FINANCE: IDG China Affiliate Roars with US Parent Buy

Bottom line: IDG Capital is likely to buy out the venture funding business of US affiliate IDG in the next year, setting the stage for the emergence of China’s first global venture capital firm.

A sort of “mouse that roared” story is in the headlines today, with word that US tech finance and information giant International Data Group (IDG) has been bought out by its China affiliate. The China affiliate, IDG Capital, is actually teaming up with another major local partner, China Oceanwide Holdings, to purchase Boston-based IDG, whose assets include the well-respected market research firm International Data Corp (IDC), as well as PCWorld Magazine.

I’ll admit I’m less familiar with China Oceanwide, which is one of a growing number of private Chinese firms that made their fortunes in real estate and are now trying to diversify into other areas. The most notable other case of such a company is the aggressive Wanda Group, which still counts real estate as its largest single asset but is rapidly buying Hollywood studios and cinema chains in a bid to move into entertainment. In this case China Oceanwide appears to be making a slightly different tack into financial services, which arguably could also include the kinds of market research and early stage corporate finance that IDG is known for.

But for me, the fact that the China-based IDG Capital is participating in this deal is the most interesting element of this deal, since it has long been associated with the US-based IDG even though the two are formally separate entities. IDG Capital is easily the oldest and most respected among foreign-linked venture capital firms in China, and has helped to fund companies that have become sector leaders like online search giant Baidu (Nasdaq: BIDU) and travel agent Ctrip (Nasdaq: CTRP).

Against all that backdrop, let’s look more closely at this latest blockbuster deal and then try to figure out where things are going from here. The US-based IDG has been in play since founder Pat McGovern died in 2014, and IDG Capital and China Oceanwide had been mounting separate bids to buy the company since last April. (English article) But they later decided to pool their resources and mount the joint bid that has now been formalized, according to media reports.

The reports don’t give a price for IDG, but note that the company was previously thought to be worth anywhere from $500 million to $1 billion. The new deal will see Oceanwide take a controlling stake in IDG’s operating businesses, with IDG Capital taking a minority. But IDG Capital will take a controlling stake in the US company’s venture capital businesses, which is obviously the most similar to its own business in China. The two sides said the deal has been cleared by the US agency that reviews such transactions for national security concerns, and is expected to close by the end of March.

Buyout Ahead?

Now that we’ve reviewed all the details, let’s look at what might be next for this new trio that will bring together China Oceanwide, IDG Capital and the original IDG. I suspect this situation is probably just temporary, and that the two buyers will quickly split up IDG. Such a breakup would see IDG Capital take over IDG’s venture business, while leaving most of the information services to China Oceanwide.

Such a breakup could position IDG Capital to potentially become China’s first truly global venture capital firm, with major operations in both China and the US. China is currently a hotbed for foreign venture capital companies, and also is home to its own bumper crop of venture capital firms. But so far none of the homegrown Chinese names have ventured very far beyond their home border.

The globalization of IDG Capital would mirror a similar movement by other private Chinese companies trying to assemble global financial services portfolios. Chief among those are Fosun International (HKEx: 656), which has been buying global insurance assets, and Shanda Group, which has been buying asset managers. More recently the equally aggressive private equity firm HNA Group has also said it wants to get into the space, announcing deals in the US and New Zealand over the last two weeks.

I’m quite positive on these privately owned private equity investors, as all are headed by quite savvy leadership that weighs not only costs but other strategic elements in their global buying decisions. But IDG Capital certainly gets my vote as one of the oldest and savviest major players in China high-tech investing for early-stage companies. Accordingly, this purchase of its former parent could set the stage for the emergence of China’s first global venture capital firm that could give Silicon Valley rivals a run for their money.