Analysis Of Tencent 's Merger And Acquisition Strategy&Case Study On Tencent 's Acquisition Of JD.com

Nowadays more and more companies expand their business by merger and acquisition with the globalization of world economy and the development of the mature capital market. Merger and acquisition has become a very hot topic. The internet industry is the most popular industry for merger and acquisition deals. Baidu, Alibaba and Tencent(‘BAT') successively merged and acquired companies to solidify each market position. And because I have participated in some private placement and M&A deals during my MBA internship, I found the internet industry M&A very interesting and thus I decided to explore more by writing this thesis.Considering the fact that the M&A history for China's internet companies is relatively short and most of the deals are executed by BAT, it is useful to do case study on a specific company to conduct analysis on China internet company M&A strategy. And I chose Tencent as my analysis target since the frequency of its M&A activities is very high and its M&A coverage is very wide. Besides, Tencent is the first company of BAT that went to public in Hong Kong and Hong Kong is one of the most developed capital market in the world, thus we can gather more public data to conduct further analysis.The thesis begins with the introduction of relevant research reports regarding M&A motivation, M&A strategy and post M&A performance valuation. Then the thesis defines M&A, introduces some relevant terminologies, and summarizes some relevant theories. Next the thesis introduces the current prospect of China's internet industry, Tencent's development history and its business model. Then I collected Tencent's all the M&A cases for further analysis.I analyze all the M&A deals of Tencent from 2008 to 2014 by time, acquisition amount, geographic and industry so as to conclude Tencent's M&A motivation and strategy. Besides, I also look specifically into the deals Tencent conduct by each internet sub-markets to conclude Tencent's M&A strategy in different markets. I also analyze the transaction method that Tencent used to conduct M&A. Last, I did a case study on Tencent's investment in JD.com from the perspectives of M&A motivation, synergy, valuation and post M&A performance. The conclusions are as below:Tencent began its M&A from the gaming industry and then it switched to the M&A strategy to build up the internet ecosystem. In the gaming industry, Tencent's major M&A strategy is to vertically buy the company in all the links of gaming industry's value chain including gaming development, gaming distribution, gaming operation companies in order to maximize the monetization of Tencent's own traffic flow from Wechat and QQ platform. Each player that Tencent invested can maximize its value through Tencent's platform. In the industries other than gaming, Tencent's M&A strategy has common features with the strategy in the gaming industry but at the same differentiates a bit. The common factor is that Tencent always positions itself as the platform that links people and service. Under this position, Tencent is always looking for and willing to invest in those excellent service providers since it will bring more added value to Tencent's current users to make them more sticky to Tencent's products and at the same time make Tencent's platform more irreplaceable and attractive to other potential users. What's different with the Tencent's strategy in gaming industry is that Tencent is willing to stay as the 2nd largest shareholder instead of seeking for controlling interest position in the target firm because Tencent's purpose is to co-build a healthy internet ecosystem together with invested company.The main value that Tencent brings to its invested company is its enormous traffic flow from its social platform and application. The other companies that Tencent has invested could also become valuable resources for the invested target. The target could seek further development resources and integrate those resources. The main value that the invested target brings to Tencent is more of strategic value rather than financial value since Tencent stated before that it won't display its role as a typical financial investor. However, Tencent has achieved quite good financial performance from companies that Tencent has exited.This thesis also analyzes the case of Tencent's investment in JD.com and makes conclusions as follow: From strategic perspective, Tencent has to acquire JD because only by doing so can it still maintain a competitive position to Alibaba in e-commerce business, a sector that Tencent hasn't been doing very successively in the past years although it has its own Paipai.com and QQ Wangou platforms and Yixun.com to compete. Moreover, this investment also lays a relatively solid foundation for Tencent in the mobile e-commerce sector. JD utilized this opportunity to wipe out Yixun, which is its another major competitor in the B2 C sector. For Tencent, from the perspective of financial return, this is a worth investment for Tencent because I have calculated the financial return for Tencent's by comparing its invested amount and intrinsic amount of its invested capital and it turns out that Tencent yielded around 1.88 multiple return. From the perspective of profitability, JD didn't really yielded very positive profit to Tencent's e-commerce business. From the perspective of market capitalization management, by calculating the excessive stock price surplus 60 days before the investment announcement which is around 36%, it shows positive value to Tencen't market capitalization management. Also by calculation Tobin's Q of Tencent, it shows that this investment currently didn't yielded very positive value to Tencent's shareholders' true value. For JD, the main benefit of Tencent's investment is that it created more imaginative space for US investors and raised market valuation for itself before its IPO. By calculating Tobin's Q we conclude that although in the following two quarters it didn't yield to very positive impact to JD's shareholder true value but in the first quarter of 2015 the shareholders true value significantly increase showing a very positive sign for JD. Up to now, the e-commerce business is still in loss for Tencent. Considering this investment just closed less than one year, Tencent and JD still has a lot to integrate in e-commerce sector.