Sina Buys 9.05% Of Tudou. Should Investors Cheer? (Updated)

• Posted by bbishop
• on August 29th, 2011

Sina ($SINA) spent $66.4M to acquire 9.05% of Tudou ($TUDO), one of China’s leading online video sites, or as CEO Gary Wang describes it: “YouTube + Hulu + HBO” .

Sina purchased 1,075,000 shares at $29 as part of Tudou’s August 17 IPO. Sina continued buying after Tudou began trading, accumulating another 1,492,570 shares at an average price of $23.60. Sina’s average cost for its stake is $25.86, slightly above Tudou’s latest closing price. At the end of Q2 Sina had approximately $850M in cash, so $66M is a small outlay for the company.

Did Sina save Tudou’s IPO? The investment accounted for approximately 1/6th of Tudou’s entire IPO (including the greenshoe), and given market conditions and Tudou’s checkered history one might wonder if the deal could have been done without an anchor investor such as Sina. One might also ask why Sina was in such a hurry to buy Tudou shares, as they most likely would have been much cheaper if Sina had waited even a few more days.

Sina does not have a great record of recent investments.

The company purchased approximately 20% of Facebook-clone Kaixin001 (founded by a former Sina executive; some Sina executives apparently are also angel investors in the firm). Kaixin001 is struggling, in large part due to the rise of Sina Weibo. Kaixin001 had to postpone its US IPO plans and may be looking for a buyer.

In March 2011 Sina spent $66M to acquire 19% of Mecox Lane, at $6 a share. Mecox Lane ($MCOX), a firm with an even more checkered history than Tudou’s, now trades at $1.85. In less than 6 months Sina has seen nearly $45M in shareholders’ cash incinerated in the Mecox Lane investment, an investment with no obvious strategic rationale.

Sina is a marginal player in online video, a sector with massive growth in users and advertising revenue. Sina competitors like Youku ($YOKU), Baidu $$BIDU), Tencent, and Sohu ($SOHU) have growing web video businesses, so the Tudou deal appears to be Sina’s attempt to gain a credible foothold in one of the fastest growing segments of online advertising. If Sina more tightly integrates Tudou into Weibo then investors in both companies could benefit.

But given Sina’s recent investing track record, Sina and Tudou investors perhaps should be wary of assuming there will be a lot of upside from this deal.

[UPDATE: Keso, one of China’s top IT bloggers, posted a brief answer on Quora-clone Zhihu to the question "Why did Sina invest in Tudou?".

According to Keso, Sina knows that online video advertising is going to be huge, it does not have a credible offering, and is smart enough to understand that it lacks the resources to simultaneously build out Weibo and a web video business. Therefore Keso believes that buying into Tudou at a reasonable price makes sense. Keso writes that Sina picked Tudou over Youku because Tudou is relatively better priced and the lack of concentration among Tudou shareholders may make it easier for Sina to buy a much larger stake in the future.

Keso, whose real name is Hong Bo 洪波, explains that this investment is totally different than the Mecox Lane deal, which he describes as "returning a favor" (投桃报李，还沈南鹏一个人情) to Sequoia China head Neil Shen.

Regular readers of Digicha will remember that Keso has so far been correct in his prediction that the government will not shutter Weibo-Three Reasons The Government Is Unlikely To Shutdown Sina Weibo. END UPDATE]

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