Baidu deal shows pain of being China tech upstart
By Robyn Mak
(The author is a Reuters Breakingviews columnist. TheĀ opinions expressed are her own.)
Baiduās offer to buy Chinaās 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 sellerās shares plunged by almost a quarter. As competition between Chinese tech giants intensifies, upstarts must choose: compete or get out of the way.
NetDragonās 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 NetDragonās. Itās hard to see how the Hong Kong-listed gaming company could compete.
Investors shouldnāt be unhappy at the price. Baidu is paying 17 times 91 Wirelessā 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.
Chinaās internet is young, but itās 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. Tencentās 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 Chinaās biggest mobile video user base. Alibaba invested $300 million in online maps earlier this year. Canāt 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, itās a buyerās market. Some investors, like NetDragonās, may be disappointed by the prices they get – but selling out looks a surer bet in the long run.