INTERNET: 58.com Gets Indigestion From Ganji Buy

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Bottom line: 58.com’s latest quarterly results reveal a case of indigestion after its recent M&A binge, but the company could emerge as a new Chinese Internet leader if can successfully digest those assets over the next 2-3 quarters.

58.com gets M&A indigestion

Leading online classified site 58.com (NYSE: WUBA) has always been a company to watch, due to its market leading position that has led many to call it the Craigslist of China. But the company is suffering from a case of indigestion in its latest earnings report, which revealed a massive loss that shows it needs to take time from its recent buying spree to digest some of those newly purchased assets.

Investors didn’t seem too worried about the report, and actually bid up 58.com’s shares by 3.6 percent after its latest report came out, sending them to a 4-month high. With a current market value of $8.4 billion, 58.com is quickly emerging as one of China’s biggest Internet companies, behind only the big 3 of Alibaba (NYSE: BABA), Tencent (HKEx: 700) and Baidu (Nasdaq: BIDU), as well a handful of other sector leaders like Ctrip (Nasdaq: CTRP).

58.com reached its current size after a shopping spree that saw it pick up a number of relatively big assets including real estate services site Anjuke and classified job site ChinaHR over the last year. But its biggest purchase was that of former rival Ganji, which cemented 58.com’s place as China’s clear industry leader for online classified ads.

The only problem was that many of those assets were money losing, and often came with other operational problems that 58.com is now having to fix. That sudden influx of problematic assets led 58.com to post a massive loss of $206 million in its just-released third-quarter results, including an operational loss of $85 million. (company announcement; Chinese article) Those figures compared with net and operational profits of about $6 million and $3 million a year ago, respectively.

I have to commend 58.com for being quite transparent about its big move into the loss column. That’s because it included the big losses in the quarterly “highlights” section of its report, even though it could have easily excluded them and forced investors to delve into the report to find them. It also trumpeted the fact that quarterly revenue tripled to $212 million, thanks largely to the inclusion of Ganji’s results.

Bargain Hunting

58.com has been wowing investors with the relative bargain prices it has paid for its acquisitions over the past year. One of the biggest of those was Anjuke, which 58.com bought for $267 million in March, far less than the $1.5 billion that Anjuke boasted it was worth a year earlier. (previous post) 58.com also purchased ChinaHR earlier this year for an undisclosed price, but only after the entire staff of the troubled company was laid off.

But the company’s biggest purchase of the recent buying binge was its merger with Ganji in April, in a complex deal that valued Ganji at roughly $3.7 billion, slightly lower than its valuation during a major fund raising the previous August. (previous post) That deal was only formally “completed” last week, when 58.com spun off its Guazi.com used car business for former Ganji chief Yang Haoyong to run, allowing him to resign his position as 58.com’s co-CEO. That allowed 58.com’s own Yao Jinbo to resume his previous role as sole CEO of the merged company.

I suspect 58.com’s relatively late release of its quarterly results this time was tied to the Guazi spin-off, since the company probably wanted to show investors the Ganji deal was finished before announcing the relatively unattractive results. Now the real work begins, and 58.com will need to show the world it can turn around Ganji, Anjuke and its many other acquisitions so they can contribute to not only its top line revenue, but also its bottom line profit.

I’m actually relatively confident it can do that, as CEO Yao has proven to be a pretty good manager at the company, and now will retain his role as sole company chief following Yang’s departure. But the next 2-3 quarters will be critical for Yao to show he’s really capable of improving performance at his acquisitions, as he faces what will easily be the biggest challenge to date in his Internet career.

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