Less than two weeks after buying a major stake in leading Chinese microblogging site Sina Weibo, e-commerce leader Alibaba is back on the acquisition track with word of another deal to buy a similar strategic stake in mapping services firm AutoNavi. While this newest deal would be a bit smaller than the Weibo tie-up, it marks the latest transaction in a nascent M&A wave among China tech firms that looks set to gain momentum during the rest of the year. This new wave is being driven partly by strategic factors, since the deals so far have seen major tech firms try to complement their existing operations by pairing with new businesses. But perhaps more importantly, this new wave of tie-ups probably reflects the lack of cash among many smaller, money-losing tech firms, which is forcing them to consider tie-ups with larger, cash-rich players like Alibaba, Tencent, and Baidu.
As a longtime watcher of these companies, I’m particularly excited by this new wave of major M&A. This kind of consolidating activity has been sorely needed for years in China, but never materialized for a number of reasons. For starters, most of these firms were headed by their founders, who often treated the companies like their own personal empires and didn’t want to yield control to someone else.
These headstrong founders could afford to turn down attractive acquisition offers because their companies were often flush with cash, much of it pumped in by private equity, venture capital, and finally stock market investors eager to invest in the China story. But much has changed in the last two years, most notably a sharp cooling in investor sentiment towards these Chinese tech firms, many of which are now starved for cash.
Against that backdrop, let’s take a look at the deal, which has Alibaba and AutoNavi in a strategic tie-up that would see the former buy 28 percent of the latter for $294 million. The deal would make Alibaba AutoNavi’s biggest shareholder.
Such a deal would follow Alibaba’s agreement late last month to buy 18 percent of Sina Weibo for $586 million. The addition of both Sina Weibo and now AutoNavi would fit in with Alibaba’s broader strategy of building up its mobile and social networking businesses to complement its core e-commerce services.
It’s worth pointing out that AutoNavi’s stock price just before the deal was announced was about 40 percent higher than it was just two weeks earlier when rumors of the Alibaba deal must have started to circulate. The stock had lost about half of its value over the last two years before these those rumors emerged, which reflects the rapid cool-down in investor sentiment over that period that I mentioned above.
Alibaba’s two new tie-ups would come at the same time that search leader Baidu announced it would purchase the online video business of PPS for $370 million. Baidu plans to combine PPS with its own iQiyi unit to create the nation’s second largest player, behind only Youku Tudou. At the same time, media have reported that online portal Sohu is shopping around its Sogou online search unit, with Baidu and Qihoo 360 as 2 of the strongest potential buyers.
This sudden flurry of activity certainly looks exciting, and I would expect that we’ll see more similar deals in the months ahead. Cash rich companies like Baidu, Tencent, and Alibaba are likely to lead the wave, as all are highly profitable and have easy access to cash and financing. Their targets could include a wide range of firms from e-commerce, social networking and emerging areas like location based services (LBS), many of which have solid operations but are losing money due to their young age and overheated competition.
Doug Young lives in Shanghai and writes opinion pieces about tech investment in China for Techonomy and at www.youngchinabiz.com. He is the author of a new book about the media in China, The Party Line: How the Media Dictates Public Opinion in Modern China.