Gobbling up on Chinese Internet Companies

Overwhelmed by earnings stories on Hewlett Packard HPQ, Dell DELL, IMF Chief getting arrested, and the debt ceiling crisis (if there's one; the bond market certainly does not believe in one, as it keeps rallying in preparation for the arrival of QE3), an acquisition news was barely covered. The acquisition is about Tencent, the maker of QQ, the most popular Instant messenger in China, acquiring 16% of eLong, Inc. LONG for $84.4 million, putting it as the second largest shareholder of eLong after Expedia EXPE. While we wrote a bearish article on eLong back in November 2010, before its gradual decline from ~$20/share to ~$13/share in March this year, this news took eLong to surge over 50% from ~$17/share to close at $26.58/share on Tuesday. This is the 2nd major acquisition by Tencent this year, the other being the acquisition of Riot Games, the maker of League of Legends, an isometric strategy game, in Los Angeles for $400 million. As can be seen, these acquisitions are not really the core business of Tencent, and indicates that the company is branching out to growth outside its core platform. Sina Corporation SINA, started that two years ago as well, when it acquired Focus Media for $1 billion. However, the acquisition was on more traditional media companies, not internet focus companies. Unlike their US counterparts, Chinese internet companies tend to want to develop their own services, rather than acquiring others. For example, on YouTube-like online video services, Tencent, Sina, Baidu, etc. all have their own offerings, and so are twitter-like services. However, as Tencent start gobbling up other internet companies, we believe other Chinese internet companies will follow suit. However, Chinese companies do not like overpaying for non-profitable businesses on their potential growth, so we do not expect companies like RenRen.com RENN or Youku.com YOKU getting acquired anytime soon, but investors should keep their eyes on Chinese internet companies such as 51job Inc. JOBS, China Finance Online Co. Limited JRJC, JiaYuan.com DATE if and when their stocks drop significantly. The high valuation of large Chinese companies, and their apetites for branching out, should help to provide a floor for the smaller but profitable Chinese internet companies when the next Internet downturn comes.