Split to the left, M&A to the right, why are the US and China Internet giants moving to opposite ends of the scale?

The recent IPOs of NetEase Cloud Music and Jingdong Logistics have shown us an interesting phenomenon: Chinese Internet majors are spinning off their businesses and going public separately. But looking at the U.S. giant FAAMG, not only did it not take the road of spin-off, but also spent a lot of money to carry out M&A

Split to the left, M&A to the right, why are the US and China Internet giants moving to opposite ends of the scale?

The recent back-to-back IPOs of NetEase Cloud Music and Jingdong Logistics have shown us an interesting phenomenon: China’s Internet majors are spinning off their businesses and going public separately. But looking at the US giant FAAMG, not only did they not go down the road of spin-off, but instead they spent a lot of money to carry out M&A.

Why is there such a difference between Chinese and American companies? What are the reasons for the spin-off and not spin-off? What is the reason behind?

NetEase Spins Off NetEase Cloud Music for Hong Kong Listing Chinese Internet Giants Busy Spinning Off
On May 26, NetEase announced plans to spin off its NetEase Cloud Music business, which will be listed independently in Hong Kong. This means that Tencent Music and NetEase Cloud will start an era of giant rivalry.

In addition to NetEase Cloud, in October 2019, NetEase’s spin-off NetEase Youdao was listed on the New York Stock Exchange. Prior to that, in 2016, NetEase spun off its news business to raise $300 million and planned to focus on its core online gaming business after the spin-off.

Just recently, Jingdong Logistics also passed the hearing of the Hong Kong Stock Exchange and plans to go public in Hong Kong on May 28. After Jingdong Logistics officially started its IPO journey in Hong Kong, Jingdong Group has succeeded in three of its big plans to spin off and list – the other two are Jingdong Health and Jingdong Digital.

Jingdong Health logged on to the Hong Kong Stock Exchange on December 8, 2020, with a listing surge of more than 40%, and Jingdong Digital sought an A-share science and technology board listing earlier this year, but suspended its IPO plans due to tightening policies.

Spin-off listing, which is just a basic operation in China’s Internet majors, is very common.

In 2012, Ali spun off Alipay from the system, and in 2020 Ant Group applied for listing through the Science and Technology Board, although it is currently on hold for the time being.

In March 2014, Sina Weibo, which was spun off from Sina, filed a prospectus in the United States and successfully went public.

In July 2016, Tencent’s QQ Music and Ocean Music merged to form the new music group Tencent Music, which was successfully listed on the New York Stock Exchange in December 2018 after the merger and independent spin-off.

In November 2017, Sogou, which was spun off from Sohu for seven years, was also listed on the NYSE. The purpose of Zhang Chaoyang’s original spin-off was to get Sogou listed. In addition to Sogou, Sohu has another spin-off company – ChangYou, which went public in 2009.

At about the same point in time as Sogou went public, Tencent spun off ReadWrite Group, the largest online literature platform in China, to go public in Hong Kong.

In 2018, Ping An Good Doctor, the Internet healthcare segment of Ping An Group of China, was listed independently in Hong Kong.

In recent years, ByteDance has also spun off ShakeYin, while Baidu is planning to spin off Xiaodu and Baidu.com, and Xiaomi is planning to spin off Xiaomi Finance, all in preparation for an IPO ……

Cases abound and the list is endless. Why do Chinese companies like to spin off their businesses? How do you see the phenomenon of spin-offs?

Splitting the whole company into pieces to broaden financing channels and spin-off subsidiaries to increase the overall market value of the group
According to U.S. Equity Research, domestic companies, especially the big players in the Internet industry, have long entered the wave of spin-offs. It has become an important strategy for them to choose to spin off their businesses and go public to attract more capital to expand their scale.

First, from the perspective of these spin-off companies, basically all are Internet technology companies, which is inseparable from the characteristics of the Internet technology industry. Internet business iteration and expansion is very fast, changing all the time, the group’s overall organizational structure can no longer meet the needs of individual business development.

Secondly, the market opportunities brought by the spin-off subsidiaries are much larger than without the spin-off. For example, if Alibaba spins off Ant Financial Services, it will be able to do more business than just its own e-commerce system. For example, Alipay is not just a third-party payment platform for Taobao and Tmall shopping, but also adds wealth management, funds, insurance and many other businesses for a broader trading market.

Without the split, Alibaba’s original organizational structure would not have seen the Ant Group make a big splash in the digital fintech sector.

Thirdly, some of the group’s original businesses are relatively loosely connected to the sub-businesses, such as Sina and Sina Weibo, Tencent and Tencent Music, Ping An and Ping An Good Doctor, etc. The sub-businesses are not created to support the original business operations, but are innovative businesses after the group’s strategic deployment. Therefore, they can operate better independently after the spin-off.

In the case of Weibo, for example, Cao Guowei, Chairman and CEO of Sina and Chairman of Weibo, explained the reason for the spin-off at the beginning of Weibo’s IPO in 2014: “With an independent evaluation system after the independent listing of Weibo, Sina can free up its hands to re-plan the development of Sina.com.”

After the spin-off, Sina and Weibo were cut off at several levels, and Weibo had a more flexible operating system and was able to tap its full potential based on product features.

Similarly, NetEase spun off NetEase Youdao because Youdao focuses on online education, which is different from NetEase’s game, e-commerce and music businesses. After the split, NetEase Youdao can build a more adaptable management style and organizational structure for the characteristics of the education industry. NetEase cloud music is the same.

Fourth, from the capital market point of view, rule adjustments and policy dividends are good catalysts, such as the A-share science and technology innovation board and the registration system being promoted, and the Hong Kong stock market has also adjusted the three types of new economy companies into the IPO category, etc. The effective stimulation of the policy warm breeze allows technology companies to accelerate their embrace of the capital market and better participate in international competition.

There are many reasons for the intention to spin-off, and there are many benefits for these companies.

For one, after the spin-off, for the sub-businesses, they can establish independent financing channels and enjoy capital market dividends, and external shareholders often become business partners, which helps enhance the competitiveness of the sub-businesses as independent entities and enable better development. And it is more conducive to team management when the sub-businesses are separated independently.

Second, the spin-off can drive up the overall market value. Before the spin-off, the capital market valuation of the group was based on the overall profitability and development potential. But after the spin-off, the valuation will increase the judgment of the development potential of the subsidiary.

For example, Jingdong, the parent company Jingdong Group has to see a wave of rise every time there is a new development in the spin-off of a subsidiary business to be listed.

When Sina Weibo went public in 2014, Weibo’s market cap reached $4.118 billion, even surpassing Sina’s $3.778 billion. Today Weibo’s market cap is four times that of Sina’s.

Ali Health went public in 2014 and its market cap increased from HK$100.2 billion to HK$317.6 billion. 2020 Jingdong Health shares rose more than 40% on the first day of listing and its market cap surpassed HK$310 billion, surpassing Ali Health in one fell swoop.

Therefore, in general, the subsidiaries resonate with the parent company, and the valuation linkage after the spin-off listing is ultimately reflected in the overall market value of the controlling shareholder group, so the group remains the biggest beneficiary. And, for the capital institutions involved in the investment behind the scenes, they can also share the benefits.

In addition, from the investor’s perspective, it allows investors to have more opportunities to pursue quality targets and the possibility to benefit from them. At present, the total market value of Jingdong Logistics is about equal to the sum of “Tongda System” (Yuantong Shentong Zhongtong Yunda). Jingdong Logistics is a high-quality asset in the logistics field.

FAAMG actively spend money on mergers and acquisitions, why the U.S. giant does not split?
In contrast, the U.S. Internet giants seem to be on the other side of the scale, not only not splitting up, but also actively expanding through M&A.

Last year’s epidemic brought a global recession and small businesses went bankrupt, but FAAMG is rapidly expanding and accelerating its investment in M&A.

Last May, Facebook spent $400 million to acquire a GIF animation company, and it is also building a venture capital fund for investing in promising startups. Facebook invested in Gojek, a Southeast Asian “super app,” last June, and shortly before that, it invested $5.7 billion in Indian telecom giant Reliance Jio.

Apple has acquired at least four companies in the last year and released new iPhones, and Microsoft has acquired three cloud computing companies. Amazon is in talks to acquire a self-driving car startup.

Looking at FAAMG’s moves, all of which are acquiring smaller companies with great fanfare, the epidemic is not hindering forward movement. But looking at FAAMG’s sub-businesses, there are some that have gone solo enough that a spin-off might have better prospects. Why don’t they choose to spin off?

The U.S. Equity Research Service believes that it is mainly affected by the anti-trust investigation in the U.S. and restricted by intellectual property rights, which allow these companies to only plow deep in their core business. In response to the antitrust investigation, if the giants destroy the healthy competition in the industry and squeeze the living space of small and medium-sized enterprises, they will eliminate competition and stifle innovation, which greatly damage the market ecology of the U.S. technology sector.

And at the policy level, the Republican Party will support monopoly, but the Democratic Party came to power by curbing the monopoly of the super giants, giving space for fresh forces to develop through market competition, and promoting the high speed iterative development of technology and the Internet in the United States. Therefore, after Biden comes to power, the monopoly investigation against FAAMG will only further intensify, which may be an opportunity for the emerging Internet giants to flourish.

At the same time, the different Internet environments in China and the United States have created different choices for companies. In contrast, U.S. Internet giants are more willing to do infrastructure and build a good foundation before launching superstructures. Chinese Internet companies, on the other hand, like to multi-flower, involving multiple fields, trying to share a few more cups of pie.

Moreover, when domestic giants spin off, the parent company is in the growth stage, and the spin off is based on factors such as development planning, licenses, and favorable policies, but the U.S. technology giants are reluctant to divest their sub-businesses that are gaining momentum during the rapid growth stage, and only when they are stuck in development do they “cut back” and seek growth in performance and share price through spin offs. The company’s growth is only when it is in trouble.

In fact, it is not uncommon for U.S. companies to spin off their businesses, such as PayPal and eBay. eBay’s spin-off directly spurred rival Amazon. While Amazon already has 48% of the U.S. e-commerce market, eBay’s market share, in second place, has slipped to 6.1%. There are also the spin-offs of AT&T and Hewlett-Packard, the final results are not very good.

Amazon CEO Bezos once proposed the flywheel effect, which refers to a company’s various business modules that will organically drive each other, like biting gears driving each other.

Take Amazon’s cloud business, AWS, for example. AWS is currently the global cloud computing giant, with a global market share of nearly half, and AWS CEO Andy Jesse says there are no plans to spin off from Amazon. If Amazon were to spin off its cloud business as a separate entity, it would mean that Amazon’s cloud services and other businesses would face different financial situations. And it would distract from Amazon’s efforts. In his view, AWS is a business that can operate independently, with a different customer base and leadership team than the consumer business. Amazon’s consumer and retail businesses are big AWS customers and help AWS tremendously. Amazon is well aware that a really big company can extract valuable performance data from the workloads running on its own infrastructure.

As a result, whether driven by market capitalization or interest, or held back by antitrust laws, U.S. companies in all industries rarely spin off, and the spin-offs are extremely unlikely to have gratifying results. While the Chinese tech giants’ spin-offs are like cutting the dough into many pieces and then slowly kneading it to make it bigger, the U.S. is focused on spreading a pie bigger and bigger. For the development of the giant, whether it is a spin-off or an M&A, there is no need to judge which is better or worse, it is the best choice according to their own development in different contexts.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/split-to-the-left-ma-to-the-right-why-are-the-us-and-china-internet-giants-moving-to-opposite-ends-of-the-scale/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2021-05-29 23:27
Next 2021-05-29 23:38

Related articles