Yahoo’s China Buy: What’s The Strategy?
If Yahoo’s (Nasdaq: YHOO) new chief executive Marissa Mayer wanted to confuse the market about her China strategy, she’s doing a good job with the company’s latest move in the market. Just 3 months after shuttering its China email service, in what looked like the prelude to a withdrawal from the market, Yahoo has announced its purchase of a Chinese R&D startup. (English article) In all fairness, Mayer has only been on the job for a year and these kinds of little strategic moves are relatively common for incoming executives. But this kind of mixed signal could also auger a confused strategy in China, similar to Yahoo’s previous strategy that ultimately led to its failure twice in the complex market.
According to the latest reports, Yahoo has purchased the Chinese startup Ztelic, which makes software that helps users analyze activity on social networks. The deal looks a bit insider-ish, since Ztelic’s founder Hao Zheng was formerly the head of Yahoo’s R&D labs in China. Hao’s background also includes stints at the Asia unit of Zynga, the developer of games for social networks.
The reports say that Hao works with a team of 8 engineers, indicating this deal is quite small, probably worth less than $5 million. The purchase is Yahoo’s 19th acquisition since Mayer took control of the company a year ago, as she places a stronger focus on research and development.
This acquisition is the latest move in a long and complex history for Yahoo in China. The company was one of the earliest western firms to enter the Chinese Internet market about a decade ago with its purchase of an online search service that was the biggest in China at that time. But the site quickly lost market share under Yahoo management and is now an insignificant player. Many attributed Yahoo’s failure to its use of western business models and practices instead of hiring more local talent and crafting a China-specific strategy.
The company later largely abandoned the China market when it purchased 30 percent of e-commerce leader Alibaba in 2005 for $1 billion and let Alibaba operate most of its Chinese assets. That partnership was a financial success due to Alibaba’s rapid rise, but failed to provide Yahoo with any strategic value due to regular clashes between the 2 companies’ top executives. Yahoo is now in the process of selling its Alibaba stake.
After its second failure with Alibaba, Yahoo continued to operate several smaller China assets, including its popular email service. But it announced in April that it was shuttering that service, which followed a similar announcement in 2012 that it was closing its China-based music service. (previous post) Those moves prompted me to predict that Yahoo could soon withdraw from China completely, as Mayer focused on turning around its core US operations.
This latest China purchase, while small, seems to indicate that Mayer has no intention of giving up on China just yet. Given her fondness for M&A, I wouldn’t be surprised to see the company make a much larger purchase in China within the next year, with Hao perhaps eventually ending up as the company’s China chief. That would look similar to the strategy followed by search rival Google (Nasdaq: GOOG), which also named a man with a strong R&D background, Lee Kai-fu, as its original head in China.
Based on this initial purchase, Yahoo appears to be focusing its newest efforts on the social networking space. If that’s the case, perhaps we could see the company purchase or invest in one of China big social networking sites like Renren (NYSE: RENN) or Kaixin in the year ahead, or in a game developer with a similar focus to Zynga’s.
Bottom line: Yahoo’s first China purchase under its new CEO sends a confusing signal about its intentions for the market, but could auger a focus on Chinese social networks.
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