May 17, 2010 / 6:27 AM / 9 years ago

China's Tencent on prowl for global Internet buys

SHANGHAI (Reuters) - China’s No.1 online gaming operator Tencent Holdings (0700.HK), armed with $1 billion in cash, wants to take over the world or at least the BRIC nations (Brazil, Russia, India, China) and Southeast Asia to start with.

Tencent, China’s most valuable Internet firm with a market capitalization bigger than eBay (EBAY.O) and Yahoo YHOO.O, turned heads in April when it paid $300 million in cash for 10 percent of Digital Sky Technologies (DST), operator of Russia’s most popular social networking site and an investor in Facebook.

The Chinese firm, with its chubby penguin logo that has become synonymous with the Internet in China, was also shortlisted to buy AOL’s AOL.N chat messaging platform ICQ and vying to buy social networking site Friendster, before eventually losing out to other buyers.

“The DST investment is ... part of our strategy to gradually go international,” Martin Lau, Tencent’s president said in a conference call last week, after the company reported a record quarterly profit, up 70 percent from a year ago.

Analysts said Tencent could be looking for deals in Brazil and to boost its stakes in game operators in Vietnam and India.

Having mastered many of China’s Internet spaces already, including chat and online games, Tencent, co-founded by the notoriously media shy Ma Huateng, also known as Pony Ma, is using its expertise and cash to try to export its success to other developing markets, analysts said.

It is China’s largest online game operator, and runs a wildly popular instant messaging service called QQ because the letters sound like “cute cute, with over 580 million users.

Tencent, along with rivals Shanda Games GAME.O and NetEase.com (NTES.O), is riding strong on the popularity of Internet chat and gaming in the world’s largest Internet and mobile markets.

Tencent could also use stock to fund purchases, with shares that have logged an enviable 42-fold increase since their 2004 IPO, rising from an offering price of HK$3.70 to their current price of around HK$155.

“We are all very worried,” said an executive from an online game company in China, who declined to be named when speaking about a rival. “They are really bent on being big.”

Tencent’s expansion plans come as China’s Internet market becomes more cut-throat, with a wide range of martial arts and fantasy games jockeying for attention from an audience of increasingly sophisticated gamers.

Analysts said the global route is the logical choice for the cashed-up company.

“If they really want to be a global Internet company, they really need to be present in countries other than China,” said Citigroup analyst Alicia Yap. “Look at Google, it is all around the world.”

Earlier this year, Tencent, was said to be a possible contender for some of China’s Internet search business with the vacuum left by Google (GOOG.O).

FOREIGN FORAYS

Tencent already has strong overseas connections through its 30-percent ownership by South Africa’s largest media group Naspers (NPNJn.J).

In 2008, Tencent agreed to pay $7.5 million for an equity stake in Naspers’ Indian unit MIH India, which owns a Facebook-like site called ibibo. Tencent also owns a minority stake in VinaGame, Vietnam’s largest online game operator.

“We want to find markets where there is big potential for growth and particularly if there are similarities we can draw from the experience of China,” Lau said in the call.

Tencent’s foreign forays also mesh with a broader trend that has seen cash-rich Chinese Internet firms shop for global assets.

Shanda Games snapped up U.S. based game developer Mochi Media early this year, and Perfect World PWRD.O is said to be on the prowl for overseas assets.

Tencent, co-founded by the notoriously media shy Ma Huateng, also known as Pony Ma, is taking the approach of a passive investor, similar to Naspers’ position in the Chinese company.

Given the different Internet conditions in each country, analysts said it is unlikely Tencent will take an active advisory stake in any of the companies it invests in or enter the countries directly.

Reporting by Melanie Lee; Editing by Doug Young, Ken Wills and Valerie Lee

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