Kaixin Grows Games, Tencent Buy In Sight?
I’ll be a bit whimsical on this final day of the week with a prediction that a sale could be looming for social networking (SNS) site Kaixin, following reports of strong growth for the company’s online gaming business. Anyone reading this is probably puzzled, unsure about the relationship between a growing gaming business and a company getting acquired. I’ll explain all that shortly, but will end the suspense now by saying the potential buyer would be Internet titan Tencent (HKEx: 700), which shares a number of links and other key qualities with the much smaller Kaixin.
Before I delve into the latest headlines and reasons for my theory, it’s helpful to step back and look at the brief but colorful history of Kaixin. The company exploded on the scene about 5 years ago when its popular SNS site led some to predict it could become the Facebook (Nasdaq: FB) of China.
Kaixin and its main local rival, Renren (NYSE: RENN), engaged in a brief race in 2011 to become China’s first New York-listed SNS site. Renren ultimately won that race by making an IPO in May 2011. Kaixin never attempted a listing again after that, and is probably happy it made that decision since Renren’s shares have lost three-quarters of their value since its IPO. The problem for both companies has been the rapid rise of the Twitter-like Weibo (Nasdaq: WB) and Tencent’s mobile WeChat service, which have become the preferred SNS sites for most Chinese Internet users.
Kaixin largely fell from the headlines after the IPO race, but made a brief reappearance in late 2011 when Tencent purchased a strategic stake in the company for an undisclosed price. In the more than 2 years since then, Kaixin’s core Facebook-like service has rapidly faded into irrelevance. But its gaming business appears to be doing a big better, with new reports saying its Yitong Tianma game has seen explosive growth and is now posting monthly revenue of more than 30 million yuan ($5 million). (English article)
I don’t think anyone, myself included, is being fooled by this headline into thinking that Kaixin will soon be reincarnated as an online game company. In fact, Renren already tried that strategy, and briefly saw its shares jump on hopes for its profitable gaming business. But then mismanagement led that business to stumble badly, and nobody has talked about the Renren game unit since then.
In this case with Kaixin, one thing that caught my attention was the source of the news report, which was Tencent’s own gaming news page. I doubt Tencent’s news division is deliberately writing this report because of a pending acquisition bid for Kaixin; but the connection does show there’s a link between the 2 companies. What’s more, there are many reasons why a Kaixin purchase by Tencent looks logical and even likely at this point.
For starters, the 2 companies’ businesses are highly complementary. Tencent is strong in mobile and messaging communities, while Kaixin is stronger in more Facebook-like PC-based communities. Kaixin’s gaming unit, while modest, would also complement Tencent’s industry-leading games business. From a financial perspective, the 2 companies already have an equity relationship through their 3-year-old equity tie-up.
Finally there’s the broader economic environment. Smaller players like Kaixin don’t have a very bright future as independent companies due to fierce competition from much larger and better funded rivals. Meantime, Tencent and China’s other top Internet firms have plenty of cash and have been spending it on a massive buying spree over the last year. Accordingly, it seems quite logical that Tencent could make a play to buy out Kaixin, and I might even put the odds of such a deal happening later this year at as much as 50 percent.
Bottom line: Tencent could make a bid to buy out faded SNS site Kaixin later this year, valuing the company at up to $500 million.
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