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Mergers & Acquisitions

China’s Tencent buys minority stake in developer of Snapchat

PUBLISHED : Wednesday, 08 November, 2017, 9:18pm
UPDATED : Wednesday, 08 November, 2017, 9:40pm

Tencent Holdings, China’s biggest instant messaging company, bought 145.8 million non-voting shares in Snap, saying it plans to work closely with the social media company.

In a Securities and Exchange Commission filing Wednesday, the Snapchat developer said Tencent bought the shares on the open market. CNBC earlier reported the stake to represent 10 per cent of the company.

Shares in Snap rose as much as 34 per cent in pre-market trading on the news in New York but then retreated.

Snap is getting a valuable ally in China, where its disappearing message app doesn’t work amid government restrictions. Tencent operates two separate instant messaging services, WeChat and QQ, with close to a billion users each. The Shenzhen-based company has turned them into full social networks and made money by adding games, newsfeeds and advertising.

Tencent’s purchase is not seen as a hostile move, according to a person familiar with the transaction. Snap CEO and co-founder Evan Spiegel sees it as an opportunity to learn from the Chinese company, the person added, asking not to be identified discussing a private matter.

Tencent president Martin Lau said the company plans to share “ideas and experiences” with Snap, according to the filing.

Tencent, which has a market value of about US$470 billion, has been diversifying its business into advertising and finance. It’s also one of China’s more acquisitive companies and is throwing its weight behind Snap after making investments in fields from games to satellites and asteroid-mining.

Tencent didn’t immediately respond to a request for comment.

Snap said Tuesday it’s redesigning its mobile application to reach a broader audience and make more money from ads, as third-quarter financials showed sales growth keeps lagging investor expectation. Shares fell as much as 22 per cent in extended trading after the announcement, and have dropped about 38 per cent since the company’s initial public offering in March.

Snap’s earnings were a dark spot in what’s turned out to be an otherwise upbeat third quarter for tech. Results from companies such as Amazon.com and Apple have been met with a warm welcome by Wall Street in recent weeks.

In an advertising market where Facebook and Alphabet’s Google grab the majority of new spending, Snap needs to prove it can keep adding users as well as generate more revenue from each. That’s a challenge as Snap’s catchier features, beyond just letting people send photo and video messages that disappear after a short time, keep getting replicated by Facebook.

While the Snapchat app remains the company’s primary business, it has also ventured into hardware by making Spectacles – sunglasses with a built-in camera. Despite the buzz the glasses generated at launch, Snap had to take a US$39.9 million write down because it overestimated the value of its inventory.

Snap had 178 million daily users on average in the third quarter. This includes features such as “Stories”, which lets people share snapshots of their lives that disappear 24 hours after they’re posted. Similar products for Instagram, also called “Stories,” and for WhatsApp, called “Status,” each have more than 300 million daily active users, Facebook, which owns both products, said last week.

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