INTERNET: Alibaba Eyes “Snap” Deals In US SNS, India E-commerce
Bottom line: Alibaba’s 2 latest big investments in Snapchat and Snapdeal look like good bets for strong financial returns, but are unlikely to produce any major strategic benefit.
I was a bit confused on my first reading of the headlines today, after seeing articles saying e-commerce leader Alibaba (NYSE: BABA) was in talks to invest in 2 companies whose “snappy” names sounded quite similar. But a closer reading made it clear that these were 2 very different deals, one involving the popular US social networking service (SNS) Snapchat, and the other involving a popular Indian e-commerce site called Snapdeal.
Despite their big geographic and product differences, these 2 deals seem to represent a growing trend for Alibaba, which is no longer acquiring companies but instead only buying small strategic stakes. The strategy looks mostly advantageous to the investment targets. That’s because it’s helping to push up the valuations of names like Snapchat and Snapdeal to frothy levels, much the way Alibaba used similar investments to pump up its own valuation in the run-up to its IPO last year.
In these cases, I doubt whether Alibaba will be able to get much from these investments in terms of strategic alliances, and instead may have to be satisfied with simple monetary gains as these companies’ valuations climb. That’s not ideal for a company like Alibaba, which would prefer to get some strategic returns in addition to monetary gains. But in this case Alibaba really has too much idle cash that it needs to put to work, and thus at least these investments will bring it some financial returns.
Neither of these 2 deals would give Alibaba a very big stake in either Snapchat or Snapdeal, which are more interested in finding large investor groups who can give them cash to fuel growth without ceding management control. The Snapchat deal was first reported last August (previous post) and fits that profile very well, with Alibaba reportedly investing $200 million in the company. (English article; Chinese article) The investment would value Snapchat at about $15 billion, according to the reports.
Some quick math will show that Alibaba will get a meager 1.3 percent of Snapchat in exchange for this $200 million investment, which hardly qualifies as a strategic stake. Frankly speaking, Snapchat doesn’t really seem like a good strategic partner for Alibaba anyhow, since the company is an SNS service that allows users to share photos with each other. Its claim to fame is its unique function that makes shared photos disappear within seconds of being viewed by recipients.
By comparison the Snapdeal looks like it could have some more strategic potential, though the size of the stake still looks small. A local media report is saying that Alibaba is just one several companies that would like to invest in Snapdeal’s latest funding round worth $1 billion. (English article; Chinese article) The report adds the deal would value Snapdeal at about $5 billion, meaning the new investor group would get about 20 percent of the company. That means that if Alibaba is one of 4-5 investors in this round, its would receive 4-5 percent of Snapdeal in exchange for a $200-$250 million investment.
The deal would mark Alibaba’s first investment in India, which is quickly becoming a hot destination for Chinese tech firms. Alibaba-affiliated Ant Financial last month bought 25 percent of Indian electronic payments company One97. Snapdeal is a rising star in in the fast-growing India e-commerce market, behind leaders Flipkart and Amazon (Nasdaq: AMZN), which is why it’s looking for new investors right now. But as a homegrown player, the company’s founders are probably more interested in Alibaba for its money than anything else, which will limit the strategic potential of any investment.
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