- Internet deals almost quadruple to $56 billion this year
- Tech founders muscled out as big money calls the shots
To understand why China is in the midst of a surge in dealmaking and why that won’t slow down anytime soon, consider the arranged marriage of two of the country’s largest travel websites.
Qunar Cayman Islands Ltd. and Ctrip.com International Ltd. were bitter rivals for years, bickering in public and sacrificing profits to grab customers in the growing China market. Then Qunar’s largest shareholder, Baidu Inc., forced it into a deal that gave Ctrip control over the combined entity, according to a person familiar with the matter. Qunar’s management learned their fate only two days before the announcement, the person said.
China’s Internet market, after a surge in startups and record venture-capital investments, is entering a new phase of consolidation as investors grow weary of money-losing battles for customers and push for profitability. Acquisitions by Chinese companies rose 75 percent this year to $413.2 billion, according to data compiled by Bloomberg, with domestic deals in the Internet industry nearly quadrupling to $55.6 billion.
“Investors and VCs are beginning to worry about the sustainability of these models,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Service LLP. “It doesn’t matter if you are the founder or a professional management team, if the money says no, then it’s a no.”
China’s biggest Internet companies -- Baidu, Alibaba Group Holding Ltd. and Tencent Holdings Ltd., known collectively as BAT -- are driving the consolidation, accounting for more than 40 percent of domestic dealmaking in the industry. They helped finance many of the country’s startups, and now they’re combining ventures in the most fragmented niches. The deals have helped boost Tencent shares more than 35 percent this year.
The waves of deals started in February when Alibaba and Tencent merged their competing taxi-hailing applications to create Didi Kuaidi, creating a clear leader with more heft to hold off Uber Technologies Inc. Classified-ad provider 58.com Inc. followed in April, buying control of rival Ganji.com while also getting additional funding from Tencent. Then last month, the group buying and review startups Meituan.com and Dianping.com, separately backed by Alibaba and Tencent, respectively, agreed to combine into a $15 billion giant.
The deals come as venture-capital investments in China surged this year to about $29 billion, double the amount for all of last year.
“There was an abundance of capital that created this group of competitors, and that now brings out the need for strategic consolidation,” said Zhang Xiaoyin, head of China telecom, media and technology investment banking at Goldman Sachs Group Inc. “The deals are for the good of the company even if it may not be the way that the founders prefer.”
For Meituan’s investors, money was the driver. Meituan agreed to the merger only after it had unsuccessfully tried to raise money at a valuation of $15 billion. Instead, it settled for about two-thirds of that, a person familiar with the matter said last month.
Qunar, whose shares trade on Nasdaq, has been facing mounting losses amid the intense competition in China. Part of its trouble was the unraveling of a deal in which Baidu was supposed to deliver Internet traffic to their site. As users shifted from desktop PCs to smartphones, the agreement yielded less traffic than expected.
Even when Qunar raised $800 million this year amid losses, it couldn’t escape the shadow of competition. A few days later, Ctrip said it had raised $1 billion. Baidu finally had enough. It agreed to put its Qunar shares into a combined entity with Ctrip, essentially forcing Qunar’s management into the deal without consulting them.
“Baidu, Alibaba and Tencent have become kingmakers,” said Richard Robinson, who teaches at Peking University’s business school and mentors startups in Beijing.
The deals also reach into the public sector. China’s government is reforming many of the nation’s state-owned enterprises, resulting in more M&A activity. In the biggest such deal, the three wireless carriers are combining their tower assets in a $36 billion combination.
The Internet dealmaking is far from over. China’s food-delivery firms are potential candidates for their own round of consolidation after going through major funding rounds this summer. Tencent-backed Ele.me raised $630 million, valuing the company at $3 billion in August, while Alibaba and its financial arm invested almost $1 billion in Koubei Co. in June.
“A lot of companies are using similar business models trying to subsidize consumers,” said Xia Mingchen, a principal at private equity firm Hamilton Lane Advisors LLC. “Many of these types of companies won’t survive.”