Baidu’s $1.9 billion acquisition of app store 91 Wireless this week made me smile, because it solved a Chinese mystery. I’ve always wondered: Why do Chinese Internet giants try to copy the success of other companies, instead of simply buying them out?
Tech companies in the U.S. have long been willing to acquire promising up-and-comers, instead of simply duplicating them. But, until recently, it didn’t work that way in China.
A prominent example is Tencent, China’s largest Internet portal. If there was a startup doing well, Tencent would assemble a team to copy the idea and directly compete with the startup. The result was pretty predictable: the startup died, and Tencent got the startup’s market.
Chinese news sites like to note that China is different than Silicon Valley. They use many cultural, moral, or traditional reasons to explain the differences. So when Chinese media report on big M&A deals in the US, they often include accounts of how a startup died because the Internet giant entered the market.
I’ve always thought that there are reasons why Chinese Internet companies don’t do M&A, and the reasons will change and there will be more and more Chinese M&A in the future. I’ll get to that point in a moment. But, first, it’s important to understand why Chinese companies traditionally preferred competition to M&A.
Weaker Talent Acquisition Means Startups Were Traditionally Less Competitive
In China, big companies historically chose to copy/compete simply because they could. Why bother to pay a few hundred million dollars to buy a company when they could build it themselves? In the old days, most young people preferred to work for big companies. Startups struggled to get the right employees on board. So most startups were founded by inexperienced or grassroot guys. On the other side, the copycat team in big Internet companies were generally better staffed, with reasonably good people. Even without using monopoly power, they could create better products. By the rule that better products win, the big company won!
On the contrary, in Silicon Valley, talent concentrates in startups, and there is no way for big companies to compete with them. They don’t even bother to try — why spend money and, more imporantly, time to build with a high risk of failure, instead of simply buying the startup?
The situation is changing, though. Now, startups are much stronger in China. After 20 years of a flourishing Internet industry, there are enough great engineers and businessmen leaving big companies to start the next generation of Internet companies. Serial entrepreneurs are appearing. They execute better than big companies, and are harder to copy, and that is the start of M&A. The M&A opportunity will, in turn, encourage talent to start or join startups. The positive feedback loop will form. I can only predict many more M&A deals in China.
Less Competition Among Big Companies Means Time is on Big Companies’ Side
There’s another reason why M&A will pick up: Chinese companies are increasingly competing with each other.
In the old days, the competition between big companies was never heated. Each giant worked in a certain field, and didn’t face a head-to-head threat. Sina, Sohu, and Netease focused on portals; Baidu concentrated on search; Alibaba on commerce; and Tencent on communication. When these companies enter the same field, as is the case today, M&A follows. It happened in the game industry a few years ago, and now it moves to mobile.
Before, the war was between big company A versus startup B. Today, the world is more crowded. It’s not just big company A versus startup B; it’s big company A versus big company B, and the key to win is getting startup C. Even though a big company is equally confident that they can build by themselves, and finally win, they don’t want to risk the time cost, and let the competitor get it first. This new situation, just as in the U.S., significantly increases the valuation of startup C and the likelihood of additional M&A.
That brings us to Baidu. A few years ago, Baidu may have had enough time to build its own copycat. Or, at least, it may have tried before using all that cash to acquire 91 Wireless. No longer. In purchasing the startup, Baidu made its biggest deal to date, showing that it wants to quickly strengthen its position in the mobile market.
Optimistic to M&A Market in China
I am optimistic about M&A in China, and the startup scene. After all, China is not different from the rest of the world.