Recently, Uber and Careem made headlines after reaching the largest tech M&A (merger and acquisition) deal in the Middle East/North Africa (MENA) region, whereby Uber will acquire Careem for $3.1 billion.

Historically, the region has been an active field for social innovation, smart tactical moves and guerrilla marketing. According to the official press release, Uber will buy Careem with a mix of $1.4 billion in cash and $1.7 billion in convertible notes. The deal is expected to close this month, subject to regulatory approval. Both companies believe this will provide an opportunity to expand the range and reliability of their services at a broader range of price points.

Under the deal, Careem will become a wholly-owned subsidiary of Uber, although they will continue to operate as an independent company under the Careem brand, with the front-end operations untouched. This is a wise business call by Uber as Careem as a homegrown brand, has a deeper emotional connect with the region’s customers and a better understanding of the market dynamics. For example, Careem Kids (offers parents the convenience of rides with pre-installed child seats), Careem and Robin Hood Army (feed 10,000 people in Pakistan) and Careem Women Empowerment Network (increases the number of women drivers). In fact, Careem’s strong brand equity and existing customer relationships played a key role in the valuation. The other critical leverage point is Careem’s adaptive approach to regulatory issues and a “let’s work together” attitude, which helped them resolve the same issues Uber faced in Western markets when they came head to head with traditional transport systems, forcing government intervention. While Uber adopted a rigid posture, Careem amicably resolved local governments' concerns by making their platform more inclusive and open to traditional taxi territory (a good example of this are The UAE and Egyptian markets). It is expected that Uber will leverage these operational relationships and use Careem’s brand equity to further develop personal mobility and introduce new propositions in the delivery and payment verticals.

One may wonder at the timing of this acquisition, especially as it is rumoured that both companies have had multiple exploratory M&A engagements over the last couple of years. Perhaps the accelerator behind the announcement is the fact that Uber’s IPO is expected end of May (Uber has picked the New York Stock Exchange for the IPO). Lyft, another huge ride-hailing brand in North America, had a successful public offering debut at Nasdaq, reaching a market capitalisation of approximately $2.4 billion, making it the biggest IPO of 2019. If Uber (which is currently loss-making) obtain the same multiples as Lyft, we are potentially looking at a $125+ billion market capitalisation enterprise, making Careem’s acquisition a part of Uber’s next phase of growth. Post the IPO, the key elements of Uber’s strategy will include increasing ridesharing penetration in existing markets, expanding personal mobility in new markets, continuing investing in Uber Eats, pursuing targeted investments and acquisitions and investing in advanced technologies including autonomous vehicle technologies.

Careem’s high valuation speaks volumes about the booming start-up culture throughout the MENA region; one advanced enough to gain traction from international VCs for early and growth stage homegrown entrepreneurial digital businesses. A new generation of start-up founders have worked for some amazing companies and are now applying the lessons learnt to their new ventures.

According to Magnitt’s 2018 MENA Venture Investment Report, a record number of deals (336) and investment funding were carried out in 2018 (exclusive of Amazon’s acquisition of Souq and Uber’s of Careem) among MENA based start-ups, up three percent from 2017 (see Figure 2). The UAE remained the top destination for start-up investment, accounting for 30% of all deals and Egypt 22% of deals, up seven percent. FinTech overtook e-commerce as the most actively invested sector, accounting for 12% of all deals; e-commerce took second position (11%), followed by Delivery and Transport at third (nine percent). Although we can see many similarities between the MENA and Southeast Asian ecosystems in terms of macro-economic indicators, in terms of digital adoption and fragmentation of the market, there is still a huge difference in investor focus and large-scale funding between the two.

Potential reasons behind this dearth of funding can be found in the Global Entrepreneurship & Development Institute (GEDI) Index 2018 assessment (see Figure 3). This is a composite indicator of the health of the entrepreneurship ecosystem in a given country in terms of quality of entrepreneurship and depth of the supporting entrepreneurial ecosystem.

In Pakistan, despite lower economic growth projections, the digital consumption indicators are extremely favourable thanks to a supportive telecom infrastructure (a core enabler behind the increase in digital customers). Nevertheless, Pakistan is way behind the MENA countries, scoring second lowest in South Asia and the Pacific region. Despite the efforts of the National Incubation Centre, Pakistan Software Houses Association for IT and ITES (PASHA) and the Securities and Exchange Commission of Pakistan (SECP) to cultivate a conducive start-up environment along with secondary support from the private sector, the core ask is to bridge the skill-talent gap and more emphasis on private-public partnerships.

Khurram Mahboob is a tech marketer currently working in the Middle East for a leading fortune 500 company.
khurram.mahboob@gmail.com