INTERNET: Alibaba, Tencent In Rare Tie-Up With Taxi App Merger
Bottom line: The merger of Didi and Kuaidi taxi apps could mark the start of a new round of consolidation between non-core assets of China’s major Internet firms.
After 2 years of making nonstop headlines due to their intense rivalry, leading taxi apps Didi Dache and Kuaidi Dache are leading the news once more with a new and quite unexpected merger. But equally interesting was the fact that this merger also marked an unusual shift in the equally bitter rivalry between Internet titans Alibaba (NYSE: BABA) and Tencent (HKEx: 700), which are Kuaidi’s and Didi’s main backers, respectively. That element of the story has huge implications, as it shows that China’s “Big 3” Internet companies of Tencent, Alibaba and Baidu (Nasdaq: BIDU) may be willing to consider similar mergers of their non-core assets, paving the way for a new and much-needed round of consolidation in areas like online video, mapping and group buying.
All of that said, it’s probably important to note that this new merger between Didi and Kuadi is probably being driven first and foremost by the 2 companies’ CEOs, who both feature prominently in the official announcement. But the deal could never have happened without the approval and perhaps even encouragement from Alibaba and Tencent, which are major backers of both companies and have provided strong financial support during their intense rivalry over the last 2 years.
Under terms of their merger, the 2 companies will continue to separately run their own brands, with Kuaidi chief Dexter Lu, also known as Lu Chuanwei, and Didi chief Wei Cheng serving as co-CEOs of the new entity. (English article; Chinese article) The combined firm is expected to have a market value of about $6 billion, and the merger could pave the way for an IPO in the next year. The pair are 2 of China’s earliest players in the market, and collectively control the vast majority of business.
I wrote about this pair of companies nearly 2 years ago when they first splashed into the headlines, and mentioned them again when reports emerged in mid 2013 that they might be tie-up talks. (previous post) But other than that, I’ve largely avoided writing about them, not because they weren’t interesting but instead because they became a common fixture in the headlines due to their stiff competition.
While consumers and taxi drivers were happy about the rivalry, most of the headlines were relatively minor and involved promotions both companies were holding to win market share. Also in the headlines were the growing spats between the companies and city governments that worried about safety and other issues as the taxi apps exploded in popularity. But apart from the investments by Alibaba and Tencent, none of the news was particularly interesting from a financial perspective.
This new merger spotlights the reality that many of China’s Internet spaces are still quite fragmented and money-losing, despite big investments from the “Big 3” BAT firms. This merger between Kuaidi and Did should help the pair quickly become profitable by eliminating their hyperactive rivalry, and hints that Tencent, Alibaba and Baidu might consider other mergers between their non-core assets to foster consolidation and improve profitability.
The most notable area for such mergers is online video, since nearly all of China’s major sites are now losing money. Group buying sites are another area that could benefit from consolidation, and so could other areas like mapping. We might also see companies like Alibaba and Baidu combine their assets in areas like games, where Tencent is the current dominant force.
I’ve long argued that China’s top Internet companies have become far too diverse following recent buying sprees, and need to be careful or risk losing their focus and profitability. Thus this kind of consolidation of their non-core assets should come as a welcome development, and could lead to the creation of some interesting new publicly listed offerings for investors. The new Kuaid-Didi offering will be the first of those, and could be an attractive option when it makes its IPO.
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