Baidu deal shows pain of being China tech upstart

July 19, 2013

By Robyn Mak

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

Baidu’s offer to buy China’s biggest home grown mobile app store operator for $1.9 billion is a cautionary tale for smaller tech firms. NetDragon, the majority owner of 91 Wireless, agreed to sell its trophy asset to the search engine giant. The seller’s shares plunged by almost a quarter. As competition between Chinese tech giants intensifies, upstarts must choose: compete or get out of the way.

NetDragon’s exit from mobile looks timely. Although ranked number one in active users and downloads last year, its 91 Wireless platforms face fierce competition – including a rival app store from search engine Qihoo 360, whose market capitalization is six times NetDragon’s. It’s hard to see how the Hong Kong-listed gaming company could compete.

Investors shouldn’t be unhappy at the price. Baidu is paying 17 times 91 Wireless’ sales for 2013, as forecast by Nomura, compared with its own market rating of seven times. An alternative plan to list the business in Hong Kong would have put NetDragon at the mercy of volatile markets with no guarantee that the platform would be valued as high. This way, NetDragon can get $1 billion to develop its core gaming business.

China’s internet is young, but it’s already a game of scale. The three biggest players, Baidu, Tencent and Alibaba, boast hundreds of millions of users each. That gives them a ready-made user base for new products that smaller players would need years to build. Tencent’s messaging service attracted up to 173 million users at a time in 2012.

Secondly, their multi-billion dollar cash piles and access to debt markets mean they can buy their way to success in the highly contested mobile space. Baidu bought online video provider PPS for $370 million in May, creating China’s biggest mobile video user base. Alibaba invested $300 million in online maps earlier this year. Can’t acquire it? Then hire engineers to build instead.

As the big three battle it out, small companies with strong products or critical mass have some negotiating leverage. But really, it’s a buyer’s market. Some investors, like NetDragon’s, may be disappointed by the prices they get – but selling out looks a surer bet in the long run.

 

 

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