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Teens’ top tech addiction. America’s most visionary carmaker. Sweden’s global music streaming service.
Chinese internet group Tencent, owner of stakes in Snap, Tesla and Spotify, has been undeterred by a domestic crackdown on cross-border dealmaking. The company’s decision earlier this month to buy into the Swedish streaming service marked only the latest in a succession of moves by the Shenzhen-based group which has amassed stakes in more than 15 foreign companies at a cost of $4.3bn, according to Dealogic.
This has come even as Beijing has restricted overseas acquisitions by some of the country’s biggest businesses — notably the likes of HNA, Dalian Wanda, Anbang, Fosun and other so-called “grey rhinos”, companies that are thought to be problematic but are largely ignored until they act too quickly for the government’s liking.
On top of this Tencent amassed shares in two of the US’s most prominent tech companies. It acquired 10 per cent of Snap, the parent of messaging app Snapchat, and 5 per cent in electric carmaker Tesla, as well as a number of smaller deals not captured by Dealogic. It has also spent $20.5bn at home.
Tencent’s tech peer Alibaba, the ecommerce group, has nailed a total of eight cross-border deals worth a total of $2.4bn this year, according to Dealogic. After spending just shy of $7bn on overseas acquisitions last year, it has mostly focused on building its portfolio at home — bricks-and-mortar shops — as well as ploughing more into its logistics unit.
Hans Tung, a partner at GGV Capital, a venture capital firm which has some portfolio investments in common with Tencent, differentiates the acquisitions by tech companies from the grey rhinos. “[Tencent] are willing to look at anything they think will help them to export what they know in China to other countries,” he says, describing their efforts as a China-inspired “third way” of doing M&A.
Investors and analysts point to several reasons why the tech giants are afforded a longer leash at a time when Beijing is ramping up capital controls and clamping down on the acquisitive rhinos: their buying is aligned with the state’s aims to champion technology rather than trophy assets such as hotels, which have been acquired by the likes of Anbang; they have the balance sheets to support it, rather than relying on massive leverage; and the moves bring synergies in spades.
“The deals they are doing tend to be very strategic, and the size of the deals is typically hundreds of millions of dollars or single-digit billions, whereas those by Anbang, HNA and the rest are tens of billions of dollars and unrelated with nothing strategic about it,” says one banker.
Strategic also means accretive, as both buyers and investee companies are quick to point out. Cyclists riding a bike on Ofo, the Alibaba-backed bike-sharing company, for example, can be encouraged to use Alipay, the online payment system run by Alibaba affiliate Ant Financial.
It is a similar story with food delivery: Meituan-Dianping, the biggest company in food delivery, ticketing and other services that was valued at $30bn in its latest fundraising, gives Tencent access to swaths of merchants and customers in physical restaurants and stores.
“This capability is not something Tencent has in-house, but it’s something that will be beneficial to help it grow its ecosystem,” says Shaohui Chen, senior vice-president for corporate development at Meituan who previously worked in Tencent’s in-house M&A team.
“We can push Tencent payments, and small merchants to work with Tencent platforms. And Tencent can bring their traffic to us, provide infrastructure, mapping, cloud services. So this is very complementary.”
Of these, traffic is often the biggest attraction for the investee company. Tencent has nearly 1bn monthly active users on its WeChat messaging app and Alibaba boasts close to 550m mobile monthly active users on its Chinese retail sites Tmall and Taobao.
That is less helpful for overseas acquisitions: Tencent’s music unit is unlikely to have any interest in giving Spotify access to Tencent’s users.
Instead, analysts say, the deal is more about doubling up to gain bargaining clout — in the case of Spotify and Tencent Music, with the record labels — and securing a ringside seat watching international companies’ business modus operandi.
With Snap, Tencent has highlighted collaboration opportunities in news feed and mobile game publishing. That plays to the company’s biggest strength and cash engine, illustrated by last year’s $8.6bn purchase of a majority stake in Supercell, the Finnish maker of hit game Clash of Clans.
Tesla, like the backing of domestic electric vehicle maker Nio, gives Tencent an opportunity to watch and learn about an industry of which it has little direct knowledge. The company said it could help it create a connected car or understand how its services could operate in one.
That is key as both Tencent and Alibaba look to expand overseas where their experience in a protected and highly unique terrain leaves them as relative innocents abroad.
Anand Swaminathan, a senior partner at McKinsey, the consultancy, says this explains why a company such as ride-sharing app Didi is able to invest in competitors Uber and Lyft. “They want to learn,” he says, adding it is a two-way street. “Lyft is only in the US, now they have a lens into ride-sharing in China.
“Very few of these [buyers] say, ‘I invested in Uber to get a valuation rise of X’. They are investing so they can see how the heck is Uber doing this so I can learn and do it better.”
Alibaba has taken a slightly different tack. It tends to prefer majority stakes, frequently topped up at a later date, and has also concentrated its sights closer to home in Southeast Asia. Hence the two-stage purchase of an 83 per cent stake in Lazada, the Singapore-based ecommerce group, and stakes taken — often alongside Ant Financial — in payments apps such as India’s Paytm.
Much of this is about exporting the Alibaba model to fresh markets, supported by both dollars and Jack Ma, the company’s tireless founder and executive chairman who this year spent some 1,000 hours flying to spread his vision of trade without frontiers (ecommerce) and a cashless society where phone payments replace notes and coins.
The prevailing winds aiding this “third way” M&A could yet change — some of the grey rhinos were close with Beijing before falling out of favour, and US regulators continue to clamp down aggressively on Chinese deals they see impinging on national security.
But for now, the stars are aligned. “These tech giants are really national champions at the moment,” says the banker. “There’s a sense of national pride from senior officials to the guy on the street about innovation in China about what these companies are doing.”
Staying close to state
If you want to get ahead in business it pays to toe the party line, and the two (unrelated) Mas are past masters in the art of staying on side with Beijing — periodic wobbles apart.
Tencent founder Pony Ma is a deputy of the National People’s Congress, China’s legislative branch of government. Jack Ma, founder of Alibaba, has assumed the mantle of quasi-diplomat, taking his own brand of soft power as far afield as the US, where he had an early meeting with then President-elect Donald Trump, as well as to Australia and Argentina.
Both Mas are quick to adopt and spread Beijing’s mantras and initiatives. For now that means the “One Belt, One Road” policy, which aims to strengthen commercial and political ties with more than 64 countries between Asia and Europe, and the “Greater Bay Area” linking Hong Kong, Macau and the southern Chinese province of Guangdong into a souped-up version of Silicon Valley.
Philanthropy and charity are aligned with Beijing’s interests too — hence, for example, Alibaba’s $1.5bn fund launched earlier this month to help combat rural poverty.
Jack Ma plays a slightly racier game — his visit to Mr Trump, ahead of President Xi Jinping, did not play well in China — but he has embraced corporate diplomacy and the former English teacher is a master of the sound bite. “We are not conquerors, we are serving,” he told delegates at last week’s Fortune Global Forum in Guangzhou.
Serving does not just mean customers. Both Alibaba and Tencent have vast troves of data on China’s citizens: their spending, their friends, their reading habits and even their faces, which have government applications above and beyond simply targeting advertising.
However, there have been stumbles. Tencent’s wildly popular Honour of Kings game fell foul of regulators disturbed by its hold on children’s’ time, and several tech companies have been censured for failing to police inappropriate postings.
This post originally appeared on Financial Times