Why Uber Is Willing to Pay a Premium for Grubhub

Uber (NYSE: UBER) and Grubhub (NYSE: GRUB) -- two of the largest names in food delivery -- are reportedly in acquisition talks. Uber could acquire its rival in an all-stock deal. While Grubhub was seeking 2.15 Uber shares per share of its own company, the larger business countered with 1.9 shares. Grubhub said that's not enough, but the two companies continue to talk. Uber would effectively pay over $60 per share for Grubhub, a steep premium over the $47 price tag shares traded at before The Wall Street Journal reported on the two companies' talks.

But Uber has good reason to pay a premium for Grubhub. It fits perfectly within its strategy, which CEO Dara Khosrowshahi explained on its third-quarter earnings call last year. "Our strategy for Eats is simple: Invest aggressively into markets where we're confident we can establish or defend a No. 1 or No. 2 position over the next 18 months."

In other words, Uber needs scale in order to be profitable. Greater scale improves its acquisition and per-transaction economics, Khosrowshahi explained.