BAT calls shots in China as deal-making surges

SHANGHAI — To understand why China is in the midst of a surge in deal-making, and why that will not slow down anytime soon, consider the arranged marriage of two of the country’s largest travel websites.

Qunar Cayman Islands and Ctrip .com International were bitter rivals for years, bickering in public and sacrificing profits to grab customers in the growing China market.

Then Qunar’s largest shareholder, Baidu, forced it into a deal that gave Ctrip control over the combined entity, according to a person familiar with the matter.

Qunar’s management learned their fate only two days before the announcement, the source said.

China’s Internet market, after a surge in start-ups and record venture-capital investments, is entering a new phase of consolidation as investors grow weary of money-losing battles for customers and push for profitability.

Acquisitions by Chinese companies rose 75 per cent this year to US$413.2 billion (S$580.7 billion), according to data compiled by Bloomberg, with domestic deals in the Internet industry nearly quadrupling to US$55.6 billion.

“Investors and VCs (venture capitalists) are beginning to worry about the sustainability of these models,” said Mr Li Muzhi, a Hong Kong-based analyst at Arete Research Service. “It doesn’t matter if you are the founder or a professional management team, if the money says no, then it’s a no.”

DEALS DOUBLE

China’s biggest Internet companies — Baidu, Alibaba Group Holding and Tencent Holdings, known collectively as BAT — are driving the consolidation, accounting for more than 40 per cent of domestic deal-making in the industry.

They helped finance many of the country’s start-ups, and now they are combining ventures in the most fragmented niches.

The deals have helped boost Tencent shares more than 35 per cent this year.

The wave of deals started in February when Alibaba and Tencent merged their competing taxi-hailing applications to create Didi Kuaidi, creating a clear leader with more heft to hold off Uber Technologies.

Classified-ad provider 58.com followed in April, buying control of rival Ganji.com while also getting additional funding from Tencent.

Then, last month, the group- buying and review start-ups Meituan .com and Dianping.com, separately backed by Alibaba and Tencent respectively, agreed to combine into a US$15 billion giant.

The deals come as venture-capital investments in China surged this year to about US$29 billion, double the amount for all of last year.

“There was an abundance of capital that created this group of competitors, and that now brings out the need for strategic consolidation,” said Mr Zhang Xiaoyin, head of China telecom, media and technology investment banking at Goldman Sachs Group. “The deals are for the good of the company, even if it may not be the way that the founders prefer.”

For Meituan’s investors, money was the driver. Meituan agreed to the merger only after it had unsuccessfully tried to raise money at a valuation of US$15 billion. Instead, it settled for about two-thirds of that, a person familiar with the matter said.

INTERNET KINGMAKERS

Qunar, whose shares trade on Nasdaq, has been facing mounting losses amid the intense competition in China. Part of its trouble was the unravelling of a deal in which Baidu was supposed to deliver Internet traffic to its site. As users shifted from desktop PCs to smartphones, the agreement yielded less traffic than expected.

Even when Qunar managed to raise US$800 million this year amid losses, it could not escape the shadow of competition. A few days later, Ctrip said it had raised US$1 billion. Baidu finally had enough. It agreed to put its Qunar shares into a combined entity with Ctrip, essentially forcing Qunar’s management into the deal without consulting them.

“Baidu, Alibaba and Tencent have become kingmakers,” said Mr Richard Robinson, who teaches at Peking University’s business school and mentors start-ups in Beijing.

The deals also reach into the public sector. China’s government is reforming many of the nation’s state-owned enterprises, resulting in more M&A activity. In the biggest such deal, the three wireless carriers are combining their tower assets in a US$36 billion combination.

The Internet deal-making is far from over. China’s food-delivery firms are potential candidates for their own round of consolidation after going through major funding rounds this summer. Tencent-backed Ele.me raised US$630 million, valuing the company at US$3 billion in August, while Alibaba and its financial arm invested almost US$1 billion in Koubei in June.

“A lot of companies are using similar business models trying to subsidise consumers,” said Mr Xia Mingchen, a principal at private equity firm Hamilton Lane Advisors. “Many of these types of companies won’t survive.” BLOOMBERG