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Mogujie CEO Chen Qi says that a combined entity formed by shopping sites Mogujie and Meilishuo plans to seek fresh capital.PHOTO:MOGUJIE
(WALL STREET JOURNAL) The $2.5 billionmerger of two Chinese online shopping companiesis the latest sign startups are changing their strategies as the world’s second-largest economy stumbles with slowing growth and stock-market routs.
China’s startups are consolidating to secure their future amid growing competition for investors and customers, which means only the leading companies will survive.
Social-shopping startup Mogujie.com said it has agreed to take over rival Meilishuo.com to form a new company. After completing the deal, the new entity expects to raise fresh capital at a possible valuation near $3 billion, Mogujie Chief ExecutiveChen Qisaid in a letter to employees that was reviewed by The Wall Street Journal.
Both Mogujie and Meilishuo, which is backed by Chinese social-network companyTencent HoldingsLtd., run fashion-focused platforms mainly for women that combine shopping with social networking.
The deal continues the recent trend toward consolidation in China’s tech-startup scene. China’s volatile stock market and economic uncertainties are making venture capitalists more reluctant to put high price tags on startups that are burning through investor cash to compete with rivals.As investors become more selective, startup founders are facing more pressure to consider mergers with rivals as an alternative to intensifying competition that often turns into a discounting war.
“Investors arelooking for clear winners in the market…more capital is concentrating into fewer winners,”saidAnnabelle Long,managing partner of Beijing-based venture-capital firm Bertelsmann Asia Investments, an investor in Mogujie.
A rationale behind consolidation is to reduce competition, lower costs and increase efficiency, and such measures become more necessary when investors are worried about a downward market, Ms. Long said.
Beijing-based Meilishuo, whose name means “Beauty Talk,” had been trying to raise fresh funds for months without success, according to people familiar with the matter.Meanwhile,Hangzhou-based Mogujie, which means “Mushroom Street,” raised $200 million in its latest funding round in November that valued the company at roughly $1.7 billion. Meilishuo’s struggles in fundraising created a bigger incentive for the company to accept the takeover deal, which values Mogujie twice as much as Meilishuo, the people said.
The companies didn’t disclose the financial terms of the deal.
The latest deal follows other high-profile mergers and acquisitions over the past year in China’s technology sector. In October, Meituan.com and Dianping Holdings Ltd., two Chinese startups whose smartphone applications connect online users with offline services such as restaurant bookings and movie ticketing, agreed to merge under a new joint company valued at more than $15 billion.Ride-hailing serviceDidi Kuaidi Joint Co., China’s biggest competitor of Uber Technologies Inc., also was created by a merger last year.
Over the past few years, Chinese startups that connect online users with all kinds of offline services—including food deliveries, massages and carwashes—have burned through the cash raised from investors to subsidize deep discounts aimed at attracting consumers. As more investors questioned the sustainability of the startups’ business models, discussions about mergers became more serious.
Investors and bankers have said that Chinese startups shouldn’t assume that they will always be able to raise bigger funding rounds at higher valuations, as business models come under close scrutiny. “Over the past year, investors have become more concerned about startups’ plans for generating revenue,” saidDu Jian,a manager at Shenzhen Capital Group, a Chinese private-equity and venture-capital firm.
Mogujie’s deal with Meilishuo creates a stronger competitor among fashion-focused social-shopping platforms.The two startups’ combined sales last year stood at nearly 20 billion yuan, or about $3 billion, according to Mr. Chen.Tencent plans to increase its minority stake in the new company, a person familiar with the matter said. Still,the new company will continue to face competition from more comprehensive e-commerce companies such asAlibaba Group HoldingLtd.
The mergers-and-acquisitions trend hasn’t been limited to startups. Two of China’s biggestonline travel companiesthat are listed on the Nasdaq Stock Market,Ctrip.com InternationalLtd.andQunar Cayman IslandsLtd., said in October that they would join forces.
The startup-financing market’s slowdown and the trend toward consolidation is a “healthy development” for the industry, Ms. Long said. For investors, the trend creates more exit options other than an initial public offering of stock, she said.
“This overall M&A trend will continue. This should be one of the future growth paths for Chinese startups,” Ms. Long said.
