INTERNET: After Youku Tudou Bid, Weibo Next on Alibaba’s Menu?

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Bottom line: Alibaba could make a bid for Weibo in the next 6 months, in a deal that would share many similarities with its newly launched blockbuster offer for Youku Tudou.

Weibo next on Alibaba’s M&A menu?

China’s Internet is buzzing over the industry’s biggest acquisition to date with Alibaba’s (NYSE: BABA) offer for Youku Tudou (NYSE: YOKU), but that deal could presage an even higher-profile one that sees the fading Twitter-like Weibo (Nasdaq: WB) follow a similar fate. Or even more intriguing, Alibaba could make a potential play for Weibo’s parent and founder Sina (Nasdaq: SINA), in a move that would spell the end for China’s leading web portal and one of its oldest Internet firms.

There would be many similarities between such a deal and the Alibaba offer for leading online video site Youku Tudou deal announced late last week. Investors appear to also believe such a deal could possible, based on stock reactions to the blockbuster deal that would see Alibaba pay $4.6 billion for the more than 80 percent of Youku Tudou it doesn’t already own. Weibo shares leaped 13.4 percent after the deal was announced, second only to Youku Tudou’s own 22 percent jump.

All that said, let’s review some of the many similarities between Youku Tudou and Weibo that make an Alibaba bid for the latter seem almost inevitable. For starters, both companies are similar in size and are easily affordable by Alibaba using its cash pot that totaled $23 billion at the end of the second quarter. Even after their big jumps on Friday, Youku Tudou and Weibo were worth relatively affordable sums of about $5 billion and $3.2 billion, respectively.

Both Weibo and Youku Tudou have also been historically challenged by a lack of profitability, underscoring the fact that neither is suited to life as a stand-alone entity and needs synergies from a bigger parent. US-based Twitter (Nasdaq: TWTR), which was the original model for Weibo, is quickly discovering the same reality and recently announced plans to cut more than 300 jobs in a bid to improve performance.

Youku Tudou has never been able to find a formula for profits, and instead seems to be moving in the other direction as it forks out big money to develop original content and buy rights to expensive Hollywood films. The company posted a $55 million net loss in its latest quarter, more than double the figure a year ago. Weibo was a similar loss-making machine for most of its shorter life, though it did manage to finally post a modest $4.2 million profit in its latest quarter.

Filling a Void

Weibo and Youku Tudou also fill important voids in Alibaba’s bigger ambitions to become a diversified Internet giant. Youku Tudou will complement Alibaba Pictures (HKEx: 1060) as Alibaba tries to build up its entertainment business. Likewise, Weibo could complement Alibaba’s own struggling Laiwang social network service (SNS), which has failed to gain any traction despite some big initial hype at its inception 2 years ago.

Then there are similarities in ownership. Before making its headline bid last week, Alibaba and an affiliate previously purchased nearly 20 percent of Youku Tudou last year for $1.2 billion. Similarly, Alibaba bought 20 percent of Weibo for nearly $600 million in 2013, and later said it would increase the stake to 30 percent.

Finally there are the similarities in chief executives. Unlike many Chinese Internet chiefs who treat their companies as personal fiefdoms, both Youku Tudou CEO Victor Koo and Weibo Chairman and Sina CEO Charles Chao are very practical people. Neither has the same personal attachment to his company that often thwarts many other mergers on China’s Internet. Instead, each of these leaders is more of a businessman who generally tries to do what’s best for shareholders rather than protecting his own position.

All of those similarities certainly make an Alibaba bid for Weibo look like a strong possibility, and I wouldn’t be surprised to see such an offer in the next 6 months. Even more intriguing would be an Alibaba bid for Sina, which is Weibo’s controlling stakeholder. That would come with a similar price tag of about $2.7 billion, based on Sina’s latest market value, and would at once give Alibaba control of China’s most respected web portal as well as Weibo.

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