Consolidation in China's crowded Internet is moving ahead full steam these days, with the latest reports indicating that online matchmaking site Jiayuan.com International (Nasdaq: DATE) may be the latest takeover target. If the reports are true, the talks would mark the latest tie-up that has seen cash-rich Internet giants including Baidu (Nasdaq: BIDU), Alibaba and Tencent (0700.HK ) embark on a recent buying frenzy for undervalued and cash-starved smaller Internet firms. Jiayuan certainly seems to fit that description, as the company's shares have languished since its IPO two years ago.
After initially surging following the May 2011 IPO, Jiayuan shares have moved steadily downward as investors lost interest in China Internet stocks. They were trading at less than half their IPO price just a week ago, though they have rallied 22 per cent this week on the takeover rumours. Still, even at its current levels the stock still trades at just over half of its IPO price, reflecting the strong headwinds that many US-listed Chinese stocks have faced following a series of accounting scandals that rocked the sector two years ago.
In this particular case, media are reporting  that Tencent and Alibaba have both expressed an interest in Jiayuan, a relatively small player that posted about $18 million (HK$140 million) in revenue during the first quarter of this year. Despite its small size, the company probably looks attractive because it is actually profitable, unlike many Chinese Internet companies that are currently losing money as they vie for market share in more crowded spaces like e-commerce and video sharing. Jiayuan posted a net profit of $1.3 million (HK$10.1 million) in the first quarter, up about 50 per cent from the same period a year earlier.
The latest reports don't contain much additional information, though they do include a pro forma denial by a Jiayuan vice president. Having reported on China for years, I can say that this kind of denial is usually meaningless, as companies often deny rumuors even when they are true. In this case the fact that the words are coming from a high-level executive means that perhaps the denial is really correct, though I still suspect that talks may be in progress. With a market value of just $200 million (HK$1.55 billion), Jiayuan would be an easy asset for any of the big Internet names to swallow, and even mid-sized players like social networking site Renren (NYSE: RENN) or portal operator Sina (Nasdaq: SINA) could afford to buy this company.
If Jiayuan does indeed get purchased, it would become the latest Chinese Internet company to be acquired in the recent wave of Internet M&A. That wave saw Baidu announced  its purchase of a controlling stake of wireless app supplier 91Wireless for more than $1 billion (HK$7.76 billion) earlier this week. That acquisition followed Baidu's purchase of the online video sharing assets of PPS earlier this year for $370 million (HK$2.87 billion). Alibaba has also been quite acquisitive this year, paying hundreds of millions of dollars for major stakes in the Twitter-like Sina Weibo and online mapping firm AutoNavi (Nasdaq: AMAP).
In terms of strategic fit, Jiayuan looks like a much better match for Tencent than for Alibaba. That's because Jiayuan's socially-oriented matchmaking services are much more aligned with Tencent's own core services, which focus on social networking and games. By comparison, I don't see the same kind of synergies for Alibaba, whose main focus is e-commerce. Still, Alibaba has recently shown  it could venture outside its core business areas, following its purchase this week of an online travel services site. In any case, I wouldn't be surprised to see Jiayuan close a sale in the next couple of months, continuing the much-needed consolidation trend on China's Internet.
Bottom line: Jiayuan could be sold to a mid-sized or large Chinese Internet firm over the next two months, with Tencent as the most logical buyer.
To read more commentaries from Doug Young, visit youngchinabiz.com