Internet & Tech

Survival of the unfittest?

Is troubled giant Ofo about to be taken over by smaller rival Hello?


Hello, do you want us?

A survey by Innosight, a US consultancy, found that the average lifespan of companies on the S&P 500 Index in 1964 was around 33 years. Their tenure is set to drop to 12 years by 2027 due to technological disruption and more dealmaking. China’s bike-sharing firms last even less time. And one of the leading players in this cash-burning sector has reportedly started the process of selling itself to a smaller rival – less than four years after it was founded.

According to the South China Morning Post, Beijing-based bike-sharing app Ofo has tendered a merger proposal to its much smaller competitor Hello TransTech. Citing Hello’s spokesperson, the SCMP report suggested that Shanghai-based Hello – which is 36%-owned by Alibaba affiliate Ant Financial – would actually become the acquirer should the deal go through.

The party with the upper hand in Ofo’s shareholder structure has been harder to track since a major injection of capital from Alibaba in March seemed to trump a 30% stake previously purchased by car-hailing app Didi Chuxing (see WiC401).

As one of the first-movers in China’s dockless bike market (the other is rival app Mobike), Ofo’s active user base stood at 29 million as of May. That is significantly larger than Hello’s 5.29 million.

Yet the potential merger does not look so much like David beating Goliath when Ofo’s frailer financials are considered. Ofo’s cash crunch made headlines last month when Shanghai Phoenix Bicycles petitioned a Beijing court over unpaid bills worth Rmb68 million ($9.8 million). Ofo had agreed in May 2017 to acquire five million bikes from Phoenix but ended up buying fewer than two million during the contract period. It also owes millions of yuan to various logistics companies and a maker of smart locks. The latter has threatened to stop supporting three million bikes owned by Ofo, as the company was more than six months in arrears on payments, National Business Daily reported in July.

Amid all these commercial disputes Ofo founder Dai Wei this week gave up his role as the company’s legal representative. Ofo emphasised that the change was a “normal” one and that Dai, also the chief executive, remained in overall day-to-day control. “The legal representative will be held responsible if the companies go to court,” Li Yi, a researcher at the Shanghai Academy of Social Sciences, told Securities Daily. The alteration to the governance strucuture, Li believes, suggested “the issue is perhaps quite serious” as Ofo looks to recapitalise.

Ofo was reportedly valued at $1.5 billion when Didi, whose management team was at odds with Dai, made a takeover attempt in July. The bid price was too small for Dai’s liking, as its archrival Mobike was sold in April for $2.7 billion to Meituan Dianping, a food delivery app partly-owned by Tencent.

The potential merger between Ofo and Hello comes at a time when sentiment on the sector has turned bearish.

Wreckage and widespread dumping of rental bikes has clogged streets and prompted 12 major cities to ban operators from adding fresh capacity. That may explain why a tie-up with Ofo could make strategic sense for Hello, which only has 5% of its users in tier-one cities.

Hello is moving to become a broader transport platform to rival Didi. In September it rebranded and added a new taxi-hailing function to its mobile app early this month. The two year-old start-up, which is being used by Ant Financial to promote its Sesame Credit scheme (anyone with a score above 650 can get deposit-free bike rides), is also sharing customers with Alibaba’s online food delivery service

Didi, meanwhile, is still reeling from a scandal involving the second rape and murder of a female passenger by one of its drivers in late August. The sense of crisis this has prompted within the car-hailing company may be why Hello thinks Didi’s interest in buying Ofo has waned and so it has stepped in with its own offer.

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