Tencent hugs her inner Goldman Sachs

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Brian Adam
Professional Blogger, V logger, traveler and explorer of new horizons.
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It is usually a bad sign when a technology company spends more time buying than developing. Tencent may be an exception. The Chinese Goliath investment portfolio has surpassed $ 66 billion with bets on music or fintech. Recent successes could validate the festival of operations.

Two years ago, an essay titled Tencent has no dreams went viral in China. The author, a local technology journalist, accused the company that created WeChat, the world’s first all-in-one messaging “super app,” of losing its inventive spirit and becoming an investment bank.

That same year, Tencent boss Pony Ma embarked on a frenzy of binge shopping, taking stakes in everything from Finnish tennis racket maker Wilson and other equipment to the conglomerate’s commercial property division. real estate Dalian Wanda.

As with previous investments, the strategic logic was unclear. ITJuzi estimates that Tencent acquired a record 163 properties in 2018, an average of three per week.

Even in the midst of the pandemic, Tencent has shown no signs of slowing down. Recent purchases include a Malaysian video service and minority stakes in Universal Music and Warner Music. This is in addition to a wave of deals involving video game rivals, e-sports companies, Australia’s Afterpay and Tesla Nio’s Chinese rival. He has also noticed a piece of China’s $ 17 billion online video platform iQiyi.

Tencent stands out by global technology standards. Its less acquisitive American peers tend to focus on strategic objectives, such as the acquisitions of WhatsApp and Instagram by Facebook or that of Beats (audio products) by Apple. Others, including Google, have separate corporate arms.

In China, only Alibaba has pockets deep enough to match Tencent’s. The eCommerce giant’s investments totalled $ 50 billion through March, almost a quarter less than its archrival. Alibaba also tends to take full control of business units, including food delivery and video streaming, while Tencent prefers minority stakes outside of video games and entertainment.

His appetite for mergers and acquisitions may stem from Goldman Sachs, where two of Ma’s top lieutenants worked. One is Martin Lau, who chairs the investment committee. The other is Chief Strategy Officer James Mitchell. The duo is widely regarded as the driving force behind Tencent’s acquisitive nature.

At a conference in January, Lau said the company had invested in more than 800 companies since 2008, a fifth of which are valued at $ 1 billion or more. Last year’s profits totalled about $ 2 billion, representing approximately 12% of the company’s total annual earnings.

As investments play a bigger role, Tencent increasingly resembles SoftBank. The costly misadventures of WeWork and Uber left the Saudi Arabia-backed Vision Fund, valued at just $ 70 billion in March, not much more than Tencent’s portfolio.

Some of the operations are going well. In 2012, the Chinese firm bought 40% of the American Epic Games with a valuation of less than $ 1 billion. The company behind Fortnite, even more, popular during confinements, is raising new capital at a valuation of $ 17 billion, according to Bloomberg.

Chinese e-commerce firm Pinduoduo, which Tencent backed in its early days, is now worth more than $ 100 billion. Its New York-listed shares have more than quadrupled since their IPO in 2018.

What’s more, Tencent also benefits strategically. Ecommerce companies, for example, can expand the range of services offered on WeChat, making the all-in-one application and its mobile payment system even more indispensable to more than 1 billion monthly active users.

Pinduoduo’s Groupon-like site, for example, links directly to Tencent’s social network, which has benefited both. In fact, Lau has defended the company’s investment history by saying that it cannot do it all by itself and that it depends on outside partners.

Lack of transparency

Opacity is a problem for shareholders. The company is giving more details lately, including the annual return on its investment portfolio. It also created a separate website for holdings. However, due to Tencent’s size, even some large operations can be kept quiet.

The information given is also irregular. For example, a 5% stake in Tesla was announced in 2017 with Elon Musk tweeting his joy and Tencent extolling his “focus, ambition, and execution.” The strategic logic was unclear, and Tencent does not even say whether it continues to have shared. It does not appear as a significant owner.

Messaging app operator Snap also said in its annual report that due to its capital structure, neither she nor Tencent are required to say if there is any change in the stake that China bought a few years ago.

There may have been some visible successes, but analyst Mark Artherton, who posts in Smartkarma, estimates that more than 80% of Tencent’s balance sheet is in cash and investments that generate little significant profit.

This may not be a big problem now that the video game division is doing so well. Tencent is expected to generate some $ 26 billion in operating cash flow this year. That would be more than a quarter above 2019, but growth is expected to slow to less than 15% by 2022. If so, there will be more scrutiny over the expansion of the investment portfolio … and whether it is the best to use for Tencent capital.

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