Besties? Why Alibaba, Tencent Are Teaming Up in $15 Billion Dealby
Longtime rivals Jack, Pony Ma join forces for second time
Deal poses threat to China's Baidu as O2O market expands
Jack Ma and Pony Ma, whose business rivalry dates back more than a decade, are starting to look like the best buddies of China’s Internet.
Jack, founder of Alibaba Group Holding Ltd., and Pony, founder of Tencent Holdings Ltd., are joining forces for the second time this year by combining two startups they’ve financed separately. Alibaba-backed Meituan.com and Tencent-backed Dianping.com, which have been competing in offering local services online, said Thursday they would merge. Under their agreement, Wang Xing, chief executive officer of Meituan, and his counterpart at Dianping, Zhang Tao, will run the new company as co-chairmen and co-CEOs.
The deal will create a clear leader in a crowded field, just like the two men did earlier this year when they combined Didi and Kuaidi to establish a dominant player in ride-hailing services that could fend off Uber Technologies Inc. Joining forces may allow the longtime rivals to divide China’s most promising Internet businesses between them, boosting their own profits while freezing out the competition.
"Business makes strange bed fellows," said Andy Mok, the organizer of Beijing Tech Hive, a series of events linking investors and startups. "They’re both obviously very smart, driven business people, but at the end of the day practicality trumps personality."
Meituan.com is a group-buying site similar to Groupon Inc., where people can get discounts on goods and services by making purchases together. It held about 52 percent of the 77 billion yuan ($12.1 billion) market in the first half of the year, according to a report by researcher Analysys International. Dianping.com, which also runs a consumer review site like Yelp Inc., accounted for about 30 percent.
They’re examples of how China’s largest Internet companies are investing heavily in the $1.6 trillion online-to-offline services market, betting consumers will increasingly use smartphones and tablets to book everything from hotel rooms to car rides to grocery deliveries.
Alibaba shares rose 3.7 percent in U.S. trading to $66.28 at the close in New York, leaving them down 36 percent this year.
Their alliance poses a threat to Baidu Inc. Chairman Robin Li, the third giant of China’s Internet who has also targeted what’s known as the O2O market. Baidu, the leading search-engine in China, is investing $3.2 billion over three years in its own provider of local services. Baidu’s Nuomi is the third-largest player in group buying with 13.6 percent of the market, according to Analysys.
"The market is still at an early, fast-growth stage, which means it’s too early in the game to decide who the ultimate winner’s going to be," said Kaiser Kuo, a spokesman for Baidu. "Local is still Baidu’s turf to win, and we are very, very committed."
The deal comes as venture financing is becoming more difficult to obtain in China amid the slowing economy and wobbly stock market. Many Web startups that had been burning cash through big incentives to draw customers are facing pressure to cut their losses.
"Winter is coming for the capital market," said Jeff Hao, a Hong Kong-based analyst at China Merchants Securities Holdings. "It’s getting harder to find people who are willing to invest."
Jack Ma, 51, and Ma "Pony" Huateng, 43, have been rivals almost since the Internet began to take off in China. Jack started Alibaba from his Hangzhou apartment in 1999 with $60,000 and built it into the leading e-commerce player in the country. Pony created the instant messaging service QQ for Tencent in Shenzhen in 1999 and now has user base of more than 1 billion for his messaging, games and other services.
The two companies have traded positions as the most valuable Internet company in China, with Tencent currently ahead. Jack has a higher personal net worth at $26.7 billion, compared with Pony’s $17.6 billion, according to the Bloomberg Billionaires Index.
The two men, who are not related, have competed for acquisitions and driven the value of Internet deals involving Chinese companies to $58.4 billion this year, already almost double the amount for 2014, data compiled by Bloomberg show. In the current deal, Meituan’s shareholders will own about 60 percent of the combined company, which will be valued at about $15 billion, the people familiar with the matter said, asking not to be identified because the matter is private.
An Alibaba-Tencent tie-up in local services would mirror the creation of Didi Kuaidi this year via a merger of competing taxi-hailing apps they separately backed. That marriage was intended to curtail an aggressive expansion by Uber and marked a rare cooperation between companies that still compete head-to-head in entertainment, e-commerce and finance.
As fundraising becomes more difficult in China, the current merger could provide advantages for both sides. It would let the Alibaba and Tencent-backed startups avoid competition with their closest rival, potentially saving money on subsidies and allowing them to collaborate on future efforts.
“The two companies merging would allow them to have absolute dominance of the group-buying market, and require less cash burn,” said Wang Weidong, an analyst at Internet consultancy IResearch in Beijing. “They will be putting a lot of pressure on competitors.”