Li Yuan
When Jenny Zeng invested in Uber Technologies Inc. last summer,
and, as part of the deal, took a small stake in its China
operation, she thought it likely that UberChina would end up
merging with Didi Chuxing Technology Co.
"The two companies should have known it, too," said Ms. Zeng,
managing partner of Magic Stone Alternative Investments, a
Beijing-based firm that she founded in 2011. "It's inevitable as
part of the consolidation trend in the Chinese internet
industry."
This isn't hindsight. Ms. Zeng told me this not after learning
the news on Monday that Didi is buying UberChina in exchange for
about 20% of the enlarged company, but in mid-June. She was one of
several investors with skin in the game who told me then that a
merger, which seemed improbable to some, might be in the cards.
Their thinking sheds light on some of the forces that shaped
Monday's deal. For one, China's internet is increasingly a game of
giants. There are the big three that dominate the industry --
Alibaba Group Holding Ltd., Tencent Holdings Ltd., and Baidu Inc.
-- but there also have been a string of mergers recently forming
new big players. For instance, Meituan.com, China's version of
Groupon.com, and restaurant-review app Dianping Holdings Ltd.,
merged in October to provide offline services for online users. And
Didi itself was born out of a merger early last year between former
rivals Didi and Kuaidi.
Ms. Zeng said that when she invested, she thought UberChina had
good momentum, but also that the huge amount of cash needed to
battle Didi would lead the rivals into each other's arms. She
figured that would provide a good exit path delivering good
returns. She declined to say what her investment is valued at
now.
Also driving a tie-up: cash isn't flowing as freely into China's
tech sector as it was last year. Early-stage angels in China made
818 investments in the first half of 2016, 30% lower than the same
period of last year, according to Beijing-based Zero2IPO Group. The
number of venture investments also was down 30%, while the total
value of disclosed deals was down 10% from the same period of last
year, according to Zero2IPO.
UberChina gained significant market share after launching its
ride-hailing service in Shanghai in early 2014, but at sizable
cost. It has had a tough time raising new funding from Chinese
investors recently and had to rely on its parent company to fund
its loss-making operation, according to people familiar with the
matter. Didi also has spent heavily, dating from the days when Didi
and Kuaidi battled for market share before their merger in February
2015.
Though Didi and UberChina claimed that they were getting closer
to profitability, it was hard to see how that was possible,
especially for the much smaller UberChina. According to
Beijing-based research firm Analysys International, Didi had 43.1
million active users in May while UberChina had 10.1 million. New
regulations governing the sector, issued just last week, would make
it even harder to try to gain market share by barring companies
from operating below cost.
For example, an Uber ride I took last Wednesday from the Beijing
airport to a hotel in the city cost 52 yuan ($7.82), or 20 yuan
cheaper than my return trip on Sunday on a taxi, even though the
Uber ride experienced worse traffic. As I was writing this column,
I got a message from UberChina, offering a carpooling ride within
the distance of five kilometers (3.1 miles) for five yuan (75
cents) only.
While I was in Beijing, I used Didi to call a taxi but didn't
use its ride-hailing service because it was more expensive than
Uber. I used Didi more when they gave me coupons. Most Chinese
consumers are like me -- there is no brand loyalty to speak of.
Investors know this means endless, costly battles, and were
increasingly reluctant to throw in additional cash for the
companies to burn, said an investor whose fund invested in Didi. In
addition, the need to fund those battles meant that earlier Didi
investors were seeing their stakes diluted. Didi raised $7.3
billion in its latest funding round that valued the company at $28
billion. After Monday's deal, Didi will have a valuation of around
$36 billion when combined with UberChina's business that was valued
at around $8 billion. "We didn't make money in this merger or last
funding round," said the Didi investor.
Since few Chinese funds are big enough to feel comfortable
investing in startups as big as Didi, some early Didi investors
also worried that the company would have a tough time finding
future investors if it kept losing money.
For Uber, the Didi deal is a sort of retreat, but certainly
doesn't mean its foray into China is a failure. UberChina's 20%
stake in Didi already is being compared with Yahoo's early
investment in Alibaba, which turned out to be the most valuable
asset for Yahoo.
Deteriorating exit options for Chinese startups also could be
another factor for UberChina's sale to Didi. An initial public
offering for UberChina in China is increasingly unlikely as the
securities regulator tightened rules in initial public offerings.
The wait time for an IPO, if approved, could be two to three
years.
Chinese regulators require companies to win government approval
before they can list, and also require that companies be profitable
before listing.
So some investors are very happy about the sale. "The essence of
business is making money," said Ms. Zeng, the Uber investor. "It's
about creating value for shareholders, employees and
customers."
--Follow
Li Yuan
on Twitter @LiYuan6 or write to li.yuan@wsj.com.
Write to Li Yuan at li.yuan@wsj.com and LI YUAN at
li.yuan@wsj.com
(END) Dow Jones Newswires
August 01, 2016 17:35 ET (21:35 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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