Why Did Uber Spend $3.1 Billion On A Middle Eastern Rival? - YouTube

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 major acquisition, paying $3.1

billion for the Dubai-based ridesharing service Careem, giving many

investors hope that the Middle East and North Africa region could

represent a major growth opportunity for the company.

By acquiring Careem, Uber can claim a significant region outside of North

America, where they are the dominant player.

They're not the dominant player in China.

They're not the dominant player in Latin America.

So they really needed that win in the Middle East.

Even though Uber's had really a train wreck situation since the IPO,

Careem's 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.

Pending regulatory approvals, the deal is expected to close in the first

quarter of 2020. 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.

So Careem started in a number of countries ahead of Uber.

So they had a head start.

They understand the culture.

Careem built a very strong brand and I could tell you that's 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 on board, 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. Typically, only a local firm can do business in such

environments because the team and the stakeholders would be used to this.

This is the environment in which they grew up.

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, you know,

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.

So if you go to many of the cities and countries that we've gone to, and

these include places like Pakistan, Iraq, Palestine, Sudan, we've had to

build our own locations database, our own maps, our own payment systems,

our own messaging systems, our own call centers.

In many of 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. We realized that the maps in the region were not accurate.

So we decided that we have to actually build maps of the region.

Then we decided that even when we had the maps, there were times when a

lot of the captains, who come from places like Pakistan and India, were

not able to speak in the same language as the customers.

So communication was a bit of a barrier.

So we set up a call center through which we could intermediate that

communication and make that more effective.

But most importantly, in certain countries such as Saudi Arabia, Careem

understood, you know, the need to have cash payments.

They enabled that feature before Uber did.

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. They 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 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 expats 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 choice. The deal isn't the end of Careem, it's just the

start of chapter two.

And I think 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 percent in countries like Saudi

Arabia and the UAE.

And hence, you know, the growth rate and need for services like Careem and

Uber is 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. Yeah, I think they needed to pay a significant

premium to get them, because Careem could have just stayed doing what

they're doing. You know, or potentially gone down an IPO path.

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.

If you really look at what has happened in the region the last 50 to 100

years, we missed out on a lot of development that happened in the rest of

the world due to political strife, due to conflict.

The internet, and all the power that it brings, gives us an opportunity to

leapfrog our people into the digital future.

And we believe that we're uniquely positioned, as leading internet

platform of the region, to go after that opportunity.

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.

So we want to become the app for people in the region to run their daily

lives in a simpler and productive way.

So as much as Uber acquired Careem to be the dominant ridesharing player,

it may also have acquired some lessons, some talents, some knowledge about

how to become a super app. Many also hope the deal will spur more regional

entrepreneurship and inspire investors to take a chance on domestic

startups. So I think what it means for the region now is that there's a

template. And so investors can see that they can invest in a local startup

and that startup can not only survive, but compete with the best in the

world. 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.

It also, you know, shows people that strategic sectors in the Middle East

that are drivers for growth have already been, quote unquote, taken by

internationals and urges, you know, investors in the Middle East to move

much faster. We're seeing some of that money that was going to the

international unicorns now being invested locally for the homegrown ones.

I believe that in the next maybe two to three years, you're going to see

many Careems. 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. And I think you realize with the model in the United States, or

even parts of Europe, might not be successful in other regions.

And I think when you look at the way Careem did it, I think that could be

the blueprint they use to expand into Latin America, South America, parts

of Europe, potentially Africa and other areas.

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. So we know that there's an expectation of profitability and

we expect to deliver for 2021.

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.

If Uber plays it right, the Middle East could be one of the most

profitable regions for them on the longer term.

Uber has to find new streams of revenue and it has to justify itself as a

global platform for not just transportation, but as Dara Khosrowshahi

says, the operating system for our everyday lives.