Chinese giants lead the pack as industry cashes up

Chinese internet giants Alibaba, Baidu, and Tencent have spent a record US$7.4 billion on acquisitions this year, and their smaller listed peers are raising capital faster than ever to join the technology deal rush.

The financing weapons of choice for the nation's mid-sized internet companies are convertible bonds. Companies from travel agent Ctrip.com to web portal Sina sold US$3 billion of the securities this year, more than in all previous years combined.

The combination of near record-low interest rates and soaring stock valuations has made convertible bonds an attractive funding option for Chinese internet companies. The offerings come as they compete for deals with Alibaba, Baidu and Tencent, who have been buying everything from mobile-game developers to video sites.

"They're raising war chests," said John Hall, who runs technology, media, and telecoms investment banking in Asia for JP Morgan Chase. "A convertible bond allows the issuer to take advantage of the strong market conditions to raise capital quickly."

Convertible bonds sold by the companies this year will not convert into stock unless the shares rise an average 37 per cent within five years, so they carry limited risk of dilution.

They also offer lower interest costs than traditional bonds, with Sina paying 1 per cent on its US$800 million in five-year convertible bonds issued in November, compared with the 3.25 per cent Baidu pays on five-year bonds it sold in July.

Shares of Chinese internet companies listed overseas have more than doubled this year and now trade at an average 62 times earnings when adjusted by market value. Valuations are being driven by growth in mobile internet, according to Hall.

"If you do not want to be forced into joining one of the larger groups, you need the money to support you to be independent," said Jason Lam, of investment bank China Renaissance.

The latest companies to take advantage of the convertible wave are online real-estate portals E-House China and SouFun Holdings, who together raised a combined US$485 million earlier this month that they said could help fund acquisitions.

Sina was "very actively looking" for acquisitions to help sustain its business growth, and had recently become "more focused" on the deal search, chief executive Charles Chao said in a November 12 call with analysts.

Chinese internet companies will seek to branch into search, mobile-game distribution, e-commerce and online video through acquisitions, according to Citigroup.

Alibaba, China's largest e-commerce operator, agreed in May to buy a US$294 million stake in online-mapping provider AutoNavi, and invested US$500 million in applications developer UC Mobile.

The next acquisition targets in the industry may include Forgame Holdings, maker of web adventure games, and online retailer E-Commerce China Dangdang, according to Ricky Lai, an analyst at securities brokerage Guotai Junan.

Dangdang welcomes strategic investors, though it was not for sale, chief executive Li Guoqing wrote in a post on Weibo.

The intensity of internet deal-making was evident when Qihoo 360 Technology, the mainland's second-largest search engine, tried to acquire smaller rival Sogou after raising US$600 million from a convertible bond sale this year.