89% of the voting rights, but 17.7% stake of the new company, making it the biggest shareholder of the new Didi Chuxing. It’s a typical dual-share structure.
However, we still don’t know for sure how much share will Didi hold in Uber Global, and both sides seem to refuse to reveal more details on this matter. According to Bloomberg and New York Times’s reports, Didi will invest $1 billion in Uber Global with a valuation of $68 billion. If so, then Didi might hold around 1.47% stake.
Besides, the merger might be a good thing for both sides. While Didi gets rid of a challenging rival at the expense of 20% stake, Uber Global avoids the competition with the most potent potential rival around the world and even becomes the biggest shareholder of it. From all aspects, it’s a shrewd decision to sell Uber’s China operation to Didi. Uber might lose a couple billion dollars in China, but it won a 17.7% stake in a company that's likely to worth much more in the future. As a matter of fact, UberChina was even offering a close bonus of 6 months base salary and 6 months equity vesting to employees who chose to stay.
2. Uber Global becomes the biggest shareholder of Didi
On Jan, 11th, 2016, Uber’s founder and CEO Travis Kalanick officially announced that UberChina has completed the B-round financing, which was led by HNA Group, and joined by CITIC Securities, China Taiping Insurance, China Life, as well as Automaker GIC.
UberChina’s other investors include Baidu, Vanke, China Minsheng Bank, CBC Capital, etc, and Baidu even participated in both the A and B round financing. In total, UberChina raised around $2 billion from Chinese investors.
It is estimated that Baidu holds 10% stake in UberChina since it invested in both rounds of financing. However, after the merger, UberChina’s other investors’ stake might be diluted by 80%.
At the same time, according to public data, Didi Chuxing’s equity structure before the merger looks like this: the management board (20%, including ESOP), Alibaba (11%), CITIC Industrial Fund (6%), DST (5%), TigerGlobal (5% ), Coatue (5%), Softbank (4.3%), GSR (4.3%), etc. Thus, their stake will be diluted by 20% after the merger.
Similarly, if we dilute Uber Global’s share by 80%, then Uber China will hold around 17.7% stake of the combined company, making it the biggest shareholder of Didi Chuxing.
3. Valuation of the combined company didn’t change
According to public data and financing record, Didi and UberChina’s valuation before the merger is around $28 billion and $8 billion, respectively.
Zhu Xiaohu, an early investor of Didi, confirmed in his WeChat friends circle and Fenda 60-second voice answer that UberChina’s valuation was around $7billion. If so, then the total valuation of the combined company will be around $35 billion since UberChina and Didi merge and split the share by a ratio of one to four, and Didi’s valuation will be $28 billion, which is in accordance with Didi’s previous financing records.
However, we will have to wait for the next round of financing to be certain on the exact valuation of the new combined company.
In the 60-second voice answer on Fenda, Zhu Xiaohu also revealed that Didi and UberChina had been negotiating on the possible merger for over a year, and that they failed to reach an agreement for a long time because there was so much gap between each side’s expectation. UberChina had expected to merge with Didi and hold 40% stake in the combined company, but Didi refused the offer. However, Uber’s founder Travis Kalanick finally decided to make compromise and lower the stake to 20% due to the increasing pressure from investors.
4. A surprise for the Chinese media, the Chinese government and even UberChina and Didi’s PR team
An interesting thing is that the merger might come as a surprise for not only UberChina and Didi’s PR team, but also the media as well as the Chinese government.
On July, 21st, a piece of news spread widely on the Chinese internet and among Chinese media, saying that Didi would acquire UberChina due to investors’ pressure. However, both Didi and UberChina later denied. However, when the rumor finally died away, Didi and UberChina did merger together on August, 1st, after all.
According to Caijing.com, when officials from the Ministry of Transport as well as the Anti-Monopoly Bureau approached UberChina and Didi and asked if they were going to merge a week before, they all denied. The merger is even a surprise for Didi and UberChina’s PR team. When Travis Kalanick’s blog article about the merger was spread widely on the Chinese internet on the morning of August, 1st, Didi and UberChina’s PR team still denied it as rumor when approached by media.
5. The merger might not be subject to anti-monopoly review
According to public data, Didi accounts for around 87% share of the market, while UberChina takes up around 30%. So it is natural that the merger sparks worry over monopoly among many people.
Chinese anti-trust law stipulates that business owners have to file for permission if the global turnout of all the companies in the previous fiscal year reach over 10 billion yuan, and the turnover of at least two companies in China reach over 400 million yuan; or if the turnover of all the companies in China in the previous fiscal year reach over 2 billion yuan and the turnover of at least two companies in China reach over 400 million yuan.
It is worth mentioning that turnover, not market share, is what’s really important here. According to Sina Tech’s interview, if the turnover of all the companies in China in the previous fiscal year don’t reach over 2 billion yuan and the turnover of at least two companies in China don’t reach over 400 million yuan, then they don’t need to file for permission of the merger, generally speaking, even if the total market share exceeds 50%.
For Didi and UberChina, although their transaction volume might be very high, their turnover isn’t high at all. As a matter of fact, they are still losing money. From this aspect, the deal might not be subject to anti-monopoly review by China's relevant authority as both are not profitable yet and Uber China's revenue did not reach the review threshold.
However, spokesman from the Ministry of Commerce, one of the country's anti-trust regulators, said on August, 2nd that the merger "can't proceed if they don't apply for permission."
So it is likely the Chinese government might investigate in the merger, as it did when Didi and Kuaidi merger on Valentine’s Day of 2015. However, it is unlikely that the government will call a halt to the merger after all.
6. Subsidy strategy might gradually comes to an end
“For a long time to come, fully improving user experience will become the main focus of Didi, so we will continue to give subsidies to riders and incentives to drivers,” Didi stated in response to worries if it would stop adopting the money-burning subsidy strategy after the merger.
What about Uber? As of the afternoon of August, 2nd, Uber was still sending promotion messages to riders. Peng Gang, president of the third biggest ride-hailing service Yidao (or the second after the merger), told TMTpost in a previous interview that once the battle of subsidy started, it was hard to stop. On the evening of August, 1st, Yidao officially responded to the merger, saying that it would “fight” to the end, though the market share gap between Yidao and the new Didi Chuxing will become even more significant after the merger.
However, the Chinese government just legalized online ride-hailing services on July, 28th. The rules stipulate that online ride-hailing platforms should not engage in behaviors such as eliminating competition, and compete with each other by giving too much subsidy to passengers and offering ride services at prices much lower than the market average. A report from Quartz suggested that "local authorities reserve the right to give out a 'government guidance price' when necessary. That could mean subsidized rides are on their way out, which could deal an especially devastating blow to Uber—unnaturally cheap rides are key to getting people to try the service for the first time." So it is expected that the subsidy will, after all, gradually go down in the near future.
In addition, now that Didi has already merged with its biggest rival UberChina, it makes no sense that it will bother to continue to give much subsidy to users. Didi’s investors also wouldn’t be willing to see that Didi continue to spend more money in this aspect, after all.
The full text of Travis Kalanick's internal letter to UberChina's team:
Team, I wanted to let you know that we have reached an agreement to merge UberChina with Didi Chuxing. UberChina's value will represent a 20% stake in the combined entity with Uber being Didi's largest shareholder.
Three years ago, a small group of us went on a scouting mission to Beijing to see how we could expand into China.
It was a big, bold idea, especially given that Uber was still a relatively small start-up and no one in China had ever even heard of us. And of course, anytime we got into a discussion about our efforts in China, most people thought we were naive, crazy – or both. We saw things differently of course. China is an inspiring country with astonishing opportunity. Many of the world’s mega cities are Chinese, and their thirst for transportation innovation is second to none. Uber’s mission to make “transportation as reliable as running water, everywhere for everyone” resonates especially strongly in China.
Being an entrepreneur means you are an explorer by nature, doing what everyone thinks is impossible but with an optimistic perspective on the unknown. Uber entered this uncharted territory in February 2014, two years after Didi was founded. We were a young American business entering a country where most US internet companies had failed to crack the code, and with a product that needed rebuilding. Our China effort has been one of Uber's most entrepreneurial because we literally had to start from scratch.
Since launching just over two years ago, we have expanded to over 60 cities in China and we are serving over 40 million rides per week. Our team is now 800 strong, nobly serving their cities. Our philosophy on people has always been to hire the best of the best and our incredible success in China is due to all of you. You are the smartest and most entrepreneurial sons and daughters of China whose mission has been to build a transportation system in every Chinese city, and to serve those cities and to serve the people.
In the startup community in Beijing and across China, our people and our systems for empowering them have set the gold standard for Chinese technology companies. Your efforts -- and the efforts of our China engineering and product teams back in San Francisco -- have not only been been an inspiration to our thousands of employees globally but to me personally.
However, as an entrepreneur, I’ve learned that being successful is about listening to your head as much as following your heart. Sustainably serving China’s cities, and the riders and drivers who live in them, is only possible with profitability. This merger paves the way for our team and Didi’s to partner on an enormous mission, and it frees up a substantial resources for bold initiatives focused on the future of cities -- from self-driving technology to the future of food and logistics.
Uber is a better, stronger company because of our China experience. Didi has been a fierce competitor and I respect all that Didi and their team have accomplished. UberChina certainly rose to the occasion and your hustle and work ethic is the stuff of legend. Working with and learning from all of you in this remarkable China journey has been one of the great experiences in my life.
I want to thank Yanqi, Kate, Gang, Cleo, Zhen, Allen and the entire UberChina team for getting us to this point. A big shout out as well to our UberChina product and engineering team, led by Han, Vinay and Pedram, for all their hard work and creativity. China was a big bet for us and I’m incredibly proud of everything we have achieved. I will be doing an All Hands to talk to you all about our new journey forward, and how we will work with our new partner in serving China and her cities. Stay tuned for the exact time--Allen will send a note around shortly.
With much UberChina love,
[The article is published and edited with authorization from the author @Han Pei, please note source and hyperlink when reproduce.]
Translated by Levin Feng (Senior Translator at PAGE TO PAGE), working for TMTpost.