Investors Ignore Big Internet M&A, Eye Alibaba Bank
In a sign of just how overheated M&A in China’s tech sector has become, 2 major purchases by e-commerce giant Alibaba (NYSE: BABA) and online travel leader Ctrip (Nasdaq: CTRP) are receiving scant attention from investors, even though they are worth nearly $1 billion combined. Instead, the big news grabber is another headline involving Alibaba, with word that the world’s second largest Internet firm has just become one of a handful of private Chinese companies to win new private sector banking licenses being awarded by Beijing. That development will see Alibaba and several partners open an Internet-based bank that will cater to smaller savers and borrowers, an area often neglected by the current field of big state-run lenders.
Before we examine the banking news more closely, let’s look quickly at the 2 big M&A deals that barely received any media coverage at all despite their large size. That’s because such deals have become far too common in the current climate where China’s biggest Internet firms have war chests with billions of dollars in cash and not enough places to spend their money.
We’ll begin with the Ctrip deal, which will see China’s leading online travel agent pay 3.05 billion yuan ($500 million) for about 100,000 square meters of space in a Shanghai commercial building. (company announcement) Ctrip said it will use the space for its own expansion, with a special focus on its fast-growing technology operations. The investment looks marginally positive to me, since commercial real estate is a relatively safe bet in Shanghai and the company will personally use the space to build its technology. Still, this isn’t really the kind of investment that would get investors too excited despite its large size.
Meantime, Alibaba is investing a similar amount, 2.8 billion yuan to be precise, for 15 percent of Beijing Shiji Technology Co, a creator of technology for the hospitality industry. (English article; Chinese article) Again, this investment, while large, doesn’t look too exciting because Alibaba will only get a small stake in the company. What’s more, Alibaba is currently a non-player in the highly competitive hospitality space and is unlikely to gain any significant revenue from the sector anytime soon.
Now that we’ve covered those 2 deals, let’s turn to the receipt by Alibaba and several other partners of a new banking license that they will use to open an Internet-based bank, called MYbank, with registered capital of 4 billion yuan. (English article) The new license was one of 2 just awarded by China’s banking regulator, with the other going to a group anchored by Shanghai-based conglomerate Juneyao.
The 2 new licensees join 3 others that received similar awards in July, including groups anchored by Shanghai conglomerate Fosun and Internet giant Tencent (HKEx: 700). (previous post) These 5 new banks are part of Beijing’s plans to liberalize a sector now dominated almost exclusively by state-run lenders. All 5 new banks will focus on lending to small and medium-sized private businesses, a growing area of China’s economy that is often neglected by the big state-run players.
Reflecting that focus, Alibaba’s new bank will accept maximum deposits of just 200,000 yuan and offer loans of up to 5 million yuan, both relatively modest sizes. It plans to use its huge e-commerce databases to help screen borrowers, negating the need for traditional loan officers in brick-and-mortar bank branches. The idea does look quite intriguing to me, providing a very good use for so-called “big data”, and could help the new Alibaba bank to quickly grow and become a major new financial institution.
Bottom line: Alibaba’s new Internet-based bank looks like an exciting prospect with big growth potential, while its latest major M&A deal looks less interesting and reflects the overheated state of Chinese Internet M&A.
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