TRAVEL: Latest Uneasy Travel Mates in Ctrip, Qunar Tie-Up

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Bottom line: The equity tie-up between Ctrip and Qunar is likely to be an uneasy one driven by necessity rather than desire to work together, and stands a 50-50 chance of ending in divorce.

Ctrip, Qunar get hitched … sort of

The year 2015 will go down in Chinese Internet history as the year of the uneasy partnership, as several pairs of former foes suddenly merged even as their outspoken heads refused to work together. The latest of those unions is seeing former bitter rivals Ctrip (Nasdaq: CTRP) and Qunar (Nasdaq: CTRP) get together in a quasi marriage that qualifies as the largest and also strangest union to date.

This particular union isn’t even really a true marriage, and instead is a very big equity swap that will see Qunar’s controlling stakeholder Baidu (Nasdaq: BIDU) get 25 percent of Ctrip. Ctrip will get a larger chunk of Qunar on a percentage basis, ending up with 45 percent voting interest in its former rival. (Baidu announcement; English article; Chinese article) Like the other odd marriages this year, this latest one looks set for troubles, and could stand a very real chance of divorce.

Shareholders certainly seemed to like the union that was engineered by Baidu founder Robin Li and Ctrip chier James Liang, both highly opinionated people who are unlikely to want to give up control of their empires. Ctrip and Qunar shares rose 22 percent and 8 percent, respectively, giving the pair market values of $13 billion and $5.6 billion.

The quasi-merged company would have a value of nearly $20 billion, which is roughly comparable to US travel giant Expedia (Nasdaq: EXPE). But the amount is just a quarter of the value for US giant Priceline (Nasdaq: PCLN), which also happens to be another major Ctrip shareholder after a June tie-up that allowed it take a stake of up to 15 percent in the Chinese company. (previous post)

We’ll look shortly at what’s driving this latest deal, but first let’s focus quickly on the deal itself. Most significantly, Ctrip and Qunar said they will become partners, rather than rivals, in cooperating across their broad range of travel products and services. The pair had reportedly discussed a merger or equity swap at least twice in the past, but each time the deal fell apart for undisclosed reasons. (previous post)

Profit-Challenged Qunar

So what’s different now that caused the deal to succeed this time? My guess is that Baidu is feeling growing pressure to start showing a profit at Qunar, reversing a string of net losses that has recently begun ballooning and nearly doubled to $132 million in its last reporting quarter. Much of that is due to stiff competition and Robin Li’s determination to gain market share at any cost.

Qunar hasn’t been Baidu’s only loss-making machine. The company is also believed to be making big losses from its Nuomi group buying site and newer take-out dining service. The big losses are part of Li’s strategy of using Baidu’s own big cash pot to quickly build up new businesses. But shareholders have shown growing impatience with that strategy and want Baidu to show it can get some profits from these big investments. That reality, more than anything else, was probably the major factor driving this deal.

This latest tie-up follows 2 other similar uneasy alliances this year. The first of those saw China’s top 2 private car services unite at the start of the year to form Didi Kuadi. The other occurred earlier this month when leading group being sites Meituan and Dianping announced a similar union. (previous post) In all 3 cases, partners were driven together by pressure from investors growing impatient at thin profits in some cases and big losses in others.

This kind of merger of equals is almost always destined for trouble, since the marriages are usually driven by market forces rather than real desire to cooperate. In the end, such unions usually end with the chief of one of the former companies leaving, but only after a stormy period when the 2 former heads try to work together. I expect that will be the case with all 3 of these uneasy marriages, and in the case of Ctrip-Qunar there’s probably still at least a 50-50 chance that this quasi union will ultimately end in divorce.

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