Baidu, Alibaba Push Internet M&A Into Overdrive
I’m a big fan of M&A, especially in China’s overcrowded Internet space where consolidation has been desperately needed for the last 6 or 7 years. But even I am getting a bit overwhelmed by the accelerating wave of deals we’re seeing this year, with the latest headlines pointing to new activity by leading e-commerce firm Alibaba and top search engine Baidu (Nasdaq: BIDU). This sudden frantic wave of deals was refreshing at first, but it’s starting to take on irrational overtones as purchases become less logical and activity becomes overheated. That leads me to my next prediction, namely that we could soon see some serious M&A hangover for many of these acquirers, as they try to figure out how to run all of their new assets once the current buying wave subsides.
One of the biggest new headlines is only tangentially related to M&A, with Baidu announcing its sale of $1 billion in corporate debt — its second such sale in less than a year. (company announcement) Meantime, Alibaba is reportedly on the verge of yet another major acquisition with plans to buy a stake in video sharing site PPTV. (Chinese article) Even foreign firms are starting to look at Chinese Internet assets, with leading Australian telco Telstra (Sydney: TLS) reportedly close to a deal to buy portal operator Pacific Online (HKEx: 543).
This frantic wave of buying is being driven by 2 major factors, and follows years of inactivity due to reluctance by company founders to sell off their firms. Most importantly, valuations for many of these companies are extremely low right now, following a loss of interest from western investors who were typically some of their biggest backers. In addition, many of these companies are losing money and need to find new funds to stay in business.
Let’s start off this “M&A Thursday” with a look at Baidu, which announced it issued the $1 billion in bonds with a 5-year term and 3.25 percent annual interest rate. That’s a bit higher than the 2.25 percent rate that Baidu priced a similar group of bonds at late last year, when it raised an even larger $1.5 billion through offerings of 5- and 10-year notes. (previous post)
Still, the latest rate isn’t bad and Baidu is probably trying to lock in as much funds as possible in the current low interest environment to fund its M&A. That includes its recent purchase of the online video sharing assets of PPS for $370 million in May, and its preliminary agreement announced last week to purchase a controlling stake of the popular online app store 91Wireless for $1.1 billion.
Meantime, the latest reports say that Alibaba is on the cusp of a deal to purchase a stake in another money-losing online video sharing site, PPTV. Reports of this purchase first emerged earlier this week, and the fact that they’ve persisted leads me to believe a deal is really happening. This particular deal would follow Alibaba’s other recent purchases of a 18 percent stake in Sina’s (Nasdaq: SINA) Weibo SNS service earlier this year for $586 million, and its purchase for $294 million of a 28 percent stake of AutoNavi (Nasdaq: AMAP), a provider of mobile and online mapping services.
Lastly there’s Telstra, which is reportedly close to a deal that would see it pay around $800 million for Pacific Online, operator of the popular Autohome car website. Telstra has been historically active in the China market, so I wouldn’t be surprised if this latest report is true, especially in the current overheated M&A climate. Whether or not this investment is a logical one for Telstra is a debatable, as I don’t really see any major strategic synergies. But then again, such synergies are starting to become less common in the latest M&A and could become rarer still as more assets are sold.
Bottom line: Signs of new M&A from Baidu, Alibaba and Telstra point to an overheating of the market, with some new deals looking less and less rational.
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