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UPDATED: June 10, 2015 NO. 26 JUNE 26, 2014
First-Degree Merger
Alibaba has merged with mobile browser UCWeb. But will a successful business integration be a sure thing?
By Zhou Xiaoyan

CORPORATE IDENTITY: A staff member from Alibaba Group passes by the group's logo at its Hangzhou headquarters (JU HUANZONG)

China's e-commerce behemoth Alibaba Group has been occupying the media limelight for quite some time, owing to an array of dazzling investments prior to its long-awaited initial public offering (IPO) in the United States.

On June 11, Alibaba confirmed it will buy the remaining share of UCWeb, in an attempt to up the stakes in its battle with arch-rivals Tencent Holdings Ltd. and Baidu Inc. Previously, Alibaba held 66 percent of UCWeb's stake with a total investment worth $686 million.

Although the two sides did not reveal the value of the deal, the merger is expected to be the largest in China's Internet business history.

The previous record was set last August when Nasdaq-listed Baidu Inc. closed a $1.9-billion deal to acquire 91 Wireless Websoft, a major distributor of Chinese smartphone applications.

The Alibaba-UCWeb deal will mainly be carried out using Alibaba's stock, with a smaller portion of the transaction being conducted in cash. Since Alibaba has not yet completed its U.S. listing, the value of the deal can't be calculated now. However, Yu Yongfu, Board Chairman and CEO of UCWeb, confidently said the company's value will be more than twice that of 91 Wireless.

After the merger, Alibaba and UCWeb will form the UCWeb Mobile Business Group and Yu will act as chairman of the business group and become a member of Alibaba's strategic decision-making committee. The new UCWeb Mobile Business Group will be responsible for Internet browsers, search services, location-based services, a mobile gaming platform, mobile application distribution and mobile literature services.

The deal, the latest among Alibaba's series of investments totaling $4.8 billion over the past six months, marks the company's continuing push into the mobile Internet sector.

On the same day, Alibaba also unveiled its first direct-to-consumer online shopping site 11main.com in the United States.

These announcements came as Alibaba prepares for a U.S. IPO. Analysts pointed out that the offering is likely to value Alibaba between $150 billion and $250 billion.

Feng Pengcheng, Director of the China Research Center for Capital Management at the Beijing-based University of International Business and Economics, told Beijing Review that Alibaba's recent investment binge will further increase the company's valuation in the IPO.

The bigger ambition

So why did Alibaba pay so much for a mobile browser? A major reason is that it wants to do more business on mobile in the world's biggest smartphone market.

It's an inevitable trend that consumers are more inclined to shop online with their mobile devices, such as smartphones and tablets.

According to Alibaba's latest IPO filing, in the fiscal year ending March 31, the group raked in 23.4 billion yuan ($3.75 billion) in net profits, up 170.6 percent. During the period, sales completed on mobile devices reached 319 billion yuan ($51 billion), up 394 percent from the last fiscal year. In the first quarter of 2014, business completed via mobile devices reached 116.2 billion yuan ($18.6 billion), accounting for 27.4 percent of the total, a huge jump from the last quarter's 20 percent, according to the filing.

Alibaba has a dominant status in the e-commerce sector and the company wants to extend that dominance into the mobile Internet era as well. A lack of a dominant mobile app that can link users straight to Alibaba's marketplace represents the company's biggest concern.

In sharp contrast, Alibaba's rival Tencent Holdings Ltd. has dominated smartphone screens with its near-ubiquitous mobile messaging app WeChat, a situation which Alibaba executives have publicly railed against.

Alibaba's recent purchase and investments are mainly focused on four areas in the mobile Internet sector—traffic inflow (such as UCWeb), big data (such as mapping and navigation firm NaviAuto), social networking service (such as microblogging site Sina Weibo) and online-to-offline (O2O) business layout (such as taxi-hailing app Kuaidi Dache), analysts say.

"If you look at Alibaba's investments over the past two years, they have mainly focused on making up for its shortcomings in terms of a stable traffic inflow in the mobile Internet arena. After its purchase of NaviAuto, Sina Weibo, Wasu Media and Youku Tudou, Alibaba has a better business layout in the high-end portal. But still, Alibaba lacks a stable and continuous big portal. UCWeb, with its 500 million mobile users, can offer that kind of stable and continuous portal to ensure this stable traffic inflow," said Lin Wenbin, a research fellow from the Beijing-based Analysys International.

"UCWeb can connect search engine, navigation, e-commerce and payment functions. The competition between the three Internet giants will become more and more fierce," said Lin.

The UCWeb deal would draw more mobile device users to Alibaba platforms, which have lost out to their more nimble competitors, analysts say.

Feng said Alibaba and UCWeb are highly complementary to each other, making them a good match.

"Baidu, Tencent and UCWeb are in the upstream of the Internet while Alibaba is in the downstream, where the source of traffic is unstable. Buying UCWeb will help Alibaba overcome its biggest shortcoming by ensuring a stable traffic inflow," Feng told Beijing Review.

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