Commentary: A Gojek-Tokopedia merger has ramifications for regional unicorns including Grab and Sea
At first blush, a merger between Gojek and Tokopedia appears sensible but a closer look suggests huge challenges, says lawyers Joel Shen and Gabriel Li.
SINGAPORE: One of Jakarta’s best kept secrets is that it hosts the largest Jazz festival in the Southern Hemisphere.
I recall, with fondness, attending Java Jazz in the late noughties, on my regular work commutes to Indonesia as a young solicitor.
Back then, prized festival tickets were bought over-the-counter at tour agencies, who only accepted cash payments - foreign credit cards were regarded by counter staff with deep suspicion.
On my way to the festival, I would negotiate the city’s notorious traffic jams in a hired car I had booked through the hotel.
At the festival grounds, the only lunch and dinner options were Indonesian street food offered by the hawkers that congregated outside - my favourite being the very tasty but less than healthy chicken noodles or "mie ayam" sold by an elderly hawker from a blue kaki lima (push cart).
Things have changed significantly in the last decade. Today, I buy my Java Jazz tickets online, via an e-commerce marketplace like Tokopedia or ticketing platform Go-Tix, and pay for my purchase using a digital wallet like Ovo.
I travel to the festival using a ride-hailing app like Grab or Gojek, both of which also offer online food delivery services that will convey comestibles to concert-goers from the farthest reaches of Greater Jakarta.
All this is made possible by the rise of digitally-enabled businesses. Indonesia’s digital economy, valued at just US$8 billion in 2015 had quintupled to US$44 billion in 2020.
It is expected to triple again to US$124 billion by 2025 according to the 2020 South-east Asia e-Conomy report by Google, Temasek and Bain & Co.
The meteoric growth of Indonesia’s digital economy has also given rise to its first crop of technology unicorns – household names such as Gojek, Tokopedia, Ovo, Traveloka and Bukalapak; founded by a generation of Indonesian technopreneurs who themselves are champions for the country’s digital transformation, and poster boys for the new economy.
As these tech unicorns mature, they begin to assiduously pursue strategic partnerships, mergers and consolidations, in a bid to deliver lucrative exits for their founders and investors.
For most of 2020, speculation was rife as to whether a merger between aspiring super-app operators Grab and Gojek, regarded by many as the most intuitive match between Southeast Asia’s tech darlings and cleverly labelled the Grab-and-Go merger, would materialise.
Observers cited deal economics, regulatory challenges, strategic differences – whether Grab and Gojek should merge in Indonesia only or across all Southeast Asian markets - and egos in the boardroom as key impediments to the merger.
The potential antitrust ramifications of a Grab-and-Go merger prompted statements from regional competition watchdogs that they were keeping a close eye on merger discussions, and the fear of massive job losses that may result from a Grab-and-Go merger, also drove Indonesian motorcycle driver unions to threaten country-wide protests.
When news finally broke, just two weeks ago, that Grab-and-Go had abandoned their merger plans, the industry’s attention shifted to the parallel merger discussion between Indonesian powerhouses Gojek and Tokopedia (G&T).
PARTNERS MADE IN TECH HEAVEN
At first blush, a G&T merger appears to make a lot of sense.
The merged entity would be worth an estimated US$18 billion, and create the most complete technology ecosystem in Indonesia, a super-app operating on a scale hitherto undreamt of, even by the ambitious Grab.
Such an entity would be able to expand its market share and pursue profitability by offering complementary services within a single ecosystem. Visitors to Java Jazz may finally be able to have all their needs met on one platform.
G&T would have the critical mass necessary to quickly access public markets, and sustain the expensive subsidies that it has had to offer in its customer acquisition strategy, while its unlisted competitors continue to rely heavily on external funding.
The natural synergies between G&T would also allow the technology giants to cross-sell into each other’s respective pools of customers and increase user stickiness.
Imagine Tokopedia’s e-commerce business working with Gojek’s last-mile delivery solutions, or Tokopedia’s “buy-now-pay-later” schemes integrated with the services of Go-Pay and Gojek affiliate Bank Jago.
Finally, with the notable exception of digital payments, Gojek and Tokopedia operate in different verticals, which means that a G&T merger would be less objectionable from an antitrust standpoint, and attract less opposition from regulators, consumers and private hire drivers than would a Grab-and-Go merger.
CHALLENGES DO REMAIN
Upon closer scrutiny, however, the challenges of a G&T merger become apparent. G&T would run the risk of spreading themselves too thin across too many battle fronts, and would have to compete with well-funded rivals across almost all their key verticals.
G&T are also dyed-in-the-wool Indonesian companies, with either no ambition to expand beyond Indonesia, as is the case with Tokopedia, or an inconsistent overseas track record, as is the case with Gojek.
In order for the merger to succeed, G&T would also have to develop and implement a cohesive regionalisation strategy, but may have difficulty convincing international investors that they would be able to successfully execute such a strategy.
Finally, notwithstanding the fact that Gojek and Tokopedia predominantly operate in different sectors, there is one important vertical in which they currently compete – digital payments.
Gojek and Tokopedia respectively control Go-Pay and Ovo, two of Indonesia’s largest e-wallets. This sets the stage for what might possibly be the most exciting battle in the unfolding Grab-Gojek-Tokopedia love triangle.
SOMEONE TO WATCH OVO ME
Perhaps the single greatest impediment to a G&T merger is the Indonesian central bank‘s (Bank Indonesia) “single presence policy” that prohibits a party from owning a controlling interest in more than one licensed e-money issuer such as Ovo and Go-Pay.
This would mean that G&T would not be able to merge their respective digital payment units, without a specific waiver from Bank Indonesia (BI).
This is not to say that such a waiver would be beyond the reach of G&T. Gojek and Tokopedia are funded by influential backers, who have access to the highest levels of government in Indonesia - including Gojek founder Nadiem Makarim, who is the youngest Minister of Education in Indonesia’s history.
It is therefore not inconceivable that BI might be persuaded to allow a merger between Ovo and Go-Pay, or at least permit a merged G&T to continue holding controlling interests in both payments companies, especially in the interest of creating a homegrown technology major.
What happens, however, if BI does not approve the merger? Some say that Tokopedia will sell its stake in Ovo. Should this happen, it is likely that Grab, whose financial unit recently raised US$300 million, and who will likely have a right of first refusal on the proposed sale, will make a bid for Tokopedia’s stake in the payments company.
Such a move will, at least in theory, allow Grab to further entrench itself in the lucrative payments space in Indonesia.
This amid rumours of a possible merger between Ovo and Ant Group-backed e-wallet Dana, and barely three months after Grab invested in Indonesian state-owned e-wallet operator LinkAja. Such a move will also narrow the gap between Grab’s payments business and Gojek’s.
BETWEEN THE DEVIL AND THE DEEP BLUE SEA
In his 1946 standard The Best Man, the inimitable Nat King Cole sings of how a talented and eligible suitor lost the girl of his dreams when he was blindsided by a rival whom he considered inferior.
By the same token, keen observers of the evolving romance between Grab, Gojek and Tokopedia over the years might have been surprised when Tokopedia, the erstwhile undisputed king of the Indonesian e-commerce sector, was recently dethroned by Sea, a quiet game developer whose market capitalisation on Nasdaq quintupled to US$140 billion during the pandemic.
To add insult to injury, Sea’s digital payments arm ShopeePay has risen through the ranks to become one of the leading e-wallet operators in Indonesia today.
For all the talk of the drama of a Grab-and-Go breakup, or a G&T merger, the enemy isn’t Grab, Gojek, or Tokopedia – the enemy is Sea. A G&T merger, if done right, would build a compelling narrative: Two household names joining forces to form Indonesiaʼs first Big Tech company.
Will G&T prove to be a worthy adversary against the mighty Sea? It remains to be seen. Sea has a large war chest, having raised more than US$6 billion last year, and the distinct advantage of a profitable gaming business.
G&T on the other hand, operate in notoriously unprofitable verticals and have yet to articulate a growth strategy beyond Indonesia. But never underestimate Indonesian businesses which have demonstrated, time and again, their tremendous tenacity, adaptability, and capacity for innovation.
WHAT HAPPENS NEXT
Recent reports are that G&T might be close to finalising the terms of their merger, and that the ink may be drying on the merger agreements by the end of the month, subject only to approval by BI and competition regulators.
This will be followed by a complex integration process and the long road to an IPO.
Where will G&T list? The smart money is that they will pursue a dual-listing on Nasdaq and the Indonesian Stock Exchange, driven by tax considerations, and a desire to capitalise on nationalistic sentiments of patriotic retail investors at home.
An international listing will also demonstrate that Southeast Asia is not a one-hit wonder, and pave the way for other exits across the region.
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Joel Shen is Partner in the Corporate team at Withers KhattarWong. Gabriel Li is an Associate in the Corporate team at Withers KhattarWong.