When times get tough, it helps to have a rich friend. Probably.
In Snapchat's quarterly securities filing on Wednesday, the company dropped news that affiliates of Tencent Holdings Ltd., the Chinese technology giant, bought 146 million of Snapchat Class A shares. That represents about 12 percent of all shares of parent company Snap Inc., but that figure understates the size of Tencent's splurge. Its shares are about 17 percent of publicly traded Snap shares.
And that is the odd thing about Tencent's stock purchase. It was apparently not made in consultation with Snap, which certainly could use the vote of confidence that a conventional Tencent strategic investment would provide. No, Snapchat says Tencent "notified" the company sometime in the last week about its stock purchases.
These companies know each other, and Tencent certainly could have picked up the phone to talk to Snapchat about an organized investment rather than notifiying it after the fact. Those circumstances make it tough to determine Tencent's intentions.
That's why Snap shares initially soared on the news of Tencent's investment and then retreated. Bloomberg News, citing a person familiar with the transaction, said Tencent's stock purchase wasn't seen as a hostile move on Snap. The New York Times reported a Tencent spokesman said the company viewed the Snap stake as a strategic investment.
For its part, Snapchat said in its securities filing that the company is "grateful" to continue its relationship with Tencent, which had invested in Snapchat when it was private. Tencent's president also told Snapchat that the Chinese company "looks forward to sharing ideas and experiences," according to the Snap filing.
Certainly it couldn't hurt for Snapchat to have more good ideas and advice, and Tencent has a successful track record as the owner of the wildly successful WeChat and QQ apps in China. But it's not clear how much the idea exchange would help Snapchat. Its app doesn't operate in China, and Tencent hasn't been that successful with internet businesses outside its home country.
Tencent also didn't need to spend what may have been a couple billion dollars to buy Snap shares to share ideas. The obvious bullish interpretation of Tencent's investment is that it opens the door to a future acquisition of Snapchat. But really, it's hard to read what Tencent is up to given the odd way it chose to make its investment.
Maybe intentions don't matter, though. More than eight months after it went public, Snapchat seems to be having an identity crisis, and it is having a tough time predicting its revenue and other aspects of its business. That makes it nice to have an ally -- if Tencent is indeed one here.
One wild card from Tencent's stock purchase is its effect on Snapchat's stock price. Presumably Tencent will be holding onto its stock, which makes the amount of Snapchat shares available to trade significantly smaller. That could magnify price swings and cause headaches among short-sellers.
The timing of the disclosure of Tencent's investment also feels odd. Why didn't Snapchat disclose the stock purchase on Tuesday when it could have used good news, if the Tencent investment is indeed good news?
And because Snap took the remarkably unusual step of selling stock to the public that comes with zero voting rights, Tencent could sell every share of Snap stock tomorrow and it would not be required to disclose those sales, Snap said in its securities filing Wednesday. Those nonvoting shares sure look like a corporate governance nightmare, even more than they did nine months ago.
The market reaction Wednesday to Tencent's stock purchase was correct. Snapchat could use friends, and Tencent's pockets are deep and its expertise impressive. But it's unclear whether Snap will benefit from having a new name on its roster of big shareholders.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Tencent wasn't listed in Snapchat's IPO documents as one of Snap's largest stockholders.
It's not clear what Tencent paid for its Snap shares. But if it bought 146 million Class A shares on the open market in the last week or so, that works out to roughly $2 billion.
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