A new overseas deal by leading online travel agent Ctrip (CTRP.US) is drawing yawns from investors, reflecting the very real fact that Chinese Internet firms have far too much cash in their coffers and no place to spend it.
This particular dilemma is one that most western companies would love to have, since excess cash can be used for not only M&A and organic expansion, but also to pay dividends or buy back shares. But in the case of Chinese companies, a big chunk of the cash has been raised in a series of massive bond and share offerings over the last two years, meaning it would be strange to turn around and return the money to investors through a dividend or share repurchase.
Ctrip certainly isn’t the only company with too much cash on its hands, which was probably a major driving factor behind its newly announced purchase of a majority stake in British travel services provider Travelfusion. The Chinese firm raised US$500 million in a convertible bond issue in late 2013, and also sold 10 percent of itself to US peer Priceline (PCLN.US) last summer. As a result, it had nearly US$2 billion in its coffers at the end of last year’s third quarter, according to the company’s latest report.
That amount may sound large, but it’s actually quite normal and even small compared to some of China’s other Internet companies that have made similar bond offers. Leading search engine Baidu (BIDU.US) and social networking giant Tencent (00700.HK) had a hefty US$8.4 billion and US$3.4 billion in cash, respectively, at the end of the third quarter. And recently listed e-commerce leader Alibaba (BABA.US) had a staggering US$18 billion at that time, according to its maiden earnings report issued last November.
With all that cash sloshing around their accounts and easy access to billions more in additional credit, companies like Ctrip, Alibaba and Baidu are rapidly running out of targets to buy. Attractive major targets at home have largely been purchased by now, and Ctrip was even reportedly in talks at one point last year to merge with its biggest rival Qunar (QUNR.US). But such a deal never happened, partly because Qunar’s majority owner Baidu hardly needed the cash.
All that said, let’s take a quick look at Ctrip’s latest purchase, which looks similar to many other small overseas acquisitions we’ve seen by major Chinese Internet firms these days. Ctrip didn’t provide any financial details, which means the deal was probably quite small, perhaps worth US$20 million or less. For the record, Travelfusion is an aggregator of low-cost travel services.
Strategically speaking the deal looks reasonable enough, as it will move Ctrip into the area of budget travel where it currently doesn’t have much expertise. The move will also provide ties to the European travel market if Ctrip decides to expand there later. Ctrip’s tie-up with Priceline last summer had similar overtones, adding even more cash to Ctrip’s coffers after it sold 10 percent of itself to the US budget travel specialist as part of the deal.
Alibaba, Tencent and Baidu and a number of other cash-rich mid-sized Chinese Internet firms have all made similar small overseas acquisitions and investments over the last year, none of which has particularly excited investors. The same was certainly true with Ctrip’s latest announcement, which had zero effect on the company’s stock in after-hours trading after the news came out.
I can’t really find too much fault with Ctrip or any other Chinese Internet company for not being more aggressive with their cash, since most have little or not experience overseas and would be foolish to start making big purchases in unfamiliar markets. But they really do need to do something with their money, or risk criticism like that leveled at Apple (AAPL.US) and China Mobile (00941.HK; CHL.US) for hoarding too much cash.
All that said, this recent wave of minor overseas acquisitions could gradually build up to one or two major offshore deals in the next year or two as the Internet companies become more familiar in such markets. But if I were advising them, I would suggest they consider the ground-breaking move of paying some dividends, which could win them kudos not only from their core followers but also from fund managers that specifically target dividend-yielding stocks.
Bottom line: Ctrip’s latest M&A move reflects the growing scarcity of good acquisition targets for cash-rich Chinese Internet firms, which could pressure them to pay dividends or launch share buy-backs.
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