Tencent Hunt for Asian WhatsApps Fuels Deals: Real M&A

As Facebook Inc. (FB) spends $19 billion on WhatsApp Inc., half a world away China’s Internet giants are in the middle of their own acquisition rush.

Tencent Holdings Ltd. (700), Asia’s largest Internet company, Alibaba Group Holding Ltd. and Baidu Inc. (BIDU) are seeking targets to plug gaps across their businesses as they vie for China’s 618 million Web users. Citigroup Inc. sees the trio driving Internet-related deals in China to a record this year, adding to their 44 announced acquisitions since 2012 valued at $18.7 billion, according to data compiled by Bloomberg.

For each of the big three Chinese Internet companies, there is at least one technology provider that would fill a need. Qihoo 360 Technology Co. (QIHU), (LONG) with a market value of $13.2 billion, might appeal to Chinese e-commerce leader Alibaba because of its anti-virus software, said Guotai Junan International Holdings Ltd. Travel site Ctrip.com International Ltd. may lure Tencent, according to Riedel Research Group Inc., while classifieds website operator 58.com Inc. could attract China’s largest search engine Baidu, Pacific Crest Securities said.

“It’s going to be a pretty hot M&A space for the next couple of years and that’s really just driven by competition between the three largest players,” Cheng Cheng, a Portland, Oregon-based analyst at Pacific Crest, said in a phone interview.

Photographer: Brent Lewin/Bloomberg

Shenzhen-based Tencent Holdings Ltd., operator of the WeChat video, voice and texting application, is attempting to compete with Alibaba Group Holding Ltd. by combining messaging with services including shopping and gaming. Close

Shenzhen-based Tencent Holdings Ltd., operator of the WeChat video, voice and texting... Read More

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Photographer: Brent Lewin/Bloomberg

Shenzhen-based Tencent Holdings Ltd., operator of the WeChat video, voice and texting application, is attempting to compete with Alibaba Group Holding Ltd. by combining messaging with services including shopping and gaming.

Internet-related companies worldwide have already announced $27.5 billion of deals this year, led by the Facebook-WhatsApp acquisition, according to data compiled by Bloomberg.

Valuing Eyeballs

Facebook’s purchase of WhatsApp, the Menlo Park, California-based company’s biggest yet, is aimed at getting a hold of the mobile-messaging service’s 450 million users to stay at the center of consumers’ digital lives. In related deals, SoftBank Corp. (9984), which controls the third-largest U.S. wireless operator Sprint Corp., is seeking to buy a stake in Naver Corp.’s text-messaging service Line Corp., people with knowledge of the matter have said.

“People are valuing those eyeballs,” David Riedel, president and founder of Riedel Research, an independent equity research firm, said in a phone interview. For China’s technology giants, “it’s another reason for these companies to remain vigilant about identifying holes in their lineup.”

In China, the importance of services accessible by customers on the move has increased. About 500 million users in the country access the Internet from mobile devices, according to a report published by the China Internet Network Information Center, about as much as the entire population of North America.

Qihoo ‘Game-Changer’

Qihoo, which has more than 408 million users for its mobile-security products and is China’s second-largest search engine, could appeal to Alibaba as a way to bolster its anti-virus and search businesses, according to Ricky Lai, an analyst at Guotai Junan in Hong Kong.

Qihoo’s customer base makes the company “a potential game-changer,” Bank of China Ltd.’s institutional sales desk in Singapore said in a Feb. 19 note that named Qihoo as a possible target.

Any investment by Alibaba, founded by billionaire Jack Ma, may value New York-listed Qihoo at $20 billion, said Alex Wang, a Beijing-based analyst at Internet consulting group IResearch. That’s about 51 percent above Qihoo’s stock-market value.

“Alibaba would need to take into account future add-value that Qihoo is bringing,” Wang said in a phone interview. “Qihoo is on the verge of speeding up monetization on its traffic.”

Today, Qihoo’s American depositary receipts climbed 2.7 percent to a record $110.76.

Mapping Purchase

A representative for Alibaba declined to comment on Qihoo as an investment or acquisition target, as did a representative for Qihoo.

Alibaba, said to be preparing for an initial public offering, has been valued at as much as $190 billion. This month, the Hangzhou, China-based company offered to buy the rest of AutoNavi Holdings Ltd. in a bid valuing the Chinese mapping company at about $1.6 billion.

Shenzhen-based Tencent, operator of the WeChat video, voice and texting application, is attempting to compete with Alibaba by combining messaging with services including shopping and gaming.

Deal Motivation

Tencent’s strength hasn’t been in online shopping or advertising so one option for the $141 billion company may be a tie-up, or an equity swap, with Suning Commerce Group Co. (002024), China’s largest electronics retailer, according to Wang at IResearch.

“Tencent has a lot of traffic but it lacks methods to monetize its business,” said Wang. “There is a real motivation for Tencent to invest in or acquire e-commerce companies.”

Another possibility for Tencent could be to acquire an online travel service such as Ctrip, said Riedel. Ctrip ADRs surged 6.8 percent today to $55.75.

Shares of Tencent surged to a record in Hong Kong before closing 5.2 percent higher at HK$616.50. Tencent’s ADRs also climbed to a record, rising 5.7 percent to $79.35.

A representative for Tencent didn’t respond to an e-mail seeking comment, while spokesmen for Suning and Ctrip declined to comment.

Tencent, founded by billionaire Ma Huateng, this month bought a 20 percent stake in Dianping, which runs a food and entertainment review website in China. Such deals may prompt Baidu to seek other location-based service providers, Echo He, a New York-based analyst for Maxim Group LLC, said in a phone interview.

“Competitors like Alibaba, like Tencent, are very aggressively promoting their mobile products so Baidu definitely wants to enrich its product offerings,” she said.

Baidu Targets

Logical targets for Baidu include the $3.2 billion 58.com, which went public in October and lets users sell everything from cars to computers, according to Cheng at Pacific Crest. The $6.2 billion SouFun Holdings Ltd., (SFUN) China’s biggest real-estate information website, also makes sense as a potential acquisition candidate for the $61 billion company, Cheng said.

Baidu, founded by billionaire Robin Li, yesterday forecast first-quarter sales that beat analysts’ estimates. The company will focus on investment this year, crimping profit growth, as it targets marketing for its mobile applications in search, security and location-based services, Chief Financial Officer Jennifer Li told a conference call.

Today, 58.com’s ADRs rose 3.1 percent to $41.99, while SouFun’s climbed 1.5 percent to $77.52. Baidu’s ADRs gained 3.5 percent to $178.92.

Inflated Valuations

Representatives for Baidu and 58.com declined to comment. A representative for SouFun didn’t respond to an e-mail or phone call seeking comment.

With WhatsApp selling for $19 billion, the chase for technology targets may inflate valuations, said Pavel Marceux, an analyst at Euromonitor International.

“The deal could either spell a peak for pricing of such firms or increase valuations similar to the dot-com boom in the late 1990s,” Moscow-based Marceux said in an e-mail.

Even so, there’s no sign acquisitions in China will stop, said John Choi, an analyst at Daiwa Securities Group Inc. in Hong Kong.

“These Internet companies have been buying companies in areas where they’re weak,” he said. “I expect this to continue.”

To contact the reporters on this story: Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net; Angus Whitley in Sydney at awhitley1@bloomberg.net; Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editors responsible for this story: Beth Williams at bewilliams@bloomberg.net; Michael Tighe at mtighe4@bloomberg.net

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