M&A

The heavyweights bulk up

Yet more acquisitions from Alibaba and Tencent as they add punch

1001394682

Ding-ding: Ma Huateng and Jack Ma go toe-to-toe

Tencent’s chairman Ma Huateng had to take two weeks off this month to recuperate from a bad back. First, it meant that the 42 year-old skipped the National People’s Congress, the annual legislative session to which he had just been elected as a delegate. But probably of more significance to investors, the lengthy leave comes at a time when the internet giant is battling with archrival Alibaba in an acquisitive dogfight that has left onlookers in awe.

Apparently Ma could breathe easier during his days off since Richard Peng, who spearheads Tencent’s acquisition initiatives, remained on hand to do deals. (Prior to joining Tencent in 2008, Peng headed Google’s acquisition activities in China. He has also worked for Samsung as a global strategist.)

The Securities Times has reported that Peng was planning to resign last year to start his own venture capital firm. But Ma convinced Peng to stay and an investment frenzy then followed. Peng is in charge of the Tencent Industry Collaboration Fund – an Rmb5 billion ($813 million) war chest set aside in 2011. The “most mysterious department” of Tencent, as the Economic Observer puts it, has since invested in nearly 200 projects. Most of them are small investments in startups. But things seem to have changed lately. Earlier this month, the fund invested $214 million for a 15% stake in e-commerce platform JD.com, which is seeking a $1.5 billion listing in New York.

Before the deal Tencent could boast just a 3% market share in the online shopping market. By combining with JD.com, Tencent’s slice rises to 25%. That immediately strengthens Tencent’s weak spot as it seeks to compete with Alibaba’s core operation, which has a 56% market share thanks to its popular Taobao and Tmall sites. “It is Tencent’s answer to Alibaba’s tie-up with Sina Weibo,” the China Business News mused. Late last year, Alibaba paid $586 million for an 18% stake in Sina Weibo, China’s Twitter-equivalent, in a bold effort to counter Tencent’s dominant WeChat messaging app.

Alibaba and Tencent were launched within months of one other 15 years ago. For a decade and half the duo rarely exchanged fire. Alibaba grew from a marketplace where overseas firms were linked with Chinese suppliers to become the country’s dominant online shopping mall with more than 600 million active users. Tencent, meanwhile, has nearly 600 million subscribers who pay for services from instant messaging to online games.

But China’s internet population stands at 618 million and overlapping territory means the two giants are now coming into closer contact. Or as the BBC has put it: “this town – or this country – isn’t big enough for both of them”.

Adding to the competitive mix is the growing use of smartphones, and awareness at both firms that the ultimate prize is dominance of the ‘mobile’ internet.

Readers should be familiar with this rivalry. From logistics (see WiC223) to internet finance (WiC225) to taxi bookings (WiC226), few weeks go by without some kind of mention of the duo’s escalating competition. It reached a new level two weeks ago, when Alibaba bought the majority stake in ChinaVision, a Hong Kong listed movie firm controlled by leading producer Dong Ping. Alibaba’s takeover was audacious, diluting Tencent’s stake in ChinaVision from 8% to 3%. Beaten in this particular battle, Tencent was forced to divest its stake this week for a significant profit.

It was the latest of many purchases. Between the two they have announced M&A spending of around $4.5 billion in the past 12 months.

But how did the duo become so powerful? According to the Shenzhen Economic Daily, the rise of China’s internet giants is a key plank in Beijing’s economic strategy. The newspaper even noted that before Premier Li Keqiang gave the government work report this month, both Ma Huateng and Alibaba’s chairman Jack Ma were invited to the State Council’s internal economic conferences, along with other tech firm bosses. “The internet has become part of our daily life, it has also become a sharp sword to break down resistance against reforms,” the newspaper wrote.

Shanghai Securities News agrees. “The internet epitomises the liveliness of the private sector,” it suggested last week. “It is the best tool for applying pressure for reforms in entrenched state sectors.”

The argument seemed to get further vindication last week when Alibaba and Tencent were two of the 10 firms allowed into a pilot scheme to set up private banks. The aim: to break up the dominance of the state banks. Moreover, there have even been reports that Alibaba will invest in Sinopec’s consumer gas unit, another notorious monopoly for state capitalism.

Still, there are limits to the influence of China’s internet giants. Last week, the central bank halted Alibaba and Tencent’s virtual credit card products only a few days after the new services were unveiled. Both had marched aggressively into money market funds without any regulatory pushback, so they probably assumed that this new product would win favour too.

Instead it was a rare setback. Then again, further news last week demonstrated again why the government has been keener to work with tycoons like Ma Huateng than hobble his company’s growth. While they’re private companies, the internet giants know they must maintain a cooperative stance with state regulators. Such was the case when Tencent’s WeChat responded to instructions to shut down dozens of its most popular public accounts. Many were set up by journalists, commentators and influential critics such as Li Chengpeng (see WiC179). But Tencent said a number of the account holders were now banned from its service due to “complaints” received from other users.

It was the first time that a suspension had been initiated by WeChat. A similar clampdown happened last year on Sina Weibo, which hit many popular ‘Big V’ commentators (see WiC209).

So even though the internet firms operate in seemingly boundless cyberspace, each is trying to grow in pseudo-fiefdoms – though mindful that close government supervision is the norm.

Of course, in some cases, different faces of government may serve as commercial cheerleaders rather than controllers. As the Financial Times has noted, Tencent is based in the southern city of Shenzhen and Alibaba in Hangzhou with many of its units concentrated in Shanghai. Baidu, the biggest search engine stares out over the north from its base in Beijing. “Business is a mirror of the bureaucracy,” Anne Stevenson-Yang of J Capital Research told the FT, adding that this geographical grouping mirrors the overall distribution of power in China and its competing regional political clans.

Indeed, Chinese media now describes the big three as BAT (i.e. Baidu, Alibaba and Tencent), likening their rivalry to the Three Kingdoms period, a bloody third century era when three states battled for dominance.

The FT agrees with the basic description, but employs a different analogy. “Each of the big three is so big, so wired-in politically and so vital to the Chinese economy that its survival is assured,” it notes. It then cited an employee at one of the BAT firms, likening the trio more to Oceania, Eurasia and Eastasia, three superstates in George Orwell’s novel Nineteen Eighty-Four. Each are so big as to be undefeatable, but as a result they are permanently at war.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.