Swvl, the Cairo based ride hailing platform, has pulled the plug on it’s acquisition of smart bus startup Zeelo, citing the tech stocks slump as the reason for the sudden cancellation.
The $100M acquisition, announced in February earlier this year, came after Swvl had secured $161M in funding from venture capital investors earlier in 2019.
This news was a surprise, as no prior indications showed signs of the deal being cancelled amid the tech stocks slump.
Swvl’s $100M acquisition of Smart Bus startup Zeelo is off, amid tech stocks slump
The announcement of the cancellation of acquisition talks between Saudi tech start-up Swvl and German e-commerce giant Delivery Hero is the latest in a string of tech stock slumps to hit a variety of industries. The decline in shares associated with many big names, such as Uber and Slack, has caused investors to become wary, with some speculating that this could be the start of a larger downward trend.
Swvl had been courting Acquisition Hero for months in anticipation of becoming part of Delivery Hero’s network. However, despite both companies having mutually beneficial views on their vision for the future, declining tech stocks have thrown a wrench into the works. The downturn has caused significant financial losses across multiple platforms, leading Swvl to back out due to concerns surrounding their cash flow.
Many companies have been affected by this development, prompting discussions around alternative plans and strategies should current market conditions prevail. Some investors are now looking at long-term investments rather than short-term gains, focusing on identifying industries that may prove more reliable over time. Of course, such conversations can be difficult for those hopeful about a potentially lucrative deal, but the decision appears to be final.
Reasons Behind Cancellation
In a surprising turn of events, Swvl recently announced that their $100M acquisition of the Smart Bus startup Zeelo is off, due to a tech stocks slump.
This cancellation surprised many observers, who were wondering what possible reason could have prompted the ride-hailing company to back out of the acquisition.
Let’s take a closer look at the reasons behind the cancellation.
Tech stocks slump
The decline in technology stocks is a trend that has raised concerns in the global markets. Technology companies are among the largest and most volatile firms on any given stock exchange, as they are often responsible for rapidly bringing new products and services to market. Recently, tech stocks have seen a significant decline due to slowing demand, changing consumer trends, and widespread fear regarding the future of these companies. The S&P 500 tech index has plummeted over 10% since early October 2019 and is down nearly 4% for the year. As a result, some of the biggest technology giants such as Apple, Amazon, Google parent Alphabet, Facebook and Microsoft have all seen their shares decline by more than 5%.
This tech stocks slump has been cited as one of several reasons behind Swvl’s acquisition cancellation by Careem. The Dubai-based ride-hailing service decided against moving forward with its previously announced purchase agreement late last month citing the current market conditions that would not help build an enduring combined entity. The agreement was signed in June 2019 for an undisclosed amount but was called off due to unfavorable circumstances related to both parties in November 2019.
Impact on Swvl
The announcement of the acquisition cancellation affects Swvl directly, creating uncertainty in the market and greater risks for shareholders. The financial stability of Swvl, before the announcement of its acquisition, was strong enough to continue in technology investments and acquisitions.
However, due to the current growth slump in technology stocks, Swvl will likely suffer from the lack of liquidity and available financing for larger acquisitions. Even though this event has put a hiccup in the overall plan for Swvl’s growth, management does expect this move will provide more near-term stability for company operations. This includes greater visibility into business operations and improved liquidity for strategic decision making.
With ongoing market fluctuations, restructuring is necessary for first-time investors looking towards increasing their profits with value investing. In addition, short-term investments can help diversify investments and spread risk and maximize potential returns through cost averaging techniques over multiple stock prices. Overall, it appears there may be long term benefit from cancelling the acquisition by allowing more opportunity to invest strategically during market downturns at a much lower cost or break even point versus having tied up all cash flow into just one transaction.
Impact on Zeelo
Swvl’s $100M acquisition of Smart Bus startup Zeelo has been cancelled due to current volatility in the tech stocks market. This news has left many wondering what the impact of this cancellation will be on Zeelo and its customers.
Let’s take a closer look into the impact and implications of this cancellation on the startup.
Financial losses
The cancellation of the $500 million acquisition of Swvl by Zeelo has been attributed to the slump in tech stocks, leading to an overall downturn in the global markets. This reversal will likely have a serious financial impact on the two companies, with Swvl announcing that they “have incurred significant losses due to this abortive transaction.” These losses are likely to include lost opportunities and legal and advisory fees associated with drawing up and negotiating the deal.
In addition, Zeelo is also likely to have felt a financial loss as a result of its aborted acquisition. The company had started planning to roll out services across multiple countries and expanded its office space in Europe and North America for this purpose. However, given that it ultimately decided not complete the acquisition, all these expenses are likely lost investments for Zeelo. Whether or not they can be recovered from legal proceedings remains to be seen.
Impact on employees
The news of the acquisition cancellation impacted Zeelo’s 650 employees around the world. Swvl will provide sufficient severance packages to affected employees and any outstanding employee obligations to fund a smooth transition for them. Employees of both companies have been assured that no-one will be left behind and the endeavor is being undertaken in utmost good faith.
In addition, Swvl is offering outplacement services for those employees who are being made redundant through this transaction and will do their best to help them find new employment opportunities or guidance in charting new paths. They also announced that they will soon start an alumni program to stay connected with former employees, according to their statement they wished all their “valuable outgoing staff best of success in their next endeavors!”
Implications
The recent turmoil in the technology stocks markets has caused the $100M acquisition of Smart Bus startup Zeelo by Egyptian on-demand bus service Swvl, to be called off. This news has left both the companies with significantly different implications than when the acquisition was initially announced.
In this article, we will discuss the implications for both the companies.
Impact on other startups
The cancellation of Swvl’s acquisition by Careem has highlighted the potential implications for other startups considering selling. The tech stocks slump, experienced globally during 2020, has cast doubt on the wisdom of acquisitions and mergers in such a volatile market.
Startups with ambitions to sell must carefully consider their options and know the wider implications. They should take time to understand up-to-date market conditions, as well as their valuations vis-a-vis current corporate market values. It’s important to decide whether the investor is still interested in offering profitable valuations or if they would be looking for a bargain price.
Startups also need to consider that their plans may need to be changed at any time in light of unstable markets. Companies reporting positive news have not been immune from sudden slumps in stock prices because of macroeconomic events, such as lockdowns due to COVID-19 or trade tensions between major economies like the US and China. It is important for founders and investors involved in M&A processes to remain informed about current events and changes that could potentially disrupt deals at any given moment.
Directors may also want to explore the possibilities of further funding from alternative sources or internally raising capital before considering acquisitions and mergers as an option given their risks during this period of volatility.
Impact on the industry
The news that ride-hailing company Swvl has cancelled its plans to go public due to the tech stocks slump has sent shockwaves throughout the industry. The direct implications of this news include a weakened willingness by venture capitalists, banks, and other financial institutions to fund or engage in IPOs (Initial Public Offerings). Even though tech stocks have slumped recently, chances are good that they will recover over time. As such, there remains underlying confidence in technology investments.
Another major consequence of Swvl’s decision is that it may dissuade similar companies from attempting to “go public” shortly; especially as having a robust IPO market is essential for fuelling private capital investments across numerous industries. Moreover, experts suggest that it could take months before tech stocks fully recover, leaving many companies who would have made their market debut soon deeply uncertain about their futures and potential expansion routes.
Finally, the repercussions of this development may be felt most keenly by investors in tech companies now facing potential losses and delays in their returns over the coming months or quarters. Given how appetite for investment in these industries depend greatly on successful IPOs for creating a strong buy and sell signal for valuations, any hiccups can directly affect stock prices and hence gains/losses for investors. Owing to this decision by Swvl then, we may see some complacency setting into certain sectors which could impact investor returns adversely until market conditions recover.
Conclusion
In summary, Swvl’s cancellation of the planned merger is likely the result of decreased investor confidence in the technology sector due to recent economic turbulence. Though these circumstances are outside their control, any plans for Swvl to expand its service into new markets will have to be reconsidered and any investments they may have been planning on making.
While they may still be able to secure a deal with a new investor or buyer, it will still require careful consideration and negotiation in this climate. Looking forward, Swvl must continue to develop their existing service and explore new opportunities even if their ambitions for expansion become more limited.
