INTERNET: Tuniu Travels To Taiwan, 58.com Decorates
Bottom line: New smaller acquisitions by 58.com and Tuniu look like smart, focused moves to complement their existing business, and should quickly help to improve their top and bottom lines.
A couple of smaller acquisitions are in the headlines today, with word that online travel agent Tuniu (Nasdaq: TOUR) and Internet classified ad site 58.com (NYSE: WUBA) have both made strategic purchases that look like thoughtful, well-targeted moves. In this case Tuniu has announced it will buy 2 travel agencies that will boost its exposure to the Taiwan travel market, while 58.com is buying a site that specializes in home interior decoration products.
Both deals were relatively small, worth less than $40 million, which is generally the kind of purchase I like to see as it indicates a more focused approach to M&A. That contrasts sharply with the much bigger recent purchases by China’s largest Internet companies, most notably by Alibaba (NYSE: BABA) and Baidu (Nasdaq: BIDU).
Of course it’s worth pointing out that the Internet titans have much more cash than smaller companies like Tuniu and 58.com, and therefore are under far more pressure to make large purchases. Still, I do expect that these smaller purchases are far more likely to become strong contributors to their acquiring companies’ top and bottom lines, and will pose far fewer integration challenges than the bigger deals.
All that said, let’s begin with the 58.com deal, which appears to be the larger of this pair of smaller acquisitions. According to its announcement, 58.com, often called the Craigslist of China, said it will pay $38 million in cash for a minority stake in To8to, an online interior decorating site. (company announcement)
Like 58.com’s own site that hosts a wide range of classified ads for most major Chinese cities, To8to is also a listing service for home interior decorating products. This particular purchase comes just a week after 58.com announced another larger strategic acquisition, buying real estate listings site Anjuke for what looked like a relative bargain price of $267 million. (previous post)
Despite the small size of this latest deal, investors seemed to welcome the news by bidding up 58.com’s stock by 6.4 percent in the latest trading session. The shares are up 18 percent over the last month since the announcement of these 2 deals, showing investors like 58.com’s relatively cautious, targeted approach to M&A. It also helped that the company released relatively upbeat quarterly results over the weekend, and was one of the few Chinese Internet firms that didn’t forecast a business slowdown in the current quarter. (results announcement)
Next let’s look at Tuniu, which didn’t give a price for its acquisition of majority stakes in the 2 travel agencies, one based in the northern coastal city of Tianjin and the other in Hangzhou, a scenic city not far from Shanghai. (company announcement; Chinese article) The regional nature of these 2 travel agencies means they’re both probably more traditional shops rather than online-focused sellers of air tickets and travel packages.
In its announcement, Tuniu is clear that its motivation for the move is both agencies’ strong presence in the market for tour packages for mainland Chinese visiting Taiwan. It says both companies are leaders in their respective markets, and that Taiwan tours accounted for 70 percent of their gross bookings last year. The Taiwan market is indeed a booming area for Chinese tourism, and this move looks like a good small acquisition for Tuniu, probably costing it less than $30 million.
Investors were less impressed with the acquisition, with Tuniu shares unchanged on the day of the announcement. The stock is still up about 25 percent from the price of its IPO last year, though it has lost about half of its value from a post-IPO peak last August. Its current level is probably more realistic following a recent correction for many Chinese Internet stocks after a big rally last year. This kind of small acquisition strategy should serve the company well going forward, and could eventually make it an acquisition target itself for a bigger firm like Ctrip (Nasdaq: CTRP), which is already a minority stakeholder.
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