Tuesday, April 13, 2010


China's Tencent has acquired a USD 300 million stake in Russian Internet firm DST. Last week we first reported on the two when they were part of a bidder group that wants to buy the ICQ instant messenging... software from AOL. We then felt - and still feel - that they might be paying too much.

China's Tencent to acquire a 10.26 percent stake in Russian internet firm DST

 Today Tencent and DST announced that Tencent has acquired a 10.26 percent stake in DST. DST is also known for its USD 300 million stake in Facebook. Tencent is one of those rare internet companies that has achieved spectacular growth and share price gains based on a solid business model that is based on selling virtual products and services to active users of its QQ instant messenging software. With 500 million active users QQ - still relatively unknown in the West - is the largest online community in the world.

It will be interesting to see if Tencent will be able to export its business model to other countries. The Russian internet market is more fragmented and lagging the Chinese one by a couple of years, according to Yuri Milner, DST's CEO. DST believes that teaming up with Tencent will allow it to make the next step in a development that clearly indicates that EM giants want to gain market share in other areas than just basic manufacturing and commodity-related business.

DST's Milner acquired stake in Facebook

The more than 300 percent share price increase of Tencent during the last 12 months clearly demonstrates that cherry picking of technology related stocks in EMs is an interesting strategy, albeit that the market is young and uncertainties large. What will the Western market leaders do? Will they be able to extrapolate their success into the Emerging Markets environment? Some 10 years ago the latter would be seen as an inevitable, logical result. A result that made initial market gains of domestic providers highly uncertain, with acquisition by Westerners the best possible result. But things have changed and relative powers have shifted. This does not only hold for powers of companies in the market, but also for actions taken by domestic governments as the battle between Google and the Chinese government clearly demonstrates.

LMG Emerge believes that things are different this time. Dutch financial newspapers reported that analysts felt that the global market situation was similar to that of 1975 with excess liquidity in Emerging Markets and the potential for bubbles and exuberance. When looking at liquidity alone the analogy doesn't seem far-fetched. However, we should also keep in mind that the relative size of Emerging Markets vis-a-vis the developed countries has grown tremendously when looking at global GDP weights. Back in 1975 the relative weight wasn't more than a mere 5-10 percent. Right now we are at 30-35 percent of global GDP. And an economic base of that level can handle larger efficiency levels far more effectively. We do therefore believe that EMs have to be taken more serious within portfolios and that risk levels will come down due to the fact that economies will be less one-dimensional (i.e. will be more diversified).

This will provide those brave enough to increase the allocation to EMs not just with good return opportunities but also with opportunities to do so without substantial risk increases at the overall portfolio level.

The latest international M&A activities of large firms from Emerging Markets are therefore indicative of a new market environment, not a historical analogy that brings us back to a situation like the one we saw mid-1970s.

Click here for the Financial Times article on the Tencent Acquisition of a 10.26 percent stake in Russia's DST.

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