Tudou, Youku: Stormy Marriage Ahead 优酷土豆“联姻”：想说爱你不容易

By newsdoug on March 15, 2012

After an initial bout of “irrational exuberance” in response to the merger announcement between leading online video sites Youku (NYSE: YOKU) and Tudou (Nasdaq: TUDO) earlier this week, investors are waking up to the reality that this new combined company is indeed still just a small potato, and potentially a costly and turbulent one too. The latest comments from Tudou — whose investors will get a hefty 160 percent premium for their stock — are hardly reassuring, and could hint at the turmoil ahead for these 2 companies with very different corporate cultures. Investors who bid up Youku stock 27 percent the day after the initial announcement seemed to be waking up to the new reality on Wednesday, when Youku stock fell 8 percent. That said, its shares are still well ahead of their $25 price just before the merger was announced, closing on Wednesday at $28.79. This marriage will face a number of major obstacles, including a slowing ad market that could compound both companies’ drives to become profitable. But perhaps one of the biggest challenges will be combining these 2 very different corporate cultures. Whereas Youku is much more corporate in its style under the leadership of CEO Victor Koo, Tudou is much more entrepreneurial under the leadership of outspoken founder Gary Wang. The companies didn’t say how much of a role, if any, Wang will play at the new company. But I suspect he may try to stay at the company and run Tudou as his own fiefdom, which could cause problems over the longer term. His latest comments seem to point in that direction, with Wang being quoted in the Chinese media as saying there will be no layoffs at Tudou after the merger and that, in fact, all employees will even get pay raises. (Chinese article) I understand that whenever there’s a merger like this, it’s natural for employees to be worried about job security at the acquired company — in this case Tudou, whose market cap was about a quarter of Youku’s when the deal was announced. But at the end of the day, one of the main reasons for this kind of merger is exactly the kind of cost savings that both companies hope to achieve through new synergies, and one of the most important of those is by eliminating overlapping jobs. It’s bad enough that Wang is making this kind of comment, regardless of his good intentions, but looks outright irresponsible for him to declare that everyone will get pay raises as well, further boosting costs for the combined company. I suspect Wang held little or no consultations with Victor Koo before making his comments, which came in an internal e-mail, but instead took his actions unilaterally to show his new boss that he was still in control of Tudou. Look for more of this kind of turbulence in the months ahead, both in the management office and in Youku Tudou’s stock price, as this new small potato tries to integrate 2 very different cultures.

Bottom line: Comments from Tudou founder Gary Wang hint at a difficult integration with Youku, boding poorly for the new company’s performance over the next year and its stock.

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