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 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.