2015 was a historic year for mergers and acquisitions. According to the Wall Street Journal, a series of mergers and acquisitions (M&As) at the end of 2015 pushed the global volume of M&As to USD 4.304 trillion as of December 3rd, which broke the latest record from 2007.
China’s Internet companies contributed USD 169 billion to this number according to Dealogic. Starting with the Didi-Kuaidi merger in February, the Chinese tech industry has seen mergers between top companies in almost every niche market throughout the year.
This kind of merger between top players used to be rare in the Chinese market. Before the Didi and Kuaidi merger, the only case was that of video streaming websites Youku and Tudou, which were acquired by Alibaba in October.
Why did mergers between top tech companies happen so frequently in 2015?
Both the change of business patterns in the internet industry and the online-to-offline (O2O) business transition play a significant role in the process. But more important is the capital flow of established tech companies. Baidu, Alibaba, and Tencent, known as BAT, are starting to invest heavily in startups as a strategic move. Meanwhile, existing venture capital investors are exerting their influence on on startups. All of these individual cases reflect the breakneck growth of the tech industry in China in the past couple of years.
1. Welcome to the real world: the hardship of O2O
Ever since China connected to the Internet in 1994, we’ve seen various models of Internet businesses appear during the past three decades. The centre of the Chinese online community has shifted from news portals, to search engines, then e-commerce platforms and finally to social networking sites.
Going along with this shift, internet companies in China eventually constructed a virtual society. China’s IT giants, the BAT companies, happen to represent the three different stages: Baidu represents the search engine phase, Alibaba represents the e-commerce phase, and Tencent represents the SNS phase.
However, in 2013, Chinese internet companies began to switch their focus to the offline world. The term online-to-offline, or O2O, became trendy in the Chinese tech industry in 2014. According to Baidu Index (a similar tool to Google Trends), searches for O2O doubled from 2013 to 2015.
Many early-stage companies rose up during the transition. Didi and Kuaidi, which used to be China’s top ride-hailing companies, were both founded around late 2012 to early 2013 and soon became the dominating market leaders of the sector within a year.
Other companies like Meituan jumped into the competition in other ways. As a survivor of the previous brutal battle between group buying companies, it chose to expand to food delivery at the end of 2013 and then other on-demand businesses such as house cleaning earlier this year.
But O2O is a pricey business. Firstly, it involves great expenditure on personnel. In China, connecting a business to a platform is normally done by a massive business development team. It was revealed that before the merger between Meituan and Dianping, Meituan alone had a local business development team of about 10,000 people. As of September 2015, Facebook only had 11,996 employees in total.
Meanwhile, O2O platforms are very similar — to users, one food delivery app is the same as another. The similarity of these O2O platforms made it less likely for businesses and users to foster a loyalty to a certain platform, which then triggered massive campaigns and price wars.
Platforms had to burn millions of dollars to keep up with each other in the fierce competition. Qunar, for example, literally exchanged its growth in the market for a heavy loss. In the third quarter of 2014, when the competition between Qunar and Ctrip was at its most intense, Qunar’s year-on-year growth in net loss was 1060%, ten times its growth in revenue, which was 107.8%.
With their fear of lagging behind competitors, companies were trapped in a dilemma: though everyone was clear about the unsustainability of price wars, no one dared stop first. The ongoing price war between O2O platforms then became the straw that broke the camel’s back.
“Chinese internet companies have some common understandings that finally lead to the mergers. The first is that price war isn’t sustainable,” Wang Lixing, general manager of China Renaissance, financial advisor for three of the four biggest mergers, said in an interview with Caixin this month.
In 2014, many sectors saw a deadlock: no one can see the possibility of defeating others in the short term while millions of dollars were still being spent on promotion every day. At the end of 2014, Didi and Kuaidi’s market shares were still close to a draw, according to IT industry research group Analysys International.
Though cash supplies from investors keep the leading players alive in the market, all were aware that the cash-burning was meaningless — users would simply switch to the platforms that had more subsidies while investors became more prudent as returns failed to meet expectations. Everyone looked forward to getting out of this vicious cycle. Ceasefire and peaceful collaboration then emerged as a better option.
2. Change in strategy from IT giants
Meanwhile, the established tech companies in China, represented by BAT, were changing their strategies to adapt to the new trend.
BAT’s strategy used to be to copy emerging products to nip potential competitors in the bud. With abundant resources, it was easy for the big tech companies to duplicate a new product and even develop a better version of the same thing. Talkbox, which claimed to be the first voice IM tool, got over one million downloads in three days when it first launched on Apple’s app store in 2011. It was, however, forced to withdraw from Chinese market when Tencent’s WeChat launched its in-app voice messaging function.
“But after the public conflict between Qihoo 360 and Tencent in cyber security, the public hoped these established companies would adopt a more open attitude. Under this rising pressure, the companies began to transform into platforms and develop an open ecology. Henceforth, external investment and acquisition replaced internal investment,” analyst Yin Sheng wrote in an analysis for Bloomberg Businessweek.
Under this momentum, BAT began to invest outwards. According to Bloomberg, BAT alone invested in over 200 tech companies worldwide in the past few years.
Investments from the BAT added fuel to the previous cash-burning war between O2O platforms. Tencent, for instance, invested USD 15 million in Didi Dache in April 2013 and then participated in its next two rounds of funding — which amounted to USD 800 million — in the following year.
“At first, Cheng Wei (CEO of Didi) asked for a budget of RMB eight million from Tencent to promote WeChat Payment [with coupons] on Didi. But Tencent thought that wasn’t enough and gave Didi RMB 15 million instead,” Zhu Xiaohu, general manager of GSR Ventures and early investor in Didi told Tencent Tech in an interview in March.
But more importantly, BAT aimed to construct a product ecology. During this process, they used startups to compete against each other. For example, the investment from Tencent came with a bridge to WeChat, China’s largest social network with about 570 million users, according to recent data. Didi’s partnership with WeChat Payment was a classic case of reciprocal relations between startups and established companies.
“Tencent gave RMB 15 million as budget for a three-week campaign but it ran out within half a day. Nobody imagined that subsidies can work so well and Tencent realized it was really helpful to WeChat Payment,” Zhu said.
Apart from supporting startups in the competitions in the niche market, BAT also acted as direct participants in the mergers in 2015. Ctrip’s acquisition of Qunar was also conducted via an exchange of shares with Qunar’s primary shareholder Baidu, instead of trading with Qunar directly.
BAT are pertinent to most significant M&A cases in the Chinese tech world in 2015. The frequent mergers in the niche market may possibly be a sign of BAT’s intention to reorganise the market structure in each sector and stop wasting resources on cash-burning wars. In the process, these less prominent companies were actually acting as agents for BAT.
3. Venture capitalists also play a significant role
Another significant player in these M&A cases is the venture capitalists. Pressure from early investors is one of the major reasons why many entrepreneurs ended up collaborating with their rivals or even selling their company to tech mammoths.
Sequoia Capital, early investor in both Meituan and Dianping, was reported to be one of the major pushers of the merger between the two companies. From an investor’s perspective, the integration of two companies means that Sequoia Capital will not only stop burning its money to compete against another of its own investments, but also give it a healthier asset with a better chance for further financing.
“In 2015, the return from going public is just so-so. Mergers and acquisitions show much better returns for venture capitalists than an IPO,” Kuang Ziping, general manager of Qiming Ventures, told a reporter at PE Daily, a Chinese news platform for VC investors.
“[The role of VCs and PEs] are relatively significant. We can tell from published cases that PEs and VCs brought about these M&As. Entrepreneurs are concerned with how to make the company better but we, as investors and board members of the company, are more concerned with how to make the company bigger using better methods,” Kuang said.
Before the Dianping and Meituan merger, Dianping’s plan to go public was postponed for a long time while Meituan was reported to have difficulty raising its next round of funding. Both companies were in a dilemmas which existing investors didn’t like to see. Thus, a merger between the two became an option that investors were happy to pursue.
4. After mergers, is there really a “happily ever after”?
Mergers seem to maximize the benefits to each niche market in the short term. Technically speaking, companies can break the barrier and get out of the cash-burning game through market expansion and finally get a chance to slow down and improve their product without pressure from direct competition.
In reality, Didi Kuaidi became the strongest player in the Chinese ride-hailing business, seeking allies to stop Uber’s expansion worldwide; 58.com and Ganji.com restructured their new company and developed several subsidiaries in more specific fields; Meituan-Dianping is now in direct competition with Alibaba-backed Koubei and Baidu’s Nuomi on behalf of Tencent; Ctrip’s acquisition of Qunar meant that Baidu temporarily held a leading position in the online tourism sector.
Though there are different public opinions concerning potential monopoly in each sector after significant mergers, the current situation indicates that strong but less fierce competition still exists in each field. It’s more like a wholesome reallocation of resources for the entire industry.
One of the most commonly seen methods of resource reallocation is the layoff of redundant staff, which becomes a tricky problem for all these companies.
For some players, the best choice is to leave. The administration of Kuaidi is believed to have sold their shares to institutional investors in a couple of months after the merger. Ganji’s founder Yang Haoyong left the company and is now the head of Guazi, a second-hand car trading platform cleaved off from the 58-Ganji group. Founder and CEO of Qunar, Zhuang Chenchao, hasn’t made any official announcement for his departure but is rumoured to be focusing on his investment business now.
Few choose to stay with the company. Zhang Tao, former CEO of Dianping, still acts as the chair of the new company but is only responsible for company strategies. Some other executives from Dianping are also taking leading roles due to the company’s new structure announced earlier this month.
The experience of UCWeb’s founder Yu Yongfu shows that mergers or acquisitions don’t necessarily lead to a disruption of one’s career path. After Alibaba’s acquisition of UC last year, Yu joined Alibaba’s executive board and is now one of Alibaba’s youngest partners.
It’s hard to predict whether the trend of mergers will continue in 2016, but no matter for participants or outsiders, the mergers in 2015 will serve as a landmark for the development of the Chinese tech industry in this era.