The country’s Internet giants--Baidu, Alibaba Group Holding Ltd. and Tencent Holdings Ltd., known collectively as BAT--have become “kingmakers” as domestic deals in the Internet industry continue to surge.
According to Bloomberg, the surge in dealmaking would not slow down as investors have grown tired of the rivalry between companies competing for customers and sacrificing profits.
Data compiled by Bloomberg showed that acquisitions by Chinese companies rose 75 percent this year to $413.2 billion, with domestic deals in the Internet industry nearly quadrupling to $55.6 billion.
"Investors and VCs are beginning to worry about the sustainability of these models," said Li Muzhi, a Hong Kong-based analyst at Arete Research Service LLP. "It doesn't matter if you are the founder or a professional management team, if the money says no, then it's a no."
The report said that the consolidation of several companies was partly driven by China's three biggest Internet companies, accounting for more than 40 percent of domestic dealmaking in the industry. BAT also helped finance many of the country's startups, and the Internet giants are now combining ventures in the most fragmented niches. The deals have helped Tencent increase its shares by more than 35 percent this year.
The waves of deals started in February when Alibaba and Tencent merged their competing taxi-hailing applications to create Didi Kuaidi, as a strong contender against Uber Technologies Inc.
In April, classified-ad provider 58.com Inc. bought majority stake in rival Ganji.com and also received additional funding from Tencent.
Last month, Meituan.com and Dianping.com, backed by Alibaba and Tencent, respectively, agreed to merge into a $15 billion giant.
Bloomerg said that the deals from the surge of venture-capital investments in China this year reached about $29 billion, double the amount for all of last year.
"There was an abundance of capital that created this group of competitors, and that now brings out the need for strategic consolidation," Zhang Xiaoyin, head of China telecom, media and technology investment banking at Goldman Sachs Group Inc, said. "The deals are for the good of the company even if it may not be the way that the founders prefer."
"Baidu, Alibaba and Tencent have become kingmakers," said Richard Robinson, who teaches at Peking University's business school and mentors startups in Beijing.
The public sector has also started to consolidate as the government is reforming many of the nation's state-owned enterprises, resulting in more merger and acquisition (M&A) activity. The biggest deal was the merger of the three wireless carriers in a $36 billion combination, the report said.
Bloomberg considers Internet dealmaking as far from over with China's food-delivery firms also looking for their own round of consolidation after going through major funding rounds. Ele.me, backed by Tencent, raised $630 million, increasing the company value to $3 billion in August, while Alibaba and its financial arm poured in almost $1 billion in Koubei Co. in June.
"A lot of companies are using similar business models trying to subsidize consumers," Xia Mingchen, a principal at private equity firm Hamilton Lane Advisors LLC, said. "Many of these types of companies won't survive."