Breakingviews - Tencent embraces its inner Goldman Sachs

HONG KONG (Reuters Breakingviews) - It’s usually a bad sign when a technology company spends more time buying than building. Tencent may prove to be an exception. The Chinese goliath’s investment portfolio has surpassed $66 billion with stakes in music, fintech and more. Recent successes could validate the deal spree.

A Tencent sign is seen at the World Internet Conference (WIC) in Wuzhen, Zhejiang province, China, October 20, 2019. REUTERS/Aly Song

Two years ago, an essay entitled “Tencent has no dream” went viral in China. The author, a local tech journalist, accused the company that created WeChat, the world’s first all-in-one messaging “super-app”, of losing its inventive spirit and turning into an investment bank.

That same year, Tencent boss Pony Ma embarked on a frenzied buying binge, snapping up stakes in everything from Amer Sports, the Finnish maker of Wilson tennis racquets and other gear, to real estate conglomerate Dalian Wanda’s commercial property division. As with earlier investments, the strategic rationale was unclear. Research firm ITJuzi estimates that Tencent picked up a record 163 holdings in 2018, an average of three a week.

Even amid the pandemic, Tencent shows no signs of slowing down. Recent purchases include a Malaysian video-streaming service and minority stakes in Universal Music and Warner Music. That’s on top of a flurry of deals involving video-game rivals, e-sports companies, Australia’s Afterpay and Tesla’s Chinese challenger Nio. It is also eyeing a piece of China’s $17 billion iQiyi, according to sources cited by Reuters.


By global tech standards, Tencent stands out. Less acquisitive U.S. peers tend to focus on strategic targets, such as Facebook’s acquisitions of WhatsApp and Instagram or Apple’s purchase of headphone-maker Beats. Others, including Alphabet’s Google, have separate corporate venture arms.

In the People’s Republic, only $580 billion Alibaba has pockets deep enough to match Tencent’s. The e-commerce company’s investments totalled $50 billion as of March, nearly a quarter less than its arch-rival. Alibaba also tends to take full control of business units, including in food delivery and video-streaming, whereas Tencent prefers minority stakes outside of video-games and entertainment.

Its M&A appetite may derive from Goldman Sachs, where two of Ma’s top lieutenants worked before joining Tencent. One is Martin Lau, who chairs the investment committee. The other is the company’s chief strategy officer, James Mitchell. The duo is widely regarded as the driving force behind Tencent’s acquisitive nature. At a conference in January, Lau said the company had invested in over 800 companies since 2008, a fifth of which are valued at $1 billion or more. Returns last year hit some $2 billion, accounting for roughly 12% of the company’s total annual earnings.

As investments play a bigger and more important role, Tencent increasingly resembles Masayoshi Son’s SoftBank. Costly misadventures in WeWork and Uber left the Saudi-backed Vision Fund valued at just $70 billion in March, not much larger than Tencent’s portfolio.

Some of the deals are doing well. In 2012, Tencent bought a 40% stake in U.S.-based Epic Games at a valuation of less than $1 billion. The company behind “Fortnite”, even more popular during Covid-19 lockdowns, is now raising fresh funds at a $17 billion valuation, according to Bloomberg. Chinese e-commerce challenger Pinduoduo, which Tencent backed in its early days, is now worth over $100 billion. Its New York-listed shares have more than quadrupled since its initial public offering in 2018.

What’s more, Tencent benefits strategically too. E-commerce outfits, for example, can broaden the range of services offered on WeChat, making the all-in-one app and its mobile payments system even more indispensable to more than 1 billion monthly active users. Pinduoduo’s Groupon-like site, for instance, links directly to Tencent’s social network, which has benefitted both. Indeed, Lau has defended the company’s investment record by saying it cannot do everything itself and relies on outside partners.


Opacity has been a problem for shareholders. The company is spelling out more these days, including an annual return on its investment portfolio. It also created a separate website for the holdings. Because of Tencent’s size, however, even some large deals can be kept quiet.

Disclosure is also patchy. For example, a 5% stake in Tesla was revealed in 2017 with the electric-car maker’s boss, Elon Musk, tweeting his delight and Tencent extolling his “vision, ambition and execution.” The strategic rationale was unclear, though, and Tencent won’t even say if it still owns any shares. It does not appear as a significant owner, according to Eikon.

Messaging app operator Snap also said in its annual report that because of its capital structure neither it nor Tencent are obligated to say whether anything changes about the stake the Chinese company bought a few years ago.

There may have been a few visible successes, but analyst Mark Artherton, who publishes on Smartkarma, estimates that more than 80% of Tencent’s balance sheet is in cash and investments that generate little meaningful profit.

That may not be much of an issue now with the company’s video-games division doing so well. Tencent is expected to generate some $26 billion in operating cash flow this year, based on forecasts compiled by Refinitiv. That would be up over a quarter from 2019, but growth is expected to slow to less than 15% by 2022. As that happens, the more scrutiny there will be on the expanding investment portfolio – and whether it is the best use of Tencent’s capital.


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