Technology giants Tencent Holdings (00700.HK) and Alibaba Group are likely to snap up more online games and apps producers in the United States as they intensify their rivalry to expand their online empires, a top official at Ernst & Young said.
“Alibaba is about to float its shares [in the US], while Tencent is going to issue bonds of US$5 billion [over the next year]. Part of the capital they raise is definitely for acquiring more assets,” Bernard Poon, managing director and leader in transaction advisory services in Hong Kong, told EJ Insight.
Domestic M&A activities will further consolidate China’s technology industry, while the US is the top choice for buying new assets, particularly firms related to online games and apps, Poon said.
“They want to enter the US market because the e-commerce and internet companies there are well established. They want to better understand the operations in the US market,” he said.
The two rivals can gain more technological know-how, improve their cost structures and expand their sales networks by acquiring more assets, he added.
In October 2013, Tencent president Martin Lau said the company invested over US$2 billion in overseas markets, a large part of which went to online gaming start-ups. Its most recent deal was a 28 percent stake in South Korean games maker CJ Games.
Domestically, Tencent’s most notable acquisitions are a 15 percent stake in e-commerce site JD.com; a 20 percent stake in Dianping, China’s leading restaurant rating and reviews website; a 10 percent stake in logistics firm China South City, and a 36.5 percent stake in search engine rival Sogou.
Alibaba is also following the acquisition path. It is reportedly in talks to acquire Greentown Football Club and Greentown Hospital in China.
In the recent past, it bought 16.5 percent of Youku Tudou, one of China’s biggest Internet video companies, 82 percent of mapping service AutoNavi, 60 percent of TV and movie studio Chinavision, 54.3 percent of data firm Citic 21CN, which is a joint investment with Yunfeng Fund, and 18 percent of microblog operator Sina Weibo, among other assets.
Overseas, it invested US$250 million in US ride-sharing app developer Lyft and US$215 million in US-based video messaging app Tango, both this year.
The two companies were launched within months of each other in 1998 and 1999, looking to take advantage of the growing number of internet users in China.
High hopes for M&A deals
Tencent and Alibaba are by no means the only Chinese firms on the hunt for takeovers. E&Y’s latest biannual report on global firms’ confidence in the capital market shows that China’s expectation for M&A deals stands at a two-year high.
Most firms are optimistic that they can complete the deals in the coming 12 months, and regard India, US and Russia as China’s top outbound M&A destinations.
India has always been a popular place for Chinese firms to do small to medium scale M&As. Most China firms tend to buy medium-sized firms in India, especially in clean technology, pharmaceuticals, clinical products, and information technology, Poon said.
“The number of deals is high, rather than the investment volume,” he said.
Surprisingly, Russia ranks third among the top investment destinations, while the country was not even in the top five in the past two years.
“Chinese firms will probably like to invest in energy and agriculture-related sectors, like forestry and fertilizers,” Poon said.
The survey, which interviewed more than 1,600 top executives in 54 countries, also shows that Chinese firms on the quest for making deals are mostly in the power and utilities, mining and metal, and technology sectors.
“Resources are limited. Many firms want to find a good timing [to buy assets]. From the survey results, they think current valuations are more reasonable compared with half a year ago, so they now have a bigger desire to make an investment,” Poon said.
Target companies are also more willing to lower their prices to be able to close deals than two to three years ago, he added.
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