As shares in Sea, Southeast Asia’s largest digital company, went up and up on the New York Stock Exchange, investors in its competitors Gojek and Grab were licking their lips.
Sea’s shares have risen fivefold this year, at one point reaching a valuation of $100 billion. The combined worth of Gojek and Grab, the next two biggest tech companies in the region, is $24 billion.
Gojek and Grab, superapp providers that offer a variety of services including ride hailing, food deliveries and digital payments, have been engaged in a merger talks for nearly a year. They have walked away several times, only to be coaxed back at the strong request of their investors. Now, thanks to Sea’s rise to stardom this year, the pressure is greater than ever to join hands.
Sea shares have been rising since the start of the year, as its core businesses — gaming, e-commerce and digital payments — have all benefited from changes in consumer behavior due to coronavirus. The company “is benefiting from secular tailwinds driven by [the] offline to online shift in consumer spending, and these trends have [gotten a] further boost from COVID-19,” said UBS, the investment bank, in a report in October.
The company’s revenue for the three months ended in September was up 99% compared to the same quarter last year at $1.21 billion, driven by its e-commerce service Shopee.
But the rise in Sea shares is also a reflection of the increasing interest among investors in Southeast Asia’s nascent but rapidly growing digital market.
It is expected to be worth $309 billion in 2025, up nearly three times the size of 2020 according to a report from Google, Temasek and Bain & Company. Sea shares act as a gateway for investors to reap the benefits of that growth, since it is one of the few publicly traded Southeast Asian tech stocks in the U.S.
Gojek and Grab investors seem to believe the combined entity would garner equal interest if it goes public, as it will provide another option for investors that want a slice of Southeast Asia’s growing digital market. A merged entity could also become profitable quicker by reducing overhead and competition, a bonus for when it does go public.
“I think all the investors [in Gojek and Grab] are thinking that Grab is $14 billion, Gojek is $10 billion. Let’s combine and list, maybe we can go $50 billion,” said an investor in Grab. Sea is $100 billion. I think ultimately if we can be half of that [it’s a win].”
The biggest sticking point of the merger is control over the Indonesian market, the largest market for the two companies. Various structures have been proposed, including plans which will see the current Gojek co-CEOs Kevin Aluwi and Andre Soelistyo taking care of the Indonesia operations of the combined entity, reporting to the group chief, Grab founder and CEO Anthony Tan.
However, the two remain apart on issues like to what degree the Indonesian operations will be autonomous; any deal is still some months off, and an IPO even further away.
Aluwi and Soelistyo, told their staff in an internal email in early December, when reports of a merger resurfaced, that there was “no pressing reason” for it to strike a deal with Grab. “We are very well capitalized and have enough runway to continue to operate and grow our business for years to come,” they said.
“I think [Gojek and Grab] management are reluctant, but realistic,” said the Grab investor. “Both sides have walked away many times and they have come back enough times. And the pressure from investors [is such that] at some point [they will need to make a deal].”
Aside from being buoyed by Sea’s performance on the stock market, another reason investors are pushing aggressively, especially on the Grab side, is that the company may have to pay $2 billion to U.S. ride hailing firm Uber Technologies if it does not go public by March 2023. This stipulation was part of the agreement when Grab acquired Uber’s Southeast Asia business in 2018 in exchange for its shares.
Investors have flocked to tech stocks in the U.S. this year — food delivery firm DoorDash and short-term home rental platform AirBnB both had successful IPOs. This may also have affected Gojek and Grab investors’ thinking.
Sea’s performance on the stock market has made investors agitated, but its rise in stature, especially in the region’s largest market Indonesia, means joining hands may be the best way forward for Gojek and Grab in battling the regional tech giant.
In the archipelago, GoPay and OVO, Gojek and Grab’s digital payment service, are both clear market leaders. Payment services are important to both the superapps as it enables them to lock in users within its ecosystem of services; but in recent months, Sea’s Shopee Pay has made aggressive inroads, taking a considerable portion of market share.
A late entrant into the market — it was officially launched in Indonesia in August this year, at the height of the COVID-19 pandemic — Shopee Pay instantly caught on by offering aggressive promotions at a time when both Gojek and Grab had retrenched from such cash burning strategy.
Both companies had already started to pull away from offering aggressive promotions as investors sought a quicker path to profitability. It has become even harder for them to do so, as both saw business impacted by the coronavirus pandemic, especially their core business of ride hailing.
Gojek was also forced to shut down some of its services as part of the restructuring.
“COVID-19 has affected our business and presented us with multiple challenges that we must all work to solve,” Gojek’s co-CEOs said in an internal email in June, when it announced the cuts. “We must respond to the external environment and increase our focus on building a stronger, more efficient business that will stand the test of time and stay relevant. … We’re sorry that the reality of implementing this has to be so painful.”
Sea, on the other hand, can continue to bankroll promotions on Shopee Pay, thanks to its profitable gaming arm Garena.
But even if both Gojek and Grab agree to merge, antitrust issues will persist. Grab is no stranger to this — it was hit with antitrust probes and fines in its home market of Singapore and the Philippines when it took over Uber’s operations in the region.
The crucial market is Indonesia, where the two remain dominant in both ride hailing and deliveries.
Any business transactions that could entail a large number of people being laid off, as is the case with company mergers, would not go unnoticed by the administration as well, especially at a time when many people have already lost jobs because of the coronavirus pandemic.
Coordinating Minister for Maritime Affairs and Investment Luhut Pandjaitan, President Joko Widodo’s right-hand man, recently told Nikkei Asia that the government will not stand in the way. “There is no reason for us to intervene. If they agree to marry or merge, it is their business,” he said. However, behind the scenes, the government still harbors doubts over the mega merger.
“These are private companies, so it is not in the government’s capacity to comment” on the merger, a high-ranking government official told Nikkei Asia. “However, in reality, the government wants healthy competition between the two companies to continue, so that there is market balance. If there is a merger and a large company with strong market control is formed, it would not be good and could harm consumers.”
Additional reporting by Bobby Nugroho
This article was first published on Nikkei Asia.