Inside The Alibaba-Tencent $15B Local Service Deal

The Groupon of China will soon merge — thanks to a collaboration between Alibaba and Tencent.

While the two companies are typically rivals, the duo have decided to tackle a new concept together in order to gain more ground in the local services market.

Alibaba’s Jack Ma and Tencent’s Ma Huateng, better known as Pony Ma, have decided to combine their own local service startups. Alibaba-backed Meituan and Tencent-backed Dianping will now collaborate instead of continuing to compete for market share in the local services market.

The deal will give Meituan’s shareholders 60 percent of the merged company and is said to be valued at $15 billion, according to anonymous sources said to be close to the matter.

"The two companies merging would allow them to have absolute dominance of the group-buying market and require less cash burn,” Wang Weidong, an analyst at Internet consultancy IResearch in Beijing, told Bloomberg. “They will be putting a lot of pressure on competitors."

The agreement calls for Wang Xing, CEO of Meituan, to work with Dianping’s Zhang Tao to work as co-CEOs and co-chairmen, according to Bloomberg’s report of the merger, which one tech leader said was a smart move.

“Business makes strange bedfellows,” said Andy Mok, the organizer of Beijing Tech Hive. “They’re both obviously very smart, driven business people, but at the end of the day, practicality trumps personality.”

This isn’t the first time that Alibaba and Tencent have merged their two startups into one to gain a better market share in an industry. Early in 2015, the two agreed to a rare truce in the taxicab industry, as the companies looked to focus their energies — and their cash — in areas where they might have a greater advantage.

The two taxicab companies, Kuaidi Dache and Didi Dache, were seen as a mini battleground for the two payments companies, given that consumers could hail and pay for rides using their smartphones, paying through Alibaba (Kuaidi) or Tencent (Didi) systems, depending on what cab was being hailed.

And that’s what the two are seeking in the local service market to compete against other rising rivals.

Meituan, which is like Groupon, offers discounted goods when consumers purchase them with services. It accounted for 52 percent of the 77 billion yuan ($12.1 billion) market in the first half of 2015. Dianping is like the Yelp of China, and it accounted for 30 percent of the market. Between the two companies, it’s easy to see how they’ll have a stronghold on the market share.

The biggest competitor in this arena is Baidu, and a spokesperson for the company said the local services market in the region is still young and has room for multiple players.

“The market is still at an early, fast-growth stage, which means it’s too early in the game to decide who the ultimate winner’s going to be,” Kaiser Kuo, a spokesman for Baidu, told Bloomberg. “Local is still Baidu’s turf to win, and we are very, very committed.”

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