Uber Buys Rival Postmates for $2.65 Billion as its Core Ride-Hailing Business Stumbles

author: Eric Walz   

The coronavirus pandemic has hit Uber especially hard, as its core ride-hailing business depends on people moving about. While revenue from Uber's ride-hailing business has plummeted since March, Uber's food delivery business "Uber Eats" has thrived, with gross sales up 54% in the first quarter of 2020. 

Now Uber is looking to extend its reach beyond the food delivery and ride-hailing business. The San Francisco-based company announced today the acquisition of its Uber Eats division rival Postmates in a $2.65 billion all-stock deal. 

The acquisition of Postmates by Uber is still subject to regulatory approval. However, Uber said both companies' boards have approved the deal, for which Uber currently expects to issue around 84 million shares of common stock. 

Uber offered a premium of about 10% on Postmates' last valuation of $2.4 billion. Shares of Postmates were up 5% at $32.24 on Monday and shares of Uber were up around 6% to $32.52 after today's announcement. 

Postmates was founded in 2011 and like Uber, is also headquartered in San Francisco. The company's platform allows small businesses, including restaurants, to remain more competitive with larger retailers that offer delivery, including e-commerce giant Amazon. 

Postmates customers are able to leverage the company's platform and offer delivery of all types of goods that would normally be picked up at a local retail store or restaurant.

Uber Chief Executive Dara Khosrowshahi on Monday told analysts the tie-up would allow Uber Eats to distinguish itself by delivering not only restaurant food, but everything from groceries to personal care and fashion items in its quest to become profitable.

Postmates says it works with some 600,000 merchants in the U.S. and serves 80% of households across all 50 states. The acquisition allows Uber to expand into Postmates' existing delivery network in 4,200 U.S. cities.

Despite a huge increase in its food delivery business, Uber is still bleeding cash from the loss of its ride-sharing revenue due to the coronavirus pandemic. Net loss attributable to Uber was $2.9 billion in Q1 2020, so the company is looking for new ways to generate revenue. 

Uber has launched an option to send packages via its U.S. ride-hail drivers during the pandemic and even teamed up with grocery stores in several countries to deliver grocery orders. 

"The vision for us is to become an everyday service," the Uber CEO said in a conference call with investors Monday.

"Postmates is a great step along that vision. Anyplace you want to go, anything you want delivered to your home, Uber is going to be there with you, and we think these everyday frequent interactions create a habit, create a connection with customers."

Postmates is also one of the major players in the food delivery space, alongside Uber Eats rivals DoorDash and GrubHub. 

Acquiring Postmates will give Uber a roughly 30% share of the booming U.S. food delivery market, which is experiencing a big increase in business due to the global pandemic. Currently, Uber Eats rival DoorDash holds around a 45% market share, according to analytics firm Second Measure.

Uber originally planned to acquire its other rival GrubHub, which commands a 23% market share of the food delivery business. However, the deal fell through over regulatory and other concerns. Instead, GrubHub was snatched up by Amsterdam-based food delivery company Just Eat Takeaway on June 11.

Khosrowshahi said he expects the deal to create profitability for the Uber's Eats unit, as well as some $200 million in cost saving synergies in about two years. As a part of Uber, Postmates will be able to leverage the ride-hailing company's data and logistics platform.

With people staying at home more during the pandemic, food delivery companies have experienced a massive uptick in business. 

The app-based business model allows customers to view menus and order food from dozens of local restaurants from a single app. Via Uber Eats, the company uses its platform to send a driver to pick it up and deliver the order right to a customer's door, taking a small delivery and service fee from each transaction.

The company is also expanding into public mass transit. Last month, Uber announced that it's getting into the software as service (SaaS) business for the first time. 

Uber is making its robust ride-hailing software available to cities, beginning with a pilot with the public transit agencies in Marin County, California, just north of San Francisco. Marin Transit and the Transportation Authority of Marin are paying Uber a flat monthly subscription fee for access to the software that powers Uber's ride-hailing platform.  The pilot kicked off on July 1.

Residents of Marin will be able to book rides on a fleet of passenger vans directly from Uber's smartphone app. The app will match riders travelling in the same direction. Uber will also make Marin County public transit schedules and discounts available from the Uber app. The fares collected will go directly to the Marin Transit Agency. 

With the pending acquisition of Postmates, Uber will soon be one step closer to becoming a go-to app for the transportation of goods or people, as well as for booking a ride on public transit.

Now that Uber is a publicly traded company with a market cap of over $56 billion, becoming profitable is a top priority.

Eric Walz

Originally hailing from New Jersey, Eric is a automotive & technology reporter covering the high-tech industry here in Silicon Valley. He has over 15 years of automotive experience and a bachelors degree in computer science. These skills, combined with technical writing and news reporting, allows him to fully understand and identify new and innovative technologies in the auto industry and beyond. He has worked at Uber on self-driving cars and as a technical writer, helping people to understand and work with technology.