Ola's TaxiforSure acquisition for $200 mn was waiting to happen

What could have been the most compelling reason for TaxiforSure to look towards an acquirer? Cash. Or the lack of it. And the fact that it was unable to keep up with steadily increasing competition in the absence of rapid incremental funding. The acquirer, Ola, has been funded by Japan's SoftBank and this means it brings to this acquisition deep pockets and enough patience to scale up the Rs 80,000 crore personal transportation market in India.

Currently, a mere 5% of this business is in the organised sector, presenting a huge opportunity to the Ola-TaxiforSure combine. Ola today announced it will acquire TaxiforSure for $200 million in a cash and equity deal.

This acquisition may be small in terms of valuation but will have a significant impact over the nascent cab services market India since it will likely put pressure on rivals like Uber, which are smaller and do not offer several features like advance bookings or cash payment options. Meru is another pan-India player which may watch the new alliance with some trepidation and in fact, this acquisition may trigger further consolidation in the cab services market. Remember, there are many regional players who may be looking to get acquired for reasons similar to TaxiforSure.

In an interview to Firstpost last month, TaxiforSure co-founder Raghunandan G had made it clear that as long as there was cash on the table, the company would continue to work. "As long as there is money on the table, we will continue to work. Also, we need to see what costs are we paying. All the market players are bleeding a lot of money and it is a tight rope walk. The philosophy behind starting the company was to solve a consumer pain points."

  Olas TaxiforSure acquisition for 0 mn was waiting to happen

Screenshot from TaxiForSure website.

A competitor pointed out that this acquisition was waiting to happen for several reasons. Apart from acute funds crunch that TFS had begun facing as it scaled up rapidly, its 'burn rate" was rather high. This refers to the rate at which cash is used for operations. Also, this competitor pointed out that though TFS was very strong in Bengaluru, it was not in the number one position in other large metros and going forward, would have faced issues as the market leader in each city flexed its muscle.

TFS follows a different working model to Ola's: it works with cab operators against Ola working with driver entrepreneurs. Besides, TFS focuses heavily on the economy segment of cab users.

Meru and Uber are well entrenched in the Indian cab services market. Meru has been around the longest and seems well funded; Uber is making rapid strides in India despite the controversy surrounding the alleged rape of a woman commuter in Delhi last year. Ola currently runs one lakh vehicles across 67 cities in India against TFS which operates in less than 50 cities.

An investor involved with TFS also indicated that TFS looking for an acquirer was all about needing huge amounts of cash. He said "everyone is burning cash, the option before them was to either keep burning cash and growing or to merge with a better funded competitor."

What is the fallout of the acquisition? Well, a joint statement from Ola and TaxiforSure says the two companies will continue to operate as separate entities, the 1700 employees of TaxiforSure will continue to work as before and Arvind Singhal from Ola will be the new COO of TFS. Something on the lines of the Flipkart-Myntra merger where the two entities remain separate and have seen exponential growth since the merger.

A source at TFS said the two companies will continue to operate independently, the apps used to download the cab services of Ola and TFS will continue to remain separate though TFS will use Ola's best practices in IT and other areas.

But this may be mere wishful thinking for the present. Why would consumers, who tap the Ola app for booking a taxi and do not find one at their convenience, not go to a competitor like Meru or Uber instead of TFS? The point is two apps, separate cab services would mean the merged entity loses business to competitors. The merger needs to develop synergies and root out duplication in operations. Some manpower rightsizing may also be in order.

Updated Date: Mar 03, 2015 07:35:54 IST