Note to readers: This article was written and published on Tuesday, March 13, in Hong Kong’s Economic Journal, but I’m just posting it today (Thursday) on my blog as part of my agreement with them.
It’s not often that mergers happen among publicly traded companies in China’s crowded Internet space, so I’m not even sure where to begin in discussing the just-announced deal that will see leading online video site Youku (NYSE: YOKU) buy rival Tudou (Nasdaq: TUDO) to form an undisputed domestic leader in online video. (company announcement) On paper and in theory the deal sounds quite attractive, combining China’s biggest and second biggest video sharing sites in an interesting marriage between Youku’s more corporate style and Tudou, which has a much more entrepreneurial background under the leadership of outspoken founder Gary Wang. But the reality is much less interesting, with this newly merged company still a relatively small entity likely to face numerous challenges going forward. For Tudou shareholders at least, the deal looks quite sweet. After seeing Tudou shares sink steadily to lose about half of their value following the company’s initial public offering last August, investors who had enough patience to hold on will get a rare premium of 38 percent to the company’s original IPO price, and an even juicier 160 percent to its last closing price before the deal was announced. Investors bid Tudou shares up by nearly that amount in Monday trade after the deal was announced, in a jump that should surprise no one. But perhaps more telling, Youku shares also rose 27 percent, a jump partly due to excitement about this new industry leader but also, in my view, because many believe the new company could itself soon become an acquisition target. At the end of the day, the deal itself is relatively tiny, valuing Tudou at just over $1 billion even after the big premium. That, combined with Youku’s own market value of $2.85 billion, means the entire merged company will be worth just under $4 billion — hardly a figure to get anyone too excited, and still trailing most other big Chinese Internet names like Sina (Nasdaq: SINA), NetEase (NTES) and well behind Internet search leaders Baidu (Nasdaq: BIDU) and Tencent (HKEx: 700). Youku now controls about 22 percent of China’s online video market and Tudou another 14 percent, meaning the combined company will still control less than half of this highly fragmented space. Both Youku and Tudou are also currently losing money, though this deal could help them move to profitability more quickly than each might have done as an individual company. Still, both companies’ latest quarterly results are hardly reassuring. Youku saw its loss actually widen 32 percent in the fourth quarter from a year earlier, not the best sign for a company aiming for profitability. Tudou, meantime, also saw its fourth-quarter loss balloon ten-fold from a year ago, after it notched an unexpected profit in the third quarter. The situation doesn’t look set to improve anytime soon, with a looming advertising slowdown for the broader Internet market also likely to hurt video sites in general, since advertisers looking for the most effective channel for their money are likely to skip those sites in favor of more effective platforms like Sina’s popular web portal and Baidu’s sector-leading search page. From the perspective of someone who has watched China’s Internet space for years, I have to say that I like this deal from a historical perspective as it represents one of the largest friendly mergers to date of two companies that strongly complement each other. But from the perspective of an investor, I honestly can’t get too excited about this deal, since both Youku and Tudou are ultimately just little players in China’s huge Internet realm that will quickly find that one small potato plus another small potato still equals a small potato. Furthermore, both companies have a number of factors working against them, including bottom lines moving in the wrong direction, potential integration issues of 2 very different corporate cultures, and a looming slowdown in advertising, their key revenue source. If I were a gambling man, I would bet that this new merged company will face a number of issues in the next year, but could ultimately still reward investors if it gets acquired by an even bigger company in the next 2 years, much the way that Google (Nasdaq: GOOG) purchased Youtube.
Bottom line: The Youku-Tudou merger is notable for setting a precedent, but will ultimately still create a small Internet player most likely to get purchased itself in the next 2 years.
Related postings 相关文章:
◙ Regulator Eyes Online Video in Ad Crackdown 广电总局或限制视频网站广告
◙ Tudou-Sina Tie-Up: More to Come？ 土豆网联手新浪
◙ Tudou Surprises With Profit, Licensing Deal 土豆网意外扭亏为盈视频分享市场的好兆头
So, when is the dropping of the .com suffix from a company’s name big news? The answer: When you’re an Internet veteran like NetEase (Nasdaq: NTES), whose new announcement that it plans to formally change its name from NetEase.com to simply NetEase Inc will fuel expectation that the company is nearing a spin-off of its portal business, its oldest asset since it originally went public in the late 1990s. In a decidedly low-key announcement, NetEase said it has scheduled a rare extraordinary general shareholder meeting for March 29, at which owners of its stock will be asked to approve the name change. (
The latest sign of an advertising slowdown on the Internet is coming from the high-flying Phoenix New Media (NYSE: FENG), whose investors did some profit-taking in Tuesday trade before the company announced impressive fourth-quarter results that saw its ad revenue double even as it predicted the rate of increase would slow quite a bit in the first quarter. (
There’s an interesting report in the domestic media saying popular online men’s fashion retailer Masa Maso is planning to slash its advertising budget by half this year, a move that will probably be repeated throughout the industry as many e-commerce firms, most of them losing money, go into cash conservation mode in their struggle to survive. Of course that also bodes poorly for companies that depend heavily on such ad spending for their revenue, from search leader Baidu (Nasdaq: BIDU), which gets nearly all its revenue from advertisers, to web portals like Sina (Nasdaq: SINA) and Sohu (Nasdaq: SOHU) and video and social networking sites likes Youku (NYSE: Youku) and Renren (NYSE: RENN). Let’s look at the report itself, as it does contain some details that show how the situation could play out. It cites a Masa Maso executive saying the company began slashing its ad spending in the second half of last year as part of a strategy to focus more on customer retention, in what looks like a roundabout way of saying it finally realized it had to cut costs and become profitable or risk going bankrupt. (
An online discount retailer named Vipshop has taken an early lead in the race to become the first Chinese Internet company to list in the US this year, while the more established Sohu (Nasdaq: SOHU) has set up a new headquarters for its popular video service, laying the groundwork for its own US IPO for the unit. Meantime in other news for US-listed tech firms, IT outsourcing company Camelot Information Systems (NYSE: CIS) has been hit by a second class action lawsuit over a big drop in its share price, in what looks like another major headache for the company. Let’s look at Vipshop first, a relatively small company that is taking the bold move of being the first Chinese web firm to file for a US IPO this year, with plans to raise up to $125 million. (
A day after social networking site Kaixin released some limited financial information hinting it may soon restart its stalled IPO process, its chief rival, publicly listed Renren (NYSE: RENN) has released its own preliminary fourth quarter results telling investors not to expect a profit anytime soon. The news sent a chill over Renren stock, which tumbled by more than 6 percent in after-hours trading. In fact, the preliminary announcement doesn’t look all that bad in terms of top line growth, despite the gloom profit outlook. (
Five months after buying a 9 percent stake in Tudou (Nasdaq: TUDO) shortly after its New York IPO, Sina (Nasdaq: SINA) has just announced its first tie-up with the online video site, China’s second largest, in what looks like the first of more to come, perhaps ending with the biggest tie-up of all, an outright acquisition. Under their first tie-up announced late on Friday, the 2 companies have launched a platform allowing sharing of Tudou videos on Sina’s popular Weibo microblogging platform. (
I want to start today with a silly story that shows that despite the recent confidence crisis for US-listed Chinese stocks, anyone with a good China story to tell can still earn a fast buck on Wall Street. The story I’m referring to involves battered video sharing site Ku6 Media (Nasdaq: KUTV), which has announced a tie-up with YouTube that will see the global giant start a new channel to bring Ku6’s content to a global audience. (
The search-blocking wars that gripped the e-commerce sector in the second half of last year have spread to the online video space, where Tudou (Nasdaq: TUDO) and Sohu (Nasdaq: SOHU) video, the second and third largest operators, have blocked their content from a video search engine operated by top player Youku (NYSE: YOKU). (
