INTERNET: Didi, Uber in Latest China Shotgun Mega Marriage

Bottom line: Didi’s merger with Uber China was driven by investor pressure to end their fierce price wars, and the newly combined company is likely to quickly reduce its subsidies and become profitable by year-end.

Didi Chuxing merges with Uber China

Just a week after reports emerged of a truce in the nonstop price wars between private car specialists Didi Chuxing and Uber China, the pair have suddenly announced a merger that will become the latest marriage of former bitter rivals in China. This latest shotgun union, which will put Didi Chuxing in the driver’s seat of the newly combined company, testifies to growing investor impatience at fierce price wars and resulting heavy losses that have become the norm in many emerging Chinese high-tech industries.

The first of these odd pairings actually involved Didi itself and former bitter rival Kuaidi, which combined to form the current Didi Chuxing early last year. That was followed by another merger of online classified advertising sites (NYSE: WUBA) and Ganji, and then by the mega merger of leading group buying sites Meituan and Dianping late last year.

All those mega deals led me to predict that a similar marriage could be coming between Didi Chuxing and Uber’s China operations when reports first emerged last week that the pair had reached a truce in their 2-year-old battle for China’s fast-growing but extremely competitive private car services market. (previous postMy prediction wasn’t based on any insider knowledge, but rather on the fact that the earlier deals showed that investors were quickly growing impatient with the huge losses these companies were wracking up, forcing them to continually raise major new funds.

Many of these companies have made headlines over the last 2 years with new funding rounds, often topping the $1 billion mark. But this latest merger hints that the money spigots might be rapidly turning off as China’s economy slows, making funding more difficult to get for firms both large and small. That could drive a new wave of mergers among both major players like Didi and Uber, and also many smaller start-ups that need much smaller sums to keep operating and growing.

Uber Takes Back Seat to Didi

All that said, let’s review the newest shotgun marriage that will see Didi Chuxing and Uber China swap shares in a deal that would give Uber about 20 percent of the merged company and give the rest to Didi. (English article; Chinese article) That ratio is roughly comparable to each of the 2 companies’ market values following their latest mega fund-raisings earlier this year. The most recent of those saw Didi Chuxing valued at $28 billion, while Uber’s China operations were worth $7 billion.

Thus the combined company will be worth about $35 billion, making it instantly one of China’s most valuable Internet firms. By comparison, China’s 2 largest Internet companies, Alibaba (NYSE: BABA) and Tencent (HKEx: 700), are each worth about $200 billion, and search leader Baidu (Nasdaq: BIDU) is a distant third with a value of $55 billion.

Observers will probably say the merger marks a major surrender for Uber, whose aggressive founder Travis Kalanick repeatedly boasted that he was prepared to spend billions of dollars and fight for years to build up his China business. But Kalanick still has plenty of other markets where he can dominate, and this merger shows that backers of his China business were unwilling to keep funding a brutal price war that really could have dragged on for years.

So, what’s likely to happen next? My best guess is that the highly subsidized prices that many in China were previously enjoying to use Didi and Uber service will disappear very quickly, probably within the next 2-3 months. That could deal a big blow to their newly combined business, since I expect the price for an average ride will rise 20-30 percent and in many cases could become more expensive than traditional taxis. Still, the current situation was clearly unsustainable over the longer term, and this new company should still do quite well due to its huge size and can probably become profitable by year end.

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