Banking & Finance

Exit strategy

Why Bytedance shut its investment arm down


Turning 10 years-old in March and valued at around $400 billion, Bytedance is the world’s most valuable unicorn. And it has always made plain its ambitions to take on other titans in the internet sector, most notably Tencent. But these days any expression of intent to become a dominant player in the tech and internet spaces now brings heightened levels of political risk. In recent times most of the leading tech behemoths have been slapped with warnings, fines and regulatory action from the government. Ergo aspirations are being toned down or tempered in this kind of context.

Hence China’s internet circles shouldn’t have been too shocked this month when the owner of the popular apps Douyin and Toutiao disbanded its fast-growing investment department. “After evaluating our business at the beginning of the year, we decided to strengthen our focus on our [core] business and cut down investment with little synergy,” Bytedance explained in a statement.

According to 36Kr, a news portal, the strategic investment unit has been crucial in adding to Bytedance’s sprawling empire over the past decade. Its globally popular app TikTok, for instance, was developed from the acquisition of in the United States back in 2017. Importantly, the investment unit also helped the Chinese internet giant to identify and recruit promising talent for its start-up team.

Bytedance’s investment team only got more acquisitive as the company grew in size and influence. It was involved in 76 deals last year, up from just 22 in 2018. One of the bigger acquisitions was Shanghai-based gaming studio Moonton, which Bytedance took over in March last year for $4 billion.

The decision to dial back on M&A for the foreseeable future is a response to recent regulatory changes, 36Kr suggests, coming in the wake of speculation that any deal involving companies with more than 100 million customers might need prior-approval from the government – although the Cyberspace Administration of China quickly denied any such guidelines had been given.

Nevertheless there’s no denying that spirits in the internet sector have been chilled by Beijing’s remorseless crackdown, which seems designed to prevent a small group of ‘platform’ companies from becoming too influential across too many technologies, sectors and markets. In that landscape, announcing another blockbuster takeover becomes less attractive for protagonists like Alibaba, Tencent or Bytedance.

For smaller internet companies, the pullback in investment could be a mixed blessing, however. One of the common complaints is that the major players have been predatory towards smaller newcomers, often forcing them into selling stakes at knock-down valuations. But they were also regular buyers of start-ups, giving founders a way of cashing out of their creations or financing their growth.

The new regulatory terrrain also begs the question of whether other investors will also scale back their M&A activity. Our ranking of the top 50 Chinese unicorns, for instance, highlighted how venture capital firms like Hillhouse Capital and Sequoia China also have (alongside Tencent and Alibaba) had an outsized influence on the tech landscape (see WiC530).

In the meantime the internet titans are trying to stay low-key. Tencent’s boss Pony Ma reminded his staff in December that their employer was “just an ordinary company”, warning that Tencent could be “easily replaced”. The Financial Times reported last week that Ma is taking a more cautious M&A approach in China too, instead focusing on overseas expansion. “Going forward, we expect Tencent to invest less in platform companies to avoid the impression of forming alliances through investments, which is seen as problematic under China’s antimonopoly focus,” Bo Pei of US Tiger Securities told the FT.

An alternative strategy for staying influential, perhaps, is to take a ‘fund of funds’ approach, like CATL, China’s biggest producer of electric vehicle batteries. According to Jiemian, CATL has “effectively turned into a ‘super LP’ ” (‘limited partner’), investing in more than 13 funds last year, including Hillhouse. Since going public in Shenzhen three years ago, CATL has invested indirectly or directly in dozens of companies and built a portfolio extending across the industrial chain of battery production, Time Weekly also reported.

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