Chinese e-commerce giant Alibaba (BABA) will shell out $3.7 billion to buy Youku Tudou (YOKU), the company popularly known as “China’s YouTube.”
BABA’s desire to acquire YOKU first hit the wires on Oct. 16, when Alibaba offered to pay $26.60 per share to acquire the shares of the online streaming video provider that it didn’t already own.
Alibaba already owns 18.3% of Youku.
The revised deal, announced by Alibaba on Friday, is for $27.60 per share, and values the remaining 82% of YOKU at $4.8 billion.
But why exactly is BABA, which is currently at war with JD.com (JD) for the Chinese consumer’s wallet, paying a 35% premium (to the Oct. 15 close) for a YouTube-esque service?
BABA Wants to Own the Chinese Web
At face value, the YOKU acquisition may seem farcical, especially when you consider that Youku Tudou still operates at a loss. But really, Alibaba is following a similar strategy to the American giants of the web — Facebook (FB), Alphabet (GOOG, GOOGL) and Amazon (AMZN).
BABA wants to own a part of everything online that the Chinese consumer finds valuable. Facebook is using its dominant social network as a tool to attempt a similar strategy — encouraging publishers to publish on its platform, launching its own Facebook Video service and even improving its search functionality and a Twitter (TWTR)-like “trending” feature.
And BABA can point to Alphabet as well: In 2006, back when it was just plain old “Google,” the search company bought YouTube for a cool $1.65 billion. It became Google’s largest acquisition at that time, and it, too, was unprofitable. YouTube turned out to be one of GOOG’s savviest purchases, and has helped transform the way we consume media.
Then there’s Amazon, which decided to compete directly with Netflix (NFLX) and launch its own streaming video service, Amazon Prime Video. That, too, is aimed at keeping users within Amazon’s ecosystem — and encouraging them to become Prime members, which costs $99 per year.
How deeply BABA plans on integrating YOKU with its current ecosystem remains to be seen, but that would be a shrewd way to differentiate its services from competitors like JD.com, Vipshop (VIPS), and others.
Even if it doesn’t plan on directly connecting Youku with its other sites, the market opportunity remains too attractive to pass up, especially for a company with Alibaba’s size and resources.
Youku attracted 286 million unique visitors in August 2015, according to Bloomberg. That’s not far short of the entire population of the United States. The YOKU merger is yet another way BABA is choosing to bet on the Chinese economy and particularly the Chinese middle class.
Bottom Line
If the economy implodes, this will turn out to merely be a poor acquisition — it’s not going to break the bank. ($3.7 billion is only a fraction of the $16.6 billion in cash and short-term investments to Alibaba’s name.)
If, however, China merely hums along, Youku will be another feather in Alibaba’s cap, and will give BABA one more way to turn a buck off the world’s largest middle class.
As of this writing, John Divine was long AMZN. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
