Caixin
Jun 06, 2018 10:46 AM
TECH TALK

'Baby BATs' Don't Fall Far From the Tree

A few recent China tech headlines are shining a spotlight on a group I’ve dubbed the “baby BATs,” prompting this week’s closer look at the offspring of the nation’s big-three internet firms, Baidu, Alibaba and Tencent. The tendency of China’s big tech firms to spawn numerous offspring seems quite country-specific, due to the somewhat unique tendency of this trio to pile into many different and often quite diverse business lines.

Such wide-ranging diversification moves are less frequent in more mature Western markets, where companies tend to stay closer to their core business. By comparison, cash-rich Chinese firms seem to have a much more anything-goes approach that often sees them pile into the latest high-tech flavor of the day, frequently with mixed to downright dismal results due to poor planning, inexperience and fierce competition.

The textbook case of this strategy gone awry comes from LeEco, China’s poster child for what happens when a company strays too far from its home turf. That case saw LeEco try to take its successful online video business and parlay it into a broader vision of an interconnected ecosystem of products and devices with entertainment as their core theme.

Anyone who follows China tech will know the company underwent a year-long implosion starting around the end of 2016, leaving big question marks over the future of many of its newer divisions like new-energy cars and smartphones. The BAT are no exception to this kind of anything-goes mentality, though their supercharged balance sheets tend to shield their failures from too much attention and the kinds of spectacular implosion we saw with LeEco.

All three BAT companies have been in the headlines recently for their latest babies, beginning with a long-delayed March delivery for Baidu when its money-losing iQiyi online video unit made an IPO in New York. More recently, reports emerged late last month saying Tencent is eying a New York IPO for its music unit that could raise up to $4 billion. Last but not least is Alibaba, which made headlines last week when it made some reorganizing moves that lifted its Hong Kong-listed Alibaba Health unit to formal status as official holding pot for its major healthcare assets.

Made in founder’s image

As someone who has followed all three of these companies for more than a decade, I certainly have my own views on their ability to innovate outside their core areas, in this case online search for Baidu, e-commerce for Alibaba and gaming for Tencent. Baidu seems the least capable of moving outside its core area, followed closely by Alibaba. Tencent seems the most conservative about such moves, with the result that its choices are more likely to succeed.

The track records for their publicly listed spinoffs tell a similar tale, with one or two footnotes.

Baidu is the most complex of the bunch, with two major publicly listed spin-offs to its credit. The earlier of those saw it list its Qunar online travel business in 2013, only to see the company get pummeled by stiff competition, especially from industry heavyweight Ctrip. Despite never making sustained profits in its brief history as a listed company, Qunar ultimately privatized in 2016 at a price that was double the original IPO price.

Baidu’s iQiyi listing earlier this year has also been quite successful so far, with the shares currently up about 60% from their listing price, even though the company is also losing big money. This seems to reinforce a theme that Baidu is good at spending gobs of money to build up big new operations that lose lots of money. But some of those businesses are ultimately attractive as acquisition targets for rivals who want to quickly build up their own market share. Such was the case for Qunar, which ultimately got taken over by Ctrip, and could also be the ultimate destiny of iQiyi.

Next there’s Alibaba, which has the worst record for its publicly traded spinoffs. The company’s history for such births dates back to 2007 when it listed its original B2B marketplace Alibaba.com in Hong Kong. After some brief euphoria that resulted in huge gains, the shares ultimately stagnated and were trading far below their IPO price before Alibaba privatized the company in 2012.

The case hasn’t been much better for Alibaba Pictures, which was a Hong Kong-listed filmmaker taken over by Alibaba in 2014 and is now cast as the internet giant’s entertainment offspring. After a brief rise on euphoria about the Alibaba connection, the stock proceeded to stagnate also and is now down more than 40% from the time of the original acquisition.

Alibaba Health was a similar case, trading steadily downward after the parent Alibaba originally chose it as a vehicle for its healthcare assets in 2015. Here we should note the stock spiked after last week’s announcement of the injection of new assets. That repeats an Alibaba pattern of brief price spikes for its offspring, mostly based on big announcements, followed by longer-term languishing due to lackluster business performance.

Finally there’s Tencent, whose China Literature online reading unit listed in Hong Kong last November, and now trades about 40% above its IPO price. I expect the company’s music IPO in New York, which will reportedly come by the end of this year, to do similarly well, reflecting Tencent’s go-slow approach to new businesses and tendency to stick close to its core competency in games and social networking.

At the end of the day, each of the BATs has a personality closely linked to its founder, who tends to pass on his own traits to his company’s offspring. Baidu’s Robin Li tends to spawn money-losing companies that can still find some love from acquisitive rivals; creations of Alibaba’s Jack Ma tend to make big pops on birth, only to languish over the longer term; while offspring of Tencent’s Pony Ma tend to be less copious but better positioned for solid growth over the longer term.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com

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