China’s three biggest Internet companies could be set for another record year of deals as their cash piles swell, unprofitable start-ups sell out and consolidation sweeps the crowded industry.
Alibaba Group Holding Ltd (阿里巴巴), Tencent Holdings Ltd (騰訊) and Baidu Inc (百度) could draw on more than US$80 billion for mergers and acquisitions next year, according to analysts at BNP Paribas SA.
That could enable them to easily surpass the record US$30 billion spent this year, according to Bloomberg data, as they buy their way into so-called online-to-offline (O2O) Web services such as delivery services and physical retailing.
With the market for such services potentially worth more than US$1 trillion in coming years, a shake-up is in the offing. The trio’s deals should quicken a consolidation along the lines of the US$15 billion merger of group-buying sites Meituan.com (美團網) and Dianping.com (大眾點評網) and the creation of taxi-hailing giant Didi Kuaidi (滴滴快的), both of which involved Alibaba and Tencent.
The triumvirate known as BAT are seeking out new markets to move beyond core businesses of e-commerce or advertising.
Alibaba alone would be able to spend as much as US$38 billion on deals next year, analysts at BNP Paribas calculated based on available cash, its ability to take on debt and projected cash flows.
By the same measures, Tencent could deploy US$35 billion and Baidu about US$15 billion, analysts led by Vey-Sern Ling wrote in a report on Thursday.
“There’s definitely potential for many more deals to happen,” said Michelle Ma, an analyst at Bloomberg Intelligence. “BAT are consolidating and they’re going after smaller players which might struggle to survive on their own.”
Alibaba, Tencent and Baidu are rapidly emerging as go-to buyers, with venture financing becoming more difficult to obtain in a slowing economy. Many start-ups that had been burning cash through big incentives to draw customers are now facing pressure from their investors to cut their losses.
China’s burgeoning market for O2O — online services delivered or fulfilled in the physical world — is crammed with hundreds of small players providing everything from massages and food delivery to handyman services. In the rush to grow their user base, most, including Alibaba and Tencent-backed operators, eschew profits and resort to heavy subsidies and marketing.
The overall market could be worth 10 trillion yuan (US$1.6 trillion) eventually, HSBC analysts led by Chi Tsang wrote in a report last month.
Tencent, the maker of the WeChat and QQ messaging apps, is ahead in deals this year, taking part in 37 completed or pending acquisitions totaling US$16.3 billion, according to data compiled by Bloomberg. Alibaba is close behind, with 27 deals that total US$15 billion, while Baidu trails at 15 acquisitions for US$878 million.
“Consolidation favors the strong,” BNP analysts said in a 40-page outlook on China’s Internet industry. “The merged entities benefit from reduced competition, while BAT get to further their strategic goals and still benefit from a broadened ecosystem.”
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