Gojek’s $18bn Merger with Tokopedia

By Shivaum Bapu, Daniel Winsor, Pristie Sharma, Gurneek Gill (UCL), Axel Mebarek and Pierre Pinsault (Grenoble Ecole de Management)

Photo: Afif Kusuma (Unsplash)

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Overview of the deal

Acquirer: Gojek

Target: Tokopedia

Total Transaction Size: $18bn

Closed date expected: Q2 2021

Acquirer advisor: Goldman Sachs

The new entity resulting from this merger will be called "Goto" and would become one of the largest companies in Southeast Asia and the largest South Asian technology company with a valuation of around $18 billion. The objective of this merger is clear: to compete with other regional heavyweights. The first is Sea Group - the current largest internet company in Southeast Asia - which also has a conglomerate business with both e-commerce and video game publishing. The second is Grab, Southeast Asia's equivalent of Uber and the third is Lazada, an e-commerce specialist controlled by Alibaba.

In the face of this intense competition, the merger between Gojek and Tokopedia will allow them to leverage their substantial active user base, which stood at 36.3 million as of November 2019 for Gojek and over 100 million for Tokopedia.

While Sea Group is listed on the stock exchange, Lazada is backed by Alibaba and Grab is planning an IPO, this merger would also allow them to strengthen their financial standing. Nevertheless, in the long run, an IPO is envisaged for the new entity to further increase their resources and in line with the current trend, this could be done via a SPAC as Tokopedia had already picked Morgan Stanley and Citi for a potential IPO in late 2020.

Company Details: (Acquirer - Gojek)

Gojek is an e-commerce company based in Southeast Asia. Initially focused on ride-hailing, Gojek has since diversified into e-commerce while also offering payment solutions and food delivery. The South Asian company raised $1.2 billion in March 2020 while competition with its competitor Grab -the Asian Uber- is in full swing. Gojek is reportedly valued at around $10.5 billion.

Founded in 2010, headquartered in Jakarta, Indonesia

Co-CEOs: Kevin Aluwi and Andre Soelistyo

Number of employees: 3,000

Market Cap: N/A (privately held company)

Active user base: 36.3M (Nov 2019)

Company Details: (Target - TokoPedia)

TokoPedia is an Indonesian technology company with a focus on e-commerce. It is currently private, with a unicorn valuation of $7.5b due to its 25% market share in Indonesian e-commerce. The TokoPedia marketplace has over 9 million merchants selling 350 million listed products, as well as 42 digital products in fintech, logistics, and retail solutions.

Founded in 2009, headquartered in Jakarta, Indonesia

CEO: William Tanuwijaya

Number of employees: 4,700

Market Cap: N/A (privately held company)

LTM Revenue: $15.6B (2019 estimate)

Projections and Assumptions

Short-term consequences

According to studies conducted by Google, Temasek Holdings, and Bain & Co, the internet economy in Southeast Asia could be worth $300 billion by 2025, three times its current size. This opens up great opportunities for the entity created by the merger between Gojek and Tokopedia. Indeed, this merger could represent a threat to the market leader Grab, which is currently trying to establish itself in Indonesia. The new entity would have a dominant position in Indonesia but also in Southeast Asia in general in e-commerce, digital payment, ride-hailing, as well as in the food delivery business. Thus, a merger between Gojek and Tokopedia is not only a matter of convenience but also a necessity for the two companies. This union, however, is far from complete: both companies need shareholder’s approval.

Since their market overlaps are small, a merger between Gojek and Tokopedia would face less regulatory scrutiny than a merger between Gojek and Grab. However, the payments segment could be scrutinised because Tokopedia is a major shareholder in OVO, a digital payment service, and Gojek operates GoPay. Both are two of Indonesia's most common digital payment services.

As a result, there's a chance that regulators will scrutinise a Gojek-Tokopedia deal if it appears to create a monopoly in Indonesia's payments industry.

Long-term Upsides

Andre Soelistyo, who will head the combined entity, to be called GoTo, expects a valuation of up to US$40 billion, which is over double the current value of the individual companies, showing significant synergy potential. The business areas of the two companies are different which is greatly beneficial in this merger as it means an all-in-one ‘super’ app can be created using their product lines. This generates revenue synergies because it means that customers spend longer on the app since it provides more services, increasing advertising revenue and increasing commission payments from the microservices provided within the app. The combined app would also generate some cost synergies since overlapping services can be removed. However, given the different business lines, revenue synergies are likely to be much larger.

A joint app also means greater consolidation of consumer data which raises the barriers of entry into this space, putting GoTo in a better competitive position.

There is speculation about plans for the combined company to go public. This will either be through a traditional IPO in the US and Indonesia, or via a SPAC in the US. A listing in the US means that the merger would be competing with Sea, which is currently the only major Southeast Asian firm listed in the US. Given the range of services the combined entity offers, market sentiments are positive regarding this potential listing and the extra capital raised from going public would allow the merged entity to fund new developments and future growth. This would, again, improve the competitive position of GoTo.

An additional benefit of the range of business is that job loss resulting from the merger will be minimised.

Risks and Uncertainties

Whilst the merger could create one of Southeast Asia’s fastest-growing Internet companies, it does not come without its trials and tribulations. By undertaking this merger, both firms run the risk of trying to achieve too much at once; they would have to cultivate and execute a unified consistent post-merger strategy with a lot more funding than is already available, potentially via an IPO and even still this capital would need to be very effectively deployed. This is largely down to the fact that both Gojek and Tokopedia have bigger, more pressing issues with regards to protecting their respective market space which this merger does not entirely address.

Despite the potential internal synergies, both firms may have been better off expanding overseas, since, although both Gojek and Tokopedia are notorious in Indonesia, they lack a worldwide presence and this could come back to haunt them. More global and regional players, such as Sea (NYSE: SE) and Singapore’s Grab, have begun assertive expansions across South-East Asia and should they try to fully penetrate Indonesia, they will most likely succeed. What’s more, there are strong fears that the merger will not serve its purpose and the competitive landscape may still be as it is; where Gojek has been upholding itself against Grab’s immense growth. Grab now offers a far better range of ride-hailing, fintech, and marketplace services spanning 209 cities across eight countries in Southeast Asia; in comparison, Gojek is struggling to maintain meager operations across five countries. Similarly, Tokopedia is far from overcoming the imminent threat coming from the bigger Sea Limited who now have their ‘Shopee’ e-commerce brand driving growth and the firm has a large number of resources that they are effectively using to overtake Tokopedia. Ultimately, fast-moving and powerful global competitors in South-East Asia make this merger’s potential synergies seem very weak and meaningless, and thus, it will eventually force the new entity into swiftly undertaking capital-raising solutions to realistically compete.