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Stock Market Wrap-Up: Is a Grubhub/Uber Deal Really a Good Thing?

By Dan Caplinger – May 12, 2020 at 6:20PM

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The stock market fell sharply late in the day.

The stock market has been a lot less volatile over the past few weeks than it was in February and March, but Tuesday's moves brought back some bad memories of weaker markets. After being up for much of the trading session, major market benchmarks moved sharply lower during the last couple of hours. By the close, the Dow Jones Industrial Average (^DJI -1.62%), S&P 500 (^GSPC -1.72%), and Nasdaq Composite (^IXIC 0.00%) were all down around 2%.

Today's stock market

Index

Percentage Change

Point Change

Dow

(1.89%)

(457)

S&P 500

(2.05%)

(60)

Nasdaq Composite

(2.06%)

(190)

Data source: Yahoo! Finance.

Noteworthy stocks that bucked the downward trend on Tuesday included Uber Technologies (UBER -2.66%) and Grubhub (GRUB), with Grubhub shares gaining almost 30% on the day. The two companies are reportedly considering a merger, and shareholders seem to like the idea. For restaurants and consumers, though, the benefits of a Grubhub/Uber combination are a lot less clear.

What a Grubhub/Uber deal might look like

Uber is looking at acquiring Grubhub, according to reports from The Wall Street Journal. The combination would bring Grubhub's focused food delivery business together with the ride-hailing company's Uber Eats division, creating a colossus in the industry that could help both businesses catch up with the leading DoorDash food delivery service.

Grubhub app screenshot showing names of restaurants and menu items.

Image source: Grubhub.

Discussions between the two companies have apparently been going on for a while, with negotiations looking at a fair price for a merger. With cash at a premium right now, it shouldn't be surprising that the two high-growth companies are looking at an all-stock deal, with some suggesting a possible ratio of 2.15 shares of Uber for every share of Grubhub as the likely price of getting an agreement.

What a merger means for everyone involved

It's clear what Grubhub and Uber have to gain from a merger. Grubhub has said for a while now that its growth was slowing down because of increased competition from Uber, DoorDash, and other players in the crowded food delivery space. Grubhub also questioned whether it could be profitable if it focused only on the delivery logistics of the restaurant business. Consolidation within the third-party food delivery space would give a combined Grubhub/Uber Eats more leverage to boost fees for restaurants.

Yet the restaurant industry has given third-party food delivery mixed reviews at best. For some restaurants, especially franchised chain stores, third-party delivery can be a nice boost, especially if the chain can negotiate preferred deals with companies like Uber Eats and Grubhub. For independent restaurants, however, higher costs and controversial tactics like creating shadow websites to drive traffic to third-party delivery rather than the restaurant's own services have generated considerable ill will in many corners. Moreover, some chains, most notably Domino's Pizza (DPZ 3.08%), have avoided third-party delivery, choosing instead to keep orders within their own ecosystems.

Acknowledging the issue, Grubhub has tried to improve its image. Last month, the company said it would cut commissions by $100 million in an effort to help independent restaurants. Even so, local government officials have chosen to impose fee caps on delivery charges. That's raised new questions about just how viable food delivery is as a stand-alone business.

What about customers?

Customers like the idea of cheap food delivery, especially when it comes with promotional offers that can reduce the costs of their meals. Yet based on recent trends, it looks like those deals could end up just being short-term gimmicks that eventually give way to passing rising costs onto consumers' backs.

Many customers won't really care who delivers their food as long as it's fast and doesn't cost too much. Unless the tech-based  food delivery services can repair their damaged reputations and make their restaurant partners happier, though, there might not be much to celebrate even if an Uber/Grubhub deal goes forward.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Domino's Pizza and Uber Technologies. The Motley Fool has a disclosure policy.

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Stocks Mentioned

GrubHub Inc. Stock Quote
GrubHub Inc.
GRUB
Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
UBER
$27.82 (-2.66%) $0.76
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$29,590.41 (-1.62%) $-486.27
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,693.23 (-1.72%) $-64.76
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
^IXIC
$11,066.81 (0.00%) $0.00
Domino's Pizza, Inc. Stock Quote
Domino's Pizza, Inc.
DPZ
$330.00 (3.08%) $9.86

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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