By Keshav Menon (Columbia University), Steven Skorma (Georgetown University), Nina Tagliabue (UC Berkley), Rayan Visen-Singh (University of St.Gallen)
Bidder Company Overview (MUFG)
Mitsubishi UFJ Financial Group (“MUFG”) is the largest Japanese based financial services company with approximately $3.1 trillion in current assets. The company is divided between six business groups including Retail & Commercial Banking, Japanese Corporate & Investment Banking, Global Corporate & Investment Banking, Global Commercial Banking, Asset Management & Investor Services, and Global Markets. Their largest business unit is their retail and commercial banking segment which accounted for 41% of gross profit in 2020.
Founded in 2006 through merger of Bank of Tokyo-Mitsubishi and UFJ Bank
CEO: Hironori Kamezawa
Chairman: Nobuyuki Hirano
Number of Employees: 147,000
Financial Summary:
Market Cap: $54,651.50M
EV: $164,357.54M
LTM Revenue: $34,306.56M
Book Value: $156,676.5M
LTM EV/Revenue: 4.79
P/B: 0.36x
Exchange Rate Used: USD/JPY:1/105.80 (as of 23 Aug. 2020)
Target Company Overview (Grab)
Grab Holdings Inc. is a mobile technology platform based in Southeastern-Asia that operates a variety of commuting and payment services including ride-hailing transportation, food and parcel delivery, financial services, and more. The company operates across eight different countries and over 500 different cities and towns. The Grab app has been downloaded on over 185 million mobile devices as the company continues to grow larger.
Founded: 2012 by Anthony Tan and Tan Hooi Ling
CEO/Chairman: Anthony Tan
Number of Employees: 6,000
Key Shareholders: SoftBank Group, Uber
Deal Overview
Structure
Under the terms of the deal, MUFG has agreed to invest a total amount of up to $706 million in Grab to create a strategic partnership in the financial services industry. The two companies will work jointly to develop digitalized forms of financial services including payment systems, joint lending models, insurance, rewards programs, and more. Additionally, Grab will confer “First Choice Bank'' status upon MUFG and its regional partner banks, meaning Grab will use MUFG as its first choice anytime it requires a banking partnership. Grab is currently estimated to have a $14 billion valuation, which will give MUFG a nearly 5% stake in the private company, representing the largest stake among financial institutions. The investment will likely be fully cash based given MUFG had a cash balance of nearly $750 billion at the end of fiscal 2020.
Rationale
From the investment, MUFG will form a strong alliance with Grab, becoming the biggest fintech investor among the big Japanese banks. By acquiring a nearly 5% stake in Grab, MUFG will become the largest stakeholder in Grab among financial institutions. MUFG and its regional affiliates will also become “First Choice Bank” to Grab. Grab will use MUFG first in countries where it operates when requiring a banking partnership for payments or other financial services. MUFG intends to utilize its alliance with Grab to deepen synergies in its regional network and further capture business opportunities in the region. The companies are working together on approximately a dozen potential business projects in Thailand, Indonesia, the Philippines and Vietnam, where MUFG has commercial banking units.
MUFG is shifting their focus from acquiring brick-and-mortar commercial banks to digital startups to streamline operations and grow their customer base. “I will use Grab’s data to establish new credit models and provide financial services through the super-app,” said MUFG CEO Hironori Kamezawa. The data Kamezawa is referring to includes millions of drivers, including how much money they make and how safe they drive, as well as consumer spending trends, which Grab can track through their app. With unique partner bank relationships in Southeast Asia already under their wing, MUFG will directly focus on smartphone banking. The bank is planning to issue its own stablecoin later this year, to use it for mobile retail payments. This innovation can cut costs and increase liquidity for the Japanese bank.
Short-term outlook
For MUFG, the rationale behind the investment is part of a larger geographic play to expand into the growing Southeast-Asian market. Since 2016, when Japan adopted a policy of negative interest rates, banks throughout the region have faced challenges in generating new forms of revenue. Therefore, Japanese banks such as MUFG have looked to other high growth markets such as the Southeast-Asian region. MUFG has already acquired significant stakes in other retail and commercial banks throughout the region including Bank of Ayudha Plc in Thailand, Bank Danamon in Indonesia, VietinBank in Vietnam and Security Bank in the Philippines. With the recent investment in Grab, it appears MUFG may be done with its investments in commercial banks and will look to use its established presence to develop smartphone-based services alongside Grab.
Although Grab does not disclose its number of users, the Grab app has been downloaded onto over 185 million mobile devices, nearly one third of Southeast-Asia’s 650 million population. Southeast Asia has a large young adult and millennial population, exhibited by the region’s median age of 30.2 years, whereas the median age in Japan is 48.4 years.
Remarkably, over 50% of Southeastern Asia’s population is under 30 years of age. As a result, the region is more prone to accepting new forms of smartphone-based services and less likely to engage with conventional forms of financial services. Both MUFG and Grab will look to use this available and growing consumer base to expand their regional influence. For MUFG, they hope to be able to use the products and services already provided by their regional partner banks through “First Choice Bank” status on Grab’s platform. MUFG will directly benefit from Grab’s established reputation, brand, dedicated user base, and robust data collection abilities throughout the region. MUFG will also use Grab’s vast technologies and data management expertise in the co-development of next-generation financial products, for use in both Southeast Asia and Japan.
For Grab, the investment aligns with its strategy of diversifying beyond just being a ride-hailing and food delivery service platform. Grab first rolled out its financial services platform in 2019 and quickly partnered with other financial service providers in order to accelerate the growth of its platform. Grab President Ming Maa highlighted that one of two main priorities for the super-app in 2020 is to “broaden out the portfolio of products [Grab] offer[s] in financial services. Grab views this strategy as the way to ensure the core of their operations remains present in every facet of a user’s life. Their goal is to create a regional super-app that is essential to daily life, and their expansion into financial services helps them to create this. Given MUFG’s stakes in other regional banks it makes sense for Grab to partner with a bank that has established itself in the region.
Long-term outlook
Through the acquisition, MUFG will gain increased long-run exposure to a largely untapped, growing financial services market in Southeast Asia. Compared to their European and other Asian counterparts, Southeast Asians are more likely to be underbanked and unbanked. Southeast Asia’s 98 million strong underbanked population lack access to sophisticated financial services like credit, investment and insurance solutions. Particularly in countries like Vietnam and the Philippines, there is also a significant unbanked portion of the economy which have not even gained access to bank accounts. For instance, a resounding 49 million of Vietnam’s adult population are unbanked, almost 70% of the nation’s adult population. However, the ability to offer these product offerings already lies within the core competencies of MUFG previous commercial bank acquisitions in the region: Bank of Ayudha Plc in Thailand, Bank Danamon in Indonesia, VietinBank in Vietnam and Security Bank in the Philippines.
The unique long-term driving force behind the acquisition of Grab is that the deal dramatically enhances MUFG’s ability to capitalize on the growing shift towards the online offering of financial services in the region, generating revenue synergies. Decision-making in the region is still overwhelmingly done offline; “only 60% of Singaporeans and 50% of Vietnamese did any research online prior to purchasing financial services offline. Also, particularly in emerging economies, customers are leapfrogging traditional physical banking services for online solutions. E-Finance products have cheaper switching costs and do not require the setup of any physical banking locations, increasing exposure to low-income regions with lacking physical banking infrastructure.
As more and more research and decision-making takes place online, the importance of online offerings beyond traditional commercial banking solutions will be heightened. MUFG appointed chief digital transformation officer Hironori Kamezawa as CEO of the company in April, illustrating their commitment to embracing digital transformations of traditional financial services offerings. In an interview, Kamezawa argued that the long-term shift towards digital solutions has been accelerated by the pandemic, and announced that the Grab deal is just the start of MUFG’s focus on technology investments.
Currently, Grab operates across an extremely fragmented competitive landscape for many of the services it intends to offer, illustrated in Figure 2. However, Grab’s main competitor in the battle to become a “super-app” in the region is Gojek. Gojek is developing a similar range of products to Grab; Gojek offers ride-hailing, food delivery, video-on-demand, insurance and other financial services solutions to its user base, most notably in Indonesia. In a similar fashion to Grab’s strategy, Gojek has had a number of partnerships with existing service providers to gain a competitive advantage when offering new products on its platform. For example, Gojek partnered with Google to provide news directly on its platform. They also worked with payment platforms QRIS and LinkAja to develop its financial services solutions, a very similar agreement to MUFG’s deal with Grab. The long-term roadmap that Grab and Gojek are following to gain market share is through strategic partnerships with established players to offer robust products to its established and growing user base. However, both firms may have to compete with established players if the firms fail to believe that a partnership with Grab or Gojek is in their interest.
Barriers to Closure
Since Grab operates as a private company and MUFG’s investment will only amount to a 5% equity stake, there is no need for a board approval stage which could prohibit the deal from completion. In fact, there is little risk in this investment for MUFG as the $706 million accounts for less than 1% of MUFG’s current tangible equity. However, given MUFG’s declining revenues throughout Japan, it will remain to be seen whether its partnership with Grab will create substantial revenue growth throughout the region as the company hopes.
Some potential risks to the success of this agreement include increased competition in the digital finance space throughout Southeast Asia, operating risks associated with expanding into new and emerging markets, and potential antitrust concerns around the rapid expansion of Grab. As previously mentioned, the region’s significantly underbanked population provides an opportunity for new entrant companies to compete within the financial services market without needing to develop the infrastructure that traditional banks need. While Grab still holds an advantage due to its high brand awareness, there is no clear market leader throughout Southeast Asia to provide these services yet.
Additionally, MUFG may face new market and operating risks as part of their overall strategy to expand throughout Southeast Asia. For instance, in 2019 MUFG was forced to write-down $1.9 million worth of goodwill from its investment in Bank Danamon in Indonesia. Without the success of MUFG’s partner banks throughout the region, its new partnership with Grab may fail to produce desired returns. Finally, the developing environment around antitrust concerns and competition law throughout Southeast Asia could pose a barrier to the investment’s success. Recent years have seen countries within the region evolve and increasingly regulate monopolistic activity. In 2018, Grab was fined for breaking antitrust law in Singapore related to a merger with Uber and more recently was fined $2 million this year for breaching antitrust law in Indonesia. Increased sophistication in regulations throughout Southeast Asia could inhibit Grab’s operations given its large market share.